Around the world, it is difficult to find a crevice of the earth's surface untouched by the forces of globalization. The Industrial Revolution, Internet Age and Cultural Revolutions have both literally and figuratively reshaped the way we connect, trade and engage with global commerce.
Of all the animals shaken by the pressures of a globalized world, our financial markets and economic systems have been seriously disrupted. With reduced trade barriers, increased mobility of human capital, improved infrastructure and market integration, international investors seeking diversification are looking to access U.S. investments more than ever before.
However, many of these financial instruments are not accessible to international clients without the use of a financial intermediary. And while globalization has facilitated market integration and international investment, governments have yet to streamline tax laws, consistently enforce regulations or agree on many key tax issues.
This is where wealth managers and financial advisors reap the benefits of market integration.
Growing international clientele
The rise of high-net-worth and ultra-high-net-worth classes around the world is leading to more mobility and additional assets under management. According to the World Wealth Report 2015, "Strong economic and equity market performance helped to generate 920% of global wealth in 2014.000 new millionaires to be created."
Clients, in turn, have a greater need to manage their assets and an increased incentive to protect them. .. As diversification hedges against risk, global investors are eager to realize the benefits of international investing.
According to an article on Reuters, Morgan Stanley's wealth management business will establish itself in the international segment of its client base. The firm hopes to develop this fast-growing branch of its services in Latin American and Caribbean regions. Other locations in Asia have been discussed, including Taiwan and China.
Morgan Stanley is not alone in looking to international markets for growth opportunities. Merrill Lynch of Bank of America Corp. is also strengthening its international team, particularly in Latin America and Canada. Along with these larger wealth management practices, family offices in the U.S. hope to benefit from a new wave of international investors. (For more information on Family Office trends, see: Top 3 Trends Impacting Private Wealth Management.)
What financial advisors can do to optimize taxation for international clients?
What does residency mean for an international client?
Determining residency status for a foreign citizen can change the entire game for an international client. A customer is considered a nonresident alien of the United States if he or she holds a green card or has been present on U.S. soil for 183 days, determined by looking back three years. If the days on U.S. soil in the current tax year plus 1/3 of the days in the previous year plus 1/6 of the days in the previous two years exceed 183, your client is out of luck.
If a foreign national exceeds the 183-day threshold, his or her residency begins on the date he or she entered the United States. However, you can override this start date if the first trip to the U.S. was for less than ten days. This is extremely important because foreign nationals are taxed on their world income as U.S. citizens. Although residents are never fully taxed due to foreign tax credits, they may pay additional U.S. taxes on income that is tax-deferred or otherwise tax-exempt in their home country. Non-residents are taxed only on their U.S. source income, excluding foreign capital gains, dividends, rents, interest, etc.
Residency strategy and determination are a great first step in dealing with the taxation of international clients, as they will eventually change. Their tax liability and reporting obligations. Nonresident aliens and part-time dual-status taxpayers cannot file jointly with their spouse, claim their dependents, or use foreign source tax credits, and they will lose other benefits associated with U.S. residency.
Optimal asset allocation
For many international clients, the primary goal is to maintain optimal asset allocation by gaining access to U.S. financial and real estate investments. International investing is a means to diversify a client's asset base and protect and grow their wealth. (To learn more, see: What Impact Has Globalization Had on International Investments?)
For many international clients, the U.S. can appear to be a safe haven for their investments. Client believes higher taxes can be offset by safe and profitable grounding in U.S. markets, especially real estate. However, there are still ways to minimize tax liability. Knowledge of tax law helps advisors make their investment decisions.
Use of tax deferred accounts
When designing an asset allocation with your international client, you need to know how the U.S. treats different investment practices from a tax perspective. Tax-deferred accounts include 401 (k) plans, 403 (b), tax-deferred and IRA accounts.
Tax-deferred savings plans, such as z. B. foreign retirement plans, cannot be converted to the same deduction for U.S. federal and state tax purposes and therefore must be contractually determined. Generally, tax-efficient assets should be placed in taxable accounts, while tax-deferred accounts, such as Roth IRAs, should contain less tax-efficient assets.
Foreign retirement plan contributions are allowed as a tax deduction through tax treaties, such as z. B. The United States and U.K. income tax treaty.However, any benefits will not exceed the relief that would be allowed under local law in either country. International clients should either use excess foreign tax credits or make a claim by applying tax treaties to receive the benefit of these tax-deferred accounts.
Work strategically with offshore structures
International investors can use offshore accounts and trusts to optimize their tax positions.
To maximize the performance of tax-deferred investment tools, it is often successful to move assets into an offshore Self Directed IRA. In this case, customers retain greater control over their investment decisions. This situation also allows clients to manipulate the U.S. tax code to convert taxable profits into tax-free income.
International clients may seek to avoid citizenship in order to exempt themselves from Generation Skipping Transfer Tax (GSTT). In this case, Bill Loftus, founding partner of LLBH Private Wealth Management, suggests advisors work with attorneys to set up an offshore trust. He explains a similar scenario: "Private placement life insurance (PPLI) and variable annuity vehicles combine, and other investments to achieve tax-free and tax-deferred growth in offshore trust. By using a specialized fund, we could provide portfolios with top-tier managers similar to those of our U.S. clients, but generally not accessible through Chinese banks. "
Wealth management advisors are a valuable asset to international clients themselves, serving as a necessary intermediary between the international family's wealth and the tax benefits they seek. In addition, advisors can fund PPLI insurance owned by the structured trust. In this order, assets could integrate with the policy within the trust and be tax-free.
In terms of reporting, clients need to be aware of filing requirements due to strict penalties for underreporting. Foreign bank and financial account form FinCEN114 (FBAR) was introduced in 2011 to prevent money laundering and improve tax compliance. Every resident of the United States is required to report their foreign bank accounts above a $10,000 threshold. Failure to disclose this information can result in a fine equal to half of your account or a greater amount of $25,000 per year.
Investors with international value may want to look at world regions where the market appears relatively cheap. Gary Motyl, chief investment officer of Templeton Global Equity Group, suggests that value investors should look to Europe, where the raging debt crisis has decimated equity prices. "
In the United States, long-term capital gains are investments held for more than a year and taxed at a lower rate than short-term holdings. Clients interested in buying value stocks and holding on to longer holding periods will be in an advantageous position in terms of tax rates.
International small caps
Ralf Scherschmidt, foreign trader of the Oberweis Opportunities Fund (OBIOX), urges international investors to consider smaller, lesser-known international stocks. He assumes that while these stocks represent only about 7% of the total international investment space, they present a unique opportunity for a space less populated by irrigated stocks.
This poses risks in the form of high volatility, but can provide unique access to relatively inexpensive small-cap and mid-cap companies. Although these more obscure options may prove fruitful, international clients should continue to diversify across currencies, sectors and regions.
U. S. Real Estate Investments
The National Association of Realtors released its profile of International Home Buying Activity in 2014 and found a 35% increase in total sales to international clients, including U.S. residents and non-residents. Sales of $4 billion show the volume of international clients looking to diversify their investment base and enter the unique space of U.S. real estate markets.
Clients need to be aware of exchange rate fluctuations on their real estate investments due to the significant impact on the purchase and sale value and other factors, including mortgage and principal payments. The devaluation of the dollar against foreign currencies can make U.S. real estate investments relatively inexpensive for international clients.
U. U.S. tax law provides only a 60 percent tax exemption for nonresidents.000 US dollars and in case of death 2 million US dollars for residents. The additional joint marital deduction is only allowed if the spouse is a U.S. resident or if the asset is converted into a qualifying domestic trust (QDT). To avoid these problems, among other considerations, clients may seek to sell their real estate to an indirectly managed foreign corporation to avoid an estate tax and collect a minimized income tax.
In the case of real estate purchases, international clients can benefit greatly from the purchase by creating an indirectly managed foreign entity. This allows the family to avoid the U.S. tax system while maintaining a diversified portfolio of assets in U.S. real estate.
Clients need to consider whether avoiding inheritance tax through these means will offset the higher federal corporate tax rates associated with the foreign corporation. Long-term capital gains rates of 15% are set for individual income taxes.
Charitable giving is encouraged in the United States through tax deductions. For a large list of qualified charities, see IRS Publication 78, Cumulative List of Charitable Organizations. If an international client is kind enough to support these charities, the United States government is also kind enough to give them a tax credit of up to 30 or 50 percent of the giver's adjusted gross income, regardless of residency status.