The Cross-Border Family Wealth Guide. Fisher Andrew

only issue, and shouldn't necessarily be allowed to be the financial tail that wags the wealth management dog, they also are a vital part of the analysis and recommendations throughout the book and therefore provide the best possible starting point for describing “Who's Who.” Moreover, while tax considerations are found throughout the book, all of Part V is devoted to taxes and will review, synthesize, and clarify points about taxes made elsewhere.

      Having looked at Figure 1.1, you should be able to fairly easily identify which category you fall into, although your category can change over time if you change your physical residence (moving into or out of the United States), or if you change your work status and therefore tax status in relationship to the United States (Green Card or not, work visa or not, etc.). If you are married, it might be the case that you fall into one category and your spouse or children fall into another, a possibility we'll stay attuned to throughout the book.

How Many Cross-Border Professionals and Families Are There?

      How many individuals and families fall into the different categories? Although there are no definitive numbers, a variety of estimates have been made. To begin with, there are estimated to be over 40 million foreign-born immigrants currently living in the United States, whether permanent resident aliens or temporary resident aliens, based on U.S. Census Bureau data. We further estimate that roughly 10 million to 15 million of these people could be considered cross-border professionals living in the United States (with higher education and income levels).

      In addition, the State Department estimates that there are nearly 8 million nonmilitary Americans living abroad.1 Although not all of these people can be labeled cross-border professionals, we estimate that roughly three million of them are either working professionals or retirees (again, with higher education and income levels).

      It is impossible to know the exact number of foreign-born individuals who once lived in the United States and now live somewhere else – whether permanent resident aliens or nonresident aliens – but the number might easily be between 10 million and 20 million people. Although there are once again no definitive statistics here, we can assume that the number of cross-border individuals who may benefit from this book is very large (perhaps as many as 30 million or 40 million people).

       Unique Challenges Faced by Cross-Border Families Connected to the United States

      There are three main unique challenges faced by cross-border professionals with assets in the United States:

      1. Lack of uniformity: The asymmetric nature of tax regimes and reach – that is, U.S. federal and state tax law reaches much farther than the tax laws of almost any other country.

      2. Complexity: The complexity of U.S. and foreign laws and regulations.

      3. Scarcity of resources: Lack of sufficient help and information, especially for those who are not ultra-affluent.

      These challenges are further outlined in Chapter 2.

CHAPTER 2

      Unique Challenges and the Regulatory Landscape

The Unequal Nature of Tax Regimes and Reach

      To begin to understand how different the United States is when compared to other tax regimes, let's take a step back and consider things from the perspective of cross-border families from the past. Traditionally, it has been fairly common for certain types of professionals, especially those in Europe, to have a fairly high degree of mobility and find themselves living and working in multiple countries over time. A Frenchman might work in London for a while, or a Spaniard might find himself in Zurich for a few years before returning to Spain or going elsewhere.2 Generally speaking, these individuals did not need a great deal of tax planning or other guidance with respect to how living in multiple countries might affect their personal financial and long-term wealth planning decisions, because much of their tax responsibilities to the former nation would end upon their move to a new location.

      For example, suppose two Spanish brothers move to Germany to start a business building fine guitars. Upon leaving Spain, they were no longer required to report to the Spanish government on their financial affairs, nor were they required to pay any taxes to the Spanish government unless they left some kind of income-producing asset there, like a business or a rental property. Likewise, when they moved to Germany, they did not report to Germany on assets that they held outside of Germany – that is, those back in Spain (or held in offshore accounts). This may or may not have been technically correct under German tax law, but this has been common practice for decades, if not centuries.

      Put another way, most countries tax on residency: If you are living and working in Germany, then you will be taxed by Germany. But if you are German and you are not living there – let's say you are living in New York City – then even though you are a German citizen, Germany claims no right to tax you on what you are doing in the United States.

The Unique Worldwide Reach of the U.S. Tax System

      On the other hand, once an internationally mobile individual touches the United States in his or her working life – whether that is made possible by a short-term work visa or a permanent assignment with a Green Card – then that person generally becomes a U.S. tax resident, and things become both different and more complex. The United States is the only major nation to tax all citizens and residents on their worldwide income, regardless of whether they currently reside in the United States. So, once an individual becomes a U.S. tax resident, the person is mandatorily subject to the worldwide nature of the U.S. income tax, and the IRS will seek to tax him or her on worldwide income and assets, no matter what country that income occurs in or where those assets are found in. This is even the case if you were to sell highly appreciated property, where the appreciation occurred before you even moved to the United States (like a rental property in London that you purchased 20 years before moving to the United States).

      Fortunately, a fairly complex system of foreign tax credits ensures that there is little or no double taxation – if you are working in the United States on a visa or Green Card, income from a business in a foreign country will often be taxed there first, and you will be given credit for the amount paid there when the amount of tax you owe in the United States is determined. However, there are many tricks and traps that the unwary can fall into, and a little bit of information and planning with regard to minimizing tax can go a long way and make a big difference. Similarly, with regard to assets such as bank accounts, brokerage accounts, retirement accounts, and real property, there are a wide variety of long-term planning possibilities and ways of leveraging and managing one's wealth for the long-term that are made more complex by U.S. tax law and regulations.

       Complexity in Taxation and Other Regulations

      Most cross-border professionals are quite surprised when they learn about the many financial requirements that go hand-in-hand with residing in the United States. Becoming a U.S. tax resident brings with it a great deal of potential complexity, both with regard to U.S. tax laws as well as other allied rules and regulations affecting things like moving funds from one country to another, opening accounts in more than one country, investing, business ownership requirements, and retirement planning. The U.S. system, then, is generally more complex both with regard to its tax code (many European countries have flat taxes or tax codes that are much simpler than the U.S. code) and the many other rules, regulations, and requirements that the United States imposes. For those cross-border professionals and globally mobile families with the most interest in wealth planning – which involves not only taxation and tax minimization strategies, but also questions of investment structure, asset allocation, savings and retirement plans, currencies, and so on – it can be a truly daunting task.

      Why is the U.S. tax code – which takes over 70,000 pages to explain – so much more complex than that of many other countries, with many more deductions, rules, alternative rules, and so on? It's partly because the U.S. tax code, unlike those in other countries, makes more of an attempt to achieve certain social goals by encouraging and discouraging certain types of behaviors. However, the effectiveness of the U.S. tax code in achieving these