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Why U.S. Expats Need a Fiduciary Cross-border Financial Advisor

Author: Joel Baretto, CFP®
May 30, 2023

If you are an American living abroad, you have probably faced various financial obstacles that can make it challenging to ensure your long-term financial well-being. These may include navigating complex tax regulations across different jurisdictions, dealing with investment restrictions, and staying up to date with evolving regulatory requirements between the U.S. and your country of residence.

Thankfully, you do not have to tackle these challenges on your own. By enlisting the services of an expat fiduciary financial advisor with experience in working with Americans overseas, you can make informed decisions about your income, investments, taxes, savings, estate planning, and other financial matters that affect your future.

What is a Fiduciary Financial Advisor

An advisor who operates as a fiduciary is bound by fiduciary duty standards, which impose a legal obligation to act in the best interests of their clients. This responsibility encompasses both a duty of care and a duty of loyalty. As such, fiduciary advisors are obliged to act with diligence and prudence in providing financial advice while also prioritizing their clients’ interests above their own.

Duty of Care – This refers not only to the provision of advice in the client’s best interest but also to the execution of that advice in the most advantageous way possible for the client. This standard necessitates that the fiduciary advisor continuously provide guidance and advice throughout the duration of their relationship with the client. In other words, fiduciary advisors are obligated to uphold the duty of care by ensuring that they offer advice that is both beneficial and consistently relevant to the client’s changing circumstances.

Duty of Loyalty – This demands that fiduciary advisors prioritize their clients’ interests over their own. This standard also mandates that advisors provide full and honest disclosure of all significant facts pertaining to the advisory relationship. Additionally, the advisor must work to eliminate or inform clients of any potential conflicts of interest. Essentially, fiduciary advisors must uphold the duty of loyalty by acting in a manner that is consistent with their clients’ goals and objectives, and by being transparent and upfront about any conflicts of interest that may arise.

How are Fiduciary Financial Advisors Compensated?

Financial advisors who operate as fiduciaries usually receive compensation in the form of a percentage fee, which is determined by the value of the assets they oversee for a given client. This particular fee structure is advantageous in that it promotes alignment between the advisor’s objectives and those of the client, since the advisor’s earnings increase in proportion to the client’s assets.

Unlike fiduciary financial advisors, some advisors receive compensation in the form of commissions and typically provide transaction-specific recommendations. These advisors are not obligated to offer comprehensive advice in line with the client’s long-term financial objectives. Instead, they are held to a “best interest” standard, which mandates that any recommended investment must be suitable for the client at the time of the recommendation. In other words, the advisor must possess a reasonable basis for believing that a proposed transaction or investment strategy involving a security is appropriate for the client.

Due to the fact that advisors operating under this compensation model receive commissions for the investment products they sell, they may be motivated to promote certain products over others or engage in frequent portfolio transactions. This motivation can lead to a conflict of interest between the advisor’s obligation to act in the best interests of the client and their desire to maximize their own profitability.

Why is it Essential to Engage with a Cross-border Fiduciary Financial Advisor?

Opting to work with a fiduciary advisor as a U.S. expat is crucial for several reasons that can impact your long-term financial prosperity.

    1. Multi-Jurisdiction Tax Complexities
      In the United States, taxes are levied based on citizenship, rather than residency. As a result, even if you, as a U.S. citizen living abroad, do not owe any taxes to the U.S. government, you are still required to file taxes with the IRS. This requirement can present various difficulties for expats. Furthermore, the Foreign Account Tax Compliance Act (FATCA), a recent legislation, enforces severe penalties on U.S. expats who fail to file their taxes with the IRS. If you are employed and generating income in a foreign country, you may qualify for the Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion or deduction (FHE), and Foreign Tax Credits (FTC), which can exempt a significant portion of your income from U.S. taxes. However, certain criteria must be met to be eligible for these exemptions. By partnering with a knowledgeable fiduciary advisor, you can leverage these tax-saving opportunities and ensure that you satisfy all the necessary requirements. Aside from assisting you in maximizing the benefits of the FEIE, FHE, and/or FTC, a skilled fiduciary advisor can work alongside a seasoned tax professional to provide the following services:

 

    • Provide guidance on establishing a “tax home” for filing purposes
    • Advise you on the tax filing requirements of foreign bank accounts
    • Assist you in evaluating the benefits and drawbacks of owning non-U.S. real estate from a tax perspective

 

    1. Multi-Jurisdiction Tax Complexities

      As a U.S. expat residing overseas, it is important to be cautious about your investment choices. For instance, Passive Foreign Investment Companies (PFICs) can have significant tax implications for U.S. citizens. Moreover, many American expats tend to hold portfolios heavily concentrated in U.S. investments, which may not be the optimal strategy for their circumstances.

      By working with a knowledgeable fiduciary advisor who has expertise in cross-border investing, you can build a compliant globally diversified portfolio that aligns with your financial objectives, steers clear of common investing mistakes, and mitigates currency risks. Your advisor can help you navigate the complexities of investing as a U.S. expat and select investments that comply with U.S. tax laws, while also striving for long-term growth and income.

    1. Estate Planning Complexities

      As an American expat living abroad, leaving a financial legacy for your loved ones can be challenging, given the complex financial planning considerations. One of the significant challenges is that an estate plan drafted before moving overseas may be subject to an entirely new set of laws in your host country, and failure to consider these laws may result in unintended distribution of your assets.

      Working with a qualified cross-border fiduciary advisor and an experienced cross-border estate planning attorney can help you navigate these complexities. They can review your existing estate plan in light of your current expat status, make necessary adjustments, and ensure that it complies with both U.S. and foreign laws. Some of the important estate planning considerations that an advisor can assist you with include:

    • Wills and Trust – Do several “situs” wills that divide property among different countries make sense? Will your current trusts continue to function if you relocate abroad? How are trust assets taxed in the nation where you currently reside? For beneficiaries receiving assets, how are trust assets taxed in the United States?
    • Gifting Strategies – What effects will local gift tax regulations have on your gifting strategies? Is it wise to donate assets to a loved one’s college fund through a 529 college savings plan? What are the tax repercussions of other gifting techniques, such as giving non-resident spouses appreciated assets?
    • Estate Planning for Families with a Non-U.S. Citizen Spouse – How does your tax situation change if you marry someone who is not a U.S. citizen? How are you going to choose which assets to divide and which to keep private? How do the special tax laws in the U.S. affect your particular financial situation? What are the best methods for a couple with a mix of nationalities to hold and transfer assets in order to minimize taxes?

 

    1. Retirement Planning Challenges

      If you are in the process of saving for retirement while currently employed or considering retiring in a foreign country, a competent fiduciary advisor can guide you in addressing the complexities associated with retirement planning. The advisor can provide valuable assistance by:

    • Create tax-advantaged strategies to build retirement savings that can generate income in a tax-efficient manner.
    • Assist in navigating the intricate requirements pertaining to the Required Minimum Distributions (RMDs) associated with retirement accounts.
    • Facilitate Qualified Charitable Distributions (QCDs) from your Individual Retirement Account (IRA).
    • Comprehend the intricate tax ramifications associated with Roth IRAs on an international level.
    • Ensure that you are appropriately aligned with a custodian that suits your specific circumstances.

 Disclaimer:

  • The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such.  It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status.  Abacus Wealth International (AWI) does not provide tax or legal advice.  Please consult a tax or legal professional for corresponding tax and legal advice.
  • All material and content have been obtained from sources believed to be reliable.  AWI does not guarantee the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information. 
  • All examples of graphs, financial products and historical returns contained in the foregoing material are for illustration and educational purposes only and shall not be deemed as financial advice or recommendation.  Past performance is not indicative of any future investment returns.