November 10, 2020- Cross-Border living provides rich experiences and unique financial planning opportunities. About a decade ago, I quit steady employment to live in Jakarta, Indonesia, also known as the Big Durian. Work visas, parasites, and kopi luwak (coffee made from beans digested by a civet that sell for $100–$600/pound) became familiar topics of conversation within the tight-knit expat community.

Abundant in cultural and natural resources, Indonesia is home to more than 270 million exceptionally friendly residents. The isolation of the islands has preserved more than 300 languages, and the exotic and peaceful coastal towns contrast the insane traffic and economic productivity of the busy cities. 

It was a three-year epic adventure! However, an avalanche of administrative headaches transpired. 

No matter where you’re headed, the inevitable complexity of living abroad adds challenges for keeping your financial life on track. While many tasks can be completed online, physical and emotional distance can make even simple transactions exceptionally challenging when you’re several time zones away. 

Simplify and tidy up your finances before you depart to eliminate future headaches: 

1. Execute a power of attorney (POA). This standard estate planning document is often completed along with a will and health care directive. The POA will allow you to name a trusted person to sign or act on your behalf. A durable POA is effective immediately, whereas a springing POA is effective only when certain conditions are met. You can set specific effective dates or make the powers indefinite until revoked. Rules are specific to your state of residence, and often, state government agencies provide free templates.  

2. Embrace the Cloud. Securely upload and store all official paperwork, including tax returns, birth and marriage certificates, divorce decrees, name change documentation, passports, driver’s licenses, purchase/sale documents, and business and estate documents, including trusts. 

3. Simplify your investments. Explore consolidating accounts with one investment custodian. Roll over 401(k) accounts from previous employers into one IRA.

4. Be aware of foreign address issues. Many investment custodians disallow clients with foreign addresses. Sometimes this depends on the country. If you don’t maintain a U.S. address, your custodian options will be limited.

5. Evaluate your life insurance needs. If you have dependents who rely on your income, buy a policy while you are still a U.S. resident. Rates may be higher or possibly unavailable depending on the country you move to. Term policies are generally the best value. 

6. Know your disability insurance. If you have a disability policy, find out whether there are exclusions for events that occur outside the country.

7. Research health insurance. You may need two policies – one for the U.S. and a second for all other countries. This will reduce your exposure to debilitating medical bills. 

8. Bank intelligently. We generally prefer banking at credit unions, but often they don’t effectively handle the needs of international travelers. Large banks have the resources for international wires and complex transactions.

9. Understand domicile vs. residency. Have some coffee and sit down before wrapping your head around these rules. Domicile is the fixed, permanent, and principal home that you reside in and intend to return to and/or remain in. Residency may be elsewhere at a given point in time. Know the rules, because the location of your domicile impacts state taxes, estate law, and asset protection.

10. Get familiar with your state taxes. Depending on the rules in your state, you may be on the hook for income taxes for wage and investment income. Evaluate cutting ties with your state to save income taxes if relevant.

11. Take advantage of tax savings. If you’re working abroad, strive to take advantage of the Foreign Earned Income and Housing Exclusion. In 2020, the exclusion is a hefty $107,600 per person, a significant amount worth jumping through hoops to qualify for.

12. Rethink real estate. Owning a home may affect your domicile and state income tax situation. Weigh the pros of having a home base to return to compared with the freedom of no strings attached. Honestly evaluate if you want the responsibility of owning real estate from afar. Depending on the length of time you expect to remain away, you may consider hiring a property manager, renting, or selling. Have a plan for what you’ll do if a smoke detector starts chirping or the bathtub falls through the floor. 

13. Protect your currency. Holding multiple currencies exposes you to exchange rate risk. Your long-term plan should inform the ratio of domestic and foreign currency you hold.

14. Know the FBAR rules. The IRS requires that you report foreign currency balances that exceed $10,000 at any point during the year (Report of Foreign Bank and Financial Accounts, or FBAR). Keeping the balance below that level may avoid reporting rules.

15. Be aware of Roth conversions and capital gains. If you’re earning little or no income while overseas, consider taking advantage of your low tax bracket to intentionally trigger taxable income in a 0% or low tax bracket. In our nerdy financial planning world, this is sometimes called taking advantage of a “tax valley.”

It takes a special soul to uproot and immerse oneself in another culture. Relocating is guaranteed to be a vibrant, rewarding, and memorable experience. There are plenty of opportunities for unexpected events to crop up, despite your best preparations.

Of course, any action you take should be in the context of your legal and tax situation. Please reach out to experts to avoid unknown land mines.

Organize first. Take the leap second. Avoid the kopi luwak always.