4 Tax and Planning Tips for Retiring Abroad
2. Safeguard estate plans.
Retirees should be prepared to update their estate plans before heading overseas, according to Kennedy, as doing nothing will increase the risk that assets won’t be passed to the intended heirs, and that the estate could be tied up in probate abroad and potentially incur unnecessarily high taxes.
Long-term residence in a new country likely means a client’s estate plan will be subject to new laws and regulations, she noted.
If a retiree has been living permanently outside the U.S. when they die, it may be impossible to go through U.S. probate, she explained. The estate instead may go through probate in the country where the person lived, using a locally prepared will that encompasses their worldwide assets, including the U.S., said Kennedy.
While Americans commonly use trusts to circumvent probate, this will rarely work as intended for those who die while living abroad, she added. Most countries will require local probate, which may trigger punitive tax obligations, according to Kennedy.
Similarly, investors expecting to pass along their 401(k) assets by designating beneficiaries on a financial firm’s forms may also leave intended heirs without their inheritance. Financial institutions might not recognize the beneficiary designations and pass the money to heirs if the retiree was living abroad, she explained.
Meanwhile, the U.S. enjoys the highest estate tax exemption, while many other countries have much lower exemption levels and may impose a tax on any inheritance a retiree might receive from parents or other relatives in the U.S., according to Kennedy.
3. Plan for Social Security and health care coverage.
The good news for retirees is that they can receive Social Security benefits almost everywhere outside the country, and usually, with some exceptions, the payments are taxed only by the U.S., according to Kennedy.
Moreover, the Social Security Administration is familiar with wiring money to local bank accounts overseas, she said.
Medicare is a different story, she said. The government health care program for Americans 65 and older provides services only in the U.S., but retirees may want to keep paying premiums if they plan to return to or seek treatment in the U.S., Kennedy added.
American retirees abroad should consider buying local or expat coverage, including buying into national health care programs, she said; they should be aware, however, that private expat coverage doesn’t pay for treatment provided in the U.S.
4. Assemble an expert team.
Retirees will need to consider the need to file taxes in a new country, and to find the right bank and the right brokerage as well, Kuenzi noted.
“Put a financial team together before you depart,” he said.
Kuenzi recommended that investors work with a fiduciary financial advisor who specializes in issues that U.S. expats face, and a tax preparer who specializes in tax issues facing Americans retiring outside the U.S.
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