Introduction

September 12, 2012- As an American expatriate, you may be facing difficult choices when considering how to make smart decisions about your money. Few sets of personal circumstances are more complex than that of the American expatriate who has significant financial resources. Many expatriate families are woefully unprepared to deal with their financial circumstances because:

• Their life circumstances were set in motion when their financial situation was simple.

• They lack professional advice that takes into consideration the complex factors affecting the American expatriate.

• Some of the financial challenges expatriates face may seem unsolvable.

• “Ignorance is bliss.”

While you could solve some of your financial challenges by moving back to the U.S., you may choose not to because the expatriate lifestyle is rich with experiences, places, and friends that are not available at “home.” You may have family ties that drive the decision to stay abroad. And then there is the issue of not fitting in anywhere except in an expatriate community – people at home don’t “get” it. All in all, the expatriate life is often chosen regardless of the financial implications. Your wealth must support your chosen life and include planning for future life events, navigating your complex tax issues, protecting your wealth so it is not taken from you, and, if there is anything left, planning to give to your loved ones and to charities.

Being fully informed about the implications of your decisions will help you achieve better results. It will also give you confidence in your decisions and, we feel, help you more fully enjoy the rich life you have chosen.

The content of this article is based on interviews we conducted with those who have experienced the expatriate lifestyle and with those who serve the needs of U.S. citizens living abroad. As a result of these interviews, we describe a systematic approach that may help you gain command of what you have.

“Third Culture Wealth”

“Third Culture Kid” is a term coined in the 1950s by Ruth Hill Useem (www.tckworld.com) to describe children who accompany their parents into a different society. We have borrowed from the term to describe the wealth that a family has accumulated as “Third Culture Wealth” – financial resources that have followed you to a different society and that may be suspended between two countries because of the complex issues arising from living abroad.

It is our hope that you gain command of what you have, what you will earn, and what you will be given through inheritance or other means so that you will be able to turn your resources toward your chosen purpose – with confidence. This paper may be of interest to you if you are a long-term or serial expatriate, you are a U.S. citizen with no intention of relinquishing your citizenship, and you have, or could develop, significant financial resources.

If you are familiar with third culture kids (TCKs), you understand that they sometimes have a difficult time fitting into a “normal” world. While TCKs can be very nimble, can be street smart, and can adapt quickly to a new situation, they can also feel out of place around those who don’t have a cross-cultural experience of some type. They often make friends quickly with other TCKs but are not easily understood by those who haven’t shared their experiences. This same dynamic is also often true for the finances of the American who lives abroad. The rules are different; it may not be clear what to do or how to fit things together, and often the conventional wisdom does not apply. This calls for a deeper look into what factors the expatriate must consider to make smart decisions about money.

A word about short-term expatriate assignments (less than five years) with an expatriate package and a company tax equalization policy: While this paper may provide you with some tools to understand situations common to expatriates, it may be that your company has insulated you from many of the financial challenges of the expatriate life. However, there are still a few issues that your employer may not have prepared you for. We will briefly address these later.

And a word about your U.S. citizenship, illegal “offshore” investments, and the long arm of the Internal Revenue Service: If you are considering relinquishing your citizenship because of the policies of the U.S. government, or you are seeking to illegally shelter assets from view of the IRS, you should know that we do not have any expertise in this area, and this paper will not provide you with tools to help in this regard. This paper and our firm are focused on helping individuals and families who are U.S. citizens, who plan to remain so, and who, although sometimes painfully, fully intend to follow the rules set forth by our government as well as the government of their host country.

The shrewd management of financial resources is complex enough for Americans who live within our borders. But by choosing to live outside the U.S., your wealth is “Third Culture Wealth.” This requires you to work diligently toward making what you have support your chosen purpose.

Financial Challenges of American Expatriates

We found in our interviews that almost all the financial challenges facing American expatriates could be clustered into the following subjects:

Income and Estate Tax

It is often said that tax should not be the tail that wags the dog when making financial decisions. However, for the expatriate, tax is often akin to a large wagging tail on a small puppy. While it is sometimes wise to avoid allowing tax issues to drive financial decisions, the complicated effect of tax on your wealth cannot be underestimated. Here are some observations we have made based on the interviews we conducted.

• Understand your tax situation – Many expatriates we have met have their U.S. tax returns prepared by a firm with no cross-border experience. While this is not always a problem, it can be easy to miss some of the nuances that exist for those who live abroad. In addition, tax compliance is often misinterpreted as tax advice. One is retrospective, while the other is prospective. Expatriates need both.

• Pay attention to estate tax rules – Just as U.S. estate tax rules have changed often, local estate taxes may or may not exist, and they may change from time to time. For instance, during a worldwide recession, host country governments may seek new forms of revenue and may seek to tax your wealth at your death, regardless of where it is located. Estate and transfer matters can be complicated, and it is best to avoid leaving your surviving spouse with an unsolvable mess to deal with after you are gone.

• Tax exempt may not mean tax exempt – Americans are often approached by well-meaning non-U.S. financial advisors about “tax exempt” or “tax sheltered” investments. While these non-U.S. products may provide a tax advantage for many non-U.S. citizens, because of the unique U.S. position on taxation of worldwide income, these products may turn out to be useless to some who are subject to U.S. taxation. It is important to understand the full implications of an investment, and for Americans, it is best to carefully evaluate foreign holdings.

Retirement Planning

Most Americans will likely retire where they live now or where their children live or move “back home” after wrapping up a career. However, for the expatriate, retirement planning can be much more complex. It is the answer to the question “Where will you retire?” that drives much of the retirement planning process. Since it may not be possible to answer this question, the issue must be set aside while other issues are addressed. Here are some common retirement planning issues that were shared with us in our interviews:

• Limited access to retirement plans – Because many serial expatriates are self-employed, there are few opportunities to participate in a company pension. In addition, because of the combination of the foreign income exclusion and IRA/Roth income limits, there is often little opportunity to contribute to IRA accounts. While tax-deferred investing in the U.S. is usually coupled with retirement planning, this situation creates the need for expatriates to invest more heavily in taxable accounts, which magnifies the income tax issue because of the current taxation of dividends, interest, and capital gains.

• The trailing spouse – Because the trailing spouse may have given up a career in exchange for the expatriate life, there may be little opportunity to save for retirement. We will address trailing spouse issues more fully later and include a new definition for the term “trailing spouse.”

• Where to invest: In the U.S. or in the host country – A common question for expatriate families is whether money should be invested in the U.S., in the host country, or a combination of the two. It is our observation that if you plan to retire in the U.S. and you are subject to U.S. income tax, it may be simpler and more cost effective for your investments to be located in U.S. investment accounts. If you are a U.S. citizen but are culturally more closely aligned to your host country, and you plan to retire there, it may be best for you to invest in your host country. This decision is often influenced by the spouse or children’s nationality/identity. We have observed that investing in both places complicates matters, resulting in higher costs, more taxes, and an uncoordinated approach to the management of your investments. A common reason for expatriates to invest in more than one country is to hedge against currency risk. Sometimes this solution of investing in multiple countries is worse than the original problem. This is a complex question with a complex answer that depends on your circumstances.

Repatriation

For the expatriate on assignment, the issue of repatriation is most often tied to the end of the assignment. While there is culture shock when going back home (often this is unexpected), the longer one remains abroad, the more complex the issues are related to moving back. Our perspective is that the more financial preparation there is for a planned or sudden move back to the U.S., the easier the process is emotionally. Based on our interviews, we sometimes suggest that you be prepared financially for a move back to the U.S. at all times, even if you have no intention of returning in the short term. This is especially important for trailing spouses. Later, we will share some ideas that have been shared with us, to help with the process.

Financial Advice and Service

In the interviews we conducted, we asked every participant, “What are the greatest financial challenges of American expatriates?” In almost every interview, one of the top challenges was that American expatriates have difficulty finding professional advice that is given within the context of their situation. For the non-expatriate who has accumulated substantial financial resources, there are commonly three or four main advisors – a tax preparer, an estate planning attorney, an investment advisor, and sometimes a trusted insurance agent. The most effective combination of these professionals occurs when all the advisors are providing the client coordinated advice because they have a complete view of a complex situation. For the American expatriate, this is difficult to duplicate. It needs to be understood that the financial situation of the expatriate often has so many variables that hinge on that person’s situation that no textbook answer applies. The solutions needed to solve these problems can only be crafted on an individual basis. It is common for expatriates who are not on a traditional “expatriate package” to use the tax preparer they used before leaving the U.S. It is also common for expatriates to have had no discussions with an estate planning attorney regarding the complex issues that are created by cross-border transfer of assets and estate tax. Investments are scattered about, and investment advisors are focused on security selection only, without view of all investments and the implications of how they affect tax liability in the host country. Additionally, it can be difficult to find American insurance agents who have sufficient training and knowledge of how liability can travel across borders and be a threat to the client’s personal assets.

We have found very few expatriates with an effective and integrated team of advisors who understands the complete situation and is working to provide coordinated solutions. As mentioned earlier, our observation is that it is helpful to have a U.S. tax preparer who fully understands the nuances of your situation and will work openly with your other advisors. In addition, we also feel it is necessary for all your professional advisors to understand the expatriate life, both technically and culturally, and for them to work closely with each other to craft a set of solutions that is best for your unique, complex situation.

In this age of technology, it would seem that a foreign address or a different time zone would not be a barrier to getting quality service from financial providers. Expatriates report to us that this is a much more substantive issue than it should be. Some find that obtaining services overseas is more difficult than ever for Americans as financial companies react to the Foreign Account Tax Compliance Act (FATCA). At the same time, some U.S. firms refuse to work with Americans who have a foreign address. Then there is the issue of time zones – it is difficult to find advisors and financial firms who can provide service when it is convenient for you. This is a solvable problem, depending on your circumstances.

A final issue about investment advisors: We hear many complaints about advisors who may or may not have a view of the expatriate world, but who are paid for the products they sell, not paid to provide unbiased advice to the client. A trusted, unbiased, and commission-free advisor is a concept that has been suggested by many we have interviewed, and one that we support.

Health Care

The issue of health care while outside the U.S. is, like all the challenges facing expatriates, complex. For the expatriate with a traditional “expat package,” the challenges are related to finding high-quality, coordinated care while the financial implications are limited. But for the retiree or the self-employed American, the financial implications of expatriate health care can be enormous.

This challenge is much too complex to address here. However, there are a few matters of critical importance to the American expatriate. First, after primary coverage is in place (insurance, Medicare, national health plan, etc.), we suggest you think through the most common scenarios of how you would gain access to health care in certain situations. The results of this exercise will help you to decide how big your “pink parachute” should be (discussed later) in case you need to make quick and expensive decisions related to your care.

If you are a U.S. citizen who is Medicare eligible, will you cluster your care around scheduled trips home? If you need care in your host country, will you be able to pay out of pocket, or will you need to arrange to fly home quickly? Do you need an air ambulance insurance policy? Do your loved ones know what to do in case you are incapacitated in your host country? Do you have a local health care directive?

The challenges related to health care vary depending on your age, where you live, your financial situation, and your insurance. Be sure to talk through all the possible scenarios and have ready access to the financial resources that will be needed to access health care in any scenario.

Asset Protection

The issue of asset protection was not voiced often in our interviews, but we feel the subject deserves attention. Many investors manage their resources solely to increase their returns. While increased returns may be the goal, an important objective that is often ignored is the preservation of what you have. In the U.S., it is often a simple process to set up a legal and insurance structure that will protect assets from being taken through a legal action of some type. However, for the expatriate, the issue is much more complex, and some of the most common assumptions don’t apply to automobile, liability, health insurance, long-term care coverage, creditor protection, or marital property. This problem deserves detailed attention but, like many expatriate issues, is complex, and the solutions differ from person to person, depending on your circumstances.

Uncontrollable Issues

In the interviews we conducted, there was a long list of challenges relayed to us that are factors over which you have no control. Some of these uncontrollables are currency exchange rates and procedures, IRS regulations and the U.S. treatment of expatriates, the cost of living, and the host country’s tax policy. While each of these issues is important to your life, they are things over which you have little influence or control and, in some ways, are the price you pay in exchange for the life you have chosen. We have found that many expatriate families are financially successful regardless of these uncontrollable problems – it is the management of the controllable challenges that can increase the probability that you will get the result you seek.

Priorities: What American Expatriates Want

In many of our interviews, we asked expatriates, and those who serve them, what they needed to accomplish with their money, what could happen that would cause them to worry less, and what the most successful expatriates had done for themselves. In some interviews, we didn’t have to ask these questions – the message was clear. Here is a summary of what we heard:

Confidence: “I want to know that what I am doing is the right thing to do. If I am not sure, it is possible that I will do nothing at all.”

Simplicity: “My financial situation is so complex. I seem to take one step forward and two steps back. I want to simplify my financial situation so that it does not control me.”

Control: “I want to be able to push a button and have the elevator go to the floor I want it to. Often, what I do has no bearing on the final outcome. I want to be the one who decides what happens to my money.”

Safety Net: “I want to know that if something happens that I have not planned for, I will not be financially ruined.”

Coordinated Plan: “I want to make sure I can protect what I have, invest prudently for my old age, take the edge off the tax bill, take care of my kids and grandkids when they need help, and give away anything that is left over.”

Expatriate Women, Trailing Spouses, and the Pink Parachute

First, please allow a disclaimer about this section. While it is common for an expatriate American family unit to consist of an employed husband and an accompanying wife, this is, in many places, no longer the most common arrangement. In our interviews, we heard about the challenges women face and the solutions needed to address those challenges. While the ideas we present here were not raised by men or about men, the issues and their solutions can apply to anyone. Along the same lines, we have heard discussions about the term “trailing spouse” as opposed to the term “accompanying spouse.” For simplicity, we will refer to the “trailing spouse,” as this was the term most often used by those we interviewed.

The challenges facing expatriate women became clear to us after three interviews with marriage and family therapists who serve Americans living overseas. Trailing spouses are often well-educated women who give up valuable careers and then find themselves dependent on the employed spouse both financially and socially. This can be disconcerting, to say the least. While technology has improved communication with friends and family back home, it is common for the trailing spouse to suffer a loss of identity after moving overseas. And if, after settling overseas, it becomes necessary to return home suddenly (because of job loss, divorce, or death), the trailing spouse can experience that loss of identity all over again. After our interviews with these counselors, we changed our interview questions to better understand the feelings of many expatriate women.

The most common challenge that women living abroad discussed during our interviews was the feeling of being vulnerable, defenseless, and exposed to events that could impact them and over which they have no control. In almost all these situations, it is the non-employed partner in a relationship who is exposed to the “elements.” Some of the most common events of concern are:

• Divorce or separation

• Death of the employed husband or partner

• Caring for aging parents back home

• Caring for college age or adult children back home

• An emergency medical event

In many of our interviews, we heard a sometimes-quiet fear about what would happen if the marriage were to end. The death of a spouse while overseas creates a flood of complex issues that are exponentially more difficult to solve than those of a surviving American spouse who lives at “home” (see our article What Do I Do Next? A Financial Guide for Widows. Equally difficult is the dissolution of a marriage or long-term relationship while abroad. A sudden split often is more difficult to handle than a sudden death. The ripple effect seems endless. In both situations, the non-employed partner often must return immediately to the U.S., while at the same time administrating the complex details of a death or a divorce. She has lost her relationship, her social structure, and her financial security. If children are involved, she must create a new life for them, as well. These can be overwhelming events.

The “Sandwich Generation” is the age group who is caring for aging parents while also raising children. For the expatriate woman, this can be an even more complex process. Many people shared with us the guilt they feel being abroad while aging parents back home need attention, and they discussed the financial drain of having to return to the U.S. often to care for them. This situation sometimes strains relationships with adult siblings and the employed expatriate spouse.

Another common challenge relayed to us is professional development of the trailing spouse. Often, because of uncontrollable issues, the trailing spouse has given up a career in the U.S. to embark on this rich adventure. While technological improvements have allowed some in this situation to “telecommute,” it is common that one person in the relationship has given up a significant portion of her career earning power, identity, and momentum for this experience. This can add to the feeling of being exposed and vulnerable to family challenges that arise.

In the next section, we will introduce you to the “Pink Parachute,” a solution that can help with preparing for some of these potential events. For surviving spouses in the U.S., we believe that emotional recovery from the death of the spouse can be aided by financial recovery – gaining command of what you have. The “Pink Parachute” is a way to gain command before one of these events occurs so that you have some control over how you respond and recover.

The “Pink Parachute”

You have heard of golden parachutes. Trailing spouses should consider a Pink Parachute: a figurative backpack that is packed and ready to go to prepare for when you may need help landing safely. While this idea can be both literal and figurative, we will focus on the financial tools in your bag that will give you control if an event in your life requires financial resources in a hurry. As a side note, keeping a real packed bag is a good idea, as well. Many expatriates have a “grab and go” bag with important papers, credit cards, communication devices, medicine, and a change of clothes (footnote – as a child in South Korea, I carried my own passport, residence permit, and cash and knew where to go to get out of the country in case of unrest, whether I was with my parents or not).

Let’s go through the process of determining how much should be in your financial bag and where you should store it. We recommend that you have access to enough money to leave the country at a moment’s notice, fly back to your stateside home, rent and furnish a small apartment, and live modestly for a few months. You should decide how much you need, and you should have it in a place where you have complete control over it.

To determine how much money should be available to you, think about what would happen if political unrest or a family emergency required you to leave in 24 hours. If you have children, you may need to consider the cost of a first class walk-up fare (in case coach is full) for you and each of your children. You should also consider the cost of living in the U.S. and that you may have to pay an apartment lease in advance because you are coming from outside the U.S. You may want to consider the cost of having someone come and get you in the event of a medical emergency – a first class flight to where you are and two first class flights back to the U.S. And you will also want to consider factors that may be unique to your specific circumstances. You also should consider the cost of a medical emergency (discussed earlier).

Now that you have determined how much, let’s discuss where to store your bag. It is important that the money be in a form that gives you instant access to it at any time without restriction. This means it may need to be in an individual account (in your name only – not in a joint account with your spouse). It may also mean that, instead of cash, you have a credit card (again, in your name only) with a credit and cash advance limit that is as high as you need. The purpose of the Pink Parachute is to give you the ability to land safely after a difficult situation.

Trailing Spouse – A New Definition

While “trailing spouse” has thus far referred to the non-income producing spouse, we would like to expand the definition to include the spouse who “trails” in financial knowledge or interest. When planning for issues to support the trailing spouse, sometimes it does not matter what the gender or employment status is, but more important, the person’s financial fluency and financial interest. This is the person who is in greatest need of a “pink parachute.” In many long-term relationships, one of the two partners may be financially fluent and interested in the process and have control over where the money is and how it is structured. Often, though, the other partner may not be fluent or interested or have control. While this may work well, in a difficult situation, it does not serve the needs of the less fluent partner. If you are the least financially fluent in your relationship, you may want to make the effort to gain control over this small issue, including formulating a plan of action in the event, likely or not, that you find yourself forced to manage on your own. With a good plan in place, if there is a death, you will not be at a loss as to where the money is. If the relationship quickly destructs, you will not have to negotiate for control. If there is a medical or political emergency, you can act quickly and ask questions later.

A word for the financially fluent in a relationship – it may give you pause to wonder why your spouse or partner is discussing having an individual account or credit card that does not have your name on it as well. This is your opportunity to educate and support your partner in preparing for a difficult event. In fact, allow this to open the discussion for what happens when one of you dies. For husbands, it is likely that your wife will be a widow. Allow this discussion to help her start her preparation for when the time comes.

MY STORY

I grew up as a missionary kid in poverty-stricken South Korea in the 1970s. Just across the wall from our compound, families were living in primitive conditions. Children had little to eat, few clothes, and no running water or sanitation. My family had a housekeeper who, when my parents hired her, lived with her son under a piece of corrugated metal leaned against a cinder-block wall. While we were not wealthy, we were wealthy to them. We had a source of clean water and sanitation, never missed a meal, went to a good school, and, in later years, even had a small air conditioner in one room of our house for hot summer nights. Money was always tight for my parents, as it is for most missionaries, but I never felt poor – rather, I felt ashamed of what we had compared to those on the other side of the compound wall.

These years formed my views of money. The people around us were gripped by their poverty. In the same way, we can be gripped by our wealth. We often spend our energy trying to gain command of what we have rather than having our wealth serve us. As a child in Korea, I learned that poverty is consuming. As an adult in America, I have learned that wealth can be consuming, as well. I have also learned about the apathy that sometimes comes with wealth, especially with the next generation, and the need to turn our excess into purpose. What we earn and what we have been given has no value in and of itself. Money exists to buy comfort, time, or purpose.

My early years in Korea also helped form my views of the value in living away from “home.” The rich experience and perspective that comes with living outside one’s own country is why many Americans choose the expatriate lifestyle. This is something I deeply understand and value and seek to support in my clients. --Bryan Hancock