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Winter 2023-2024 Tax Highlights in the USA

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As we prepare to put away the 2023 calendar and hang up the 2024 calendar that our favorite charity sent us, it’s worth noting that there was no 2023 income tax legislation that changed everything like the Tax Cuts and Jobs Act (TCJA) did in late 2017. We need to discuss the Inflation Reduction Act, Secure 2.0 and the Corporate Transparency Act, but first let’s go over what is almost the same as the 2022 tax year.

Same old…

The highest marginal tax rate is still 37%, 2.6% lower than the 39.6% in effect before the TCJA. The Net Investment Income Tax (NIIT) is still 3.8% on investment income after the first $200,000 of Adjusted Gross Income ($250,000 for married filing jointly). The 0.9% additional Medicare tax still applies to wage and net self-employment income in excess of $200,000 ($250,000 for married filing jointly). There has been no change to the preferential tax rates from 0% to 25% for qualified dividend and long-term capital gain income. Estate tax is still 40% of the taxable estate in excess of the lifetime estate tax exemption and that exemption is still huge – for now.

Miscellaneous itemized deductions such as interest and carrying charges subject to the 2% of Adjusted Gross Income (AGI) threshold are still suspended. There is still a $10,000 State and Local Tax (SALT) cap in place for itemized deductions. The expanded Standard Deduction still replaces the old combination of Personal Exemptions and smaller Standard Deductions. Take note that some states allow the 2% miscellaneous itemized deductions that are suspended under the TCJA.

Tax brackets and phase-outs have crept up and will creep up again for 2024. Here is a sample.

37% income tax rate applies to taxable income over:

TY 2023 TY 2024
Married Filing Jointly MFJ $693,750 $731,200
Married Filing Separately MFS $346,875 $356,600
Single S $578,125 $609,350
Head of Household HOH $578,100 $609,350
Estates & Trusts $14,450 $15,200

40% estate tax rate applies to taxable estate over:

TY 2023 TY 2024
Lifetime Gift & Estate $12,920,000 $13,610,000

The TCJA hugely affected the reporting and taxation of foreign business income. This is still the state of affairs and thousands of pages have been written about it. K1 reporting was expanded to include K2 and K3 reporting last year. This has added many pages to the tax returns of companies and individuals who have foreign-sourced income. No relief from this reporting burden is in sight.

Remember that many of the provisions of the TCJA were temporary and will sunset after December 31, 2025.You may want to accelerate income into 2025 for lower marginal tax rates and push out expenses to 2026 to shelter more income from the higher rates expected to return in 2026. The 20% qualified business income deduction (QBID) is also set to expire in 2026.

Perhaps the most significant item associated with the TCJA is the historically high Lifetime Gift and Estate Tax Exemption. The current $12,920,000 is slated to rise for 2024 and 2025, then drop to between $6 and $7 million for deaths in 2026.

If a spouse dies while the exemption is high, it is usually a good move to file an estate tax return to elect portability of the DSUE even if the estate of the deceased is well below the exemption amount.  For example, assume that E and F are married. E passes when her estate is worth $2 million, and the exemption is $13 million. If an estate and gift tax return is filed, E is the Deceased Spouse, and her Unused Exemption (DSUE) is $11 million.  F passes when his estate is worth $10 million, and the exemption is $7 million.  None of F’s estate is taxable because he has a DSUE of $11 million from E to add to his $7 million personal exemption.

The annual exclusion for gifts is $17,000 for 2023 and will rise to $18,000 for 2024.  You may elect to make a larger gift and have it considered to be given ratably over five years.  This is a great way to front-load an education savings plan or help your adult child buy a home. Split gifts, i.e. where a couple makes a joint gift of $34,000 or more, will require filing a gift tax return, as will five-year ratable gifts.

Also U.S. citizen spouses have an unlimited marital exemption for gifting, only gifts of $175,000 per year, ($185,000 for 2024) to non-citizen spouses may be given without eating into your lifetime gift and estate tax exemption.

2023 limits for contributions to Health Savings Accounts (HSAs) are $3,850 for self-only plans and $7,750 for family plans. If you are 55 or over at the end of the year you may make a $1,000 catch-up contribution for a self-only plan or $1,000 per spouse for a family plan if both spouses are at least 55 years old by the end of 2023. Be mindful that contributions to an HSA are only allowed if you are covered by a qualifying high-deductible health insurance plan – at the time of the contribution.

Health Flexible Spending Accounts (FSAs) maximum contributions are $3,050 for 2023 and will be $3,200 for 2024.

Some new…

Inflation Reduction Act

Energy Credits are fully available for 2023 and will continue through December 31, 2033. There was a phase-in of various requirements and limits during 2022. There are credits for commercial clean energy and builders but we will look at the credits for individuals.

For the residential property credits, the qualifying property must be installed – not just paid for – on the U.S. home in the year that the credit is claimed. Here is the IRS landing page for Home Energy Credits. https://www.irs.gov/credits-deductions/home-energy-tax-credits

Qualified solar electric installations, solar water heaters, fuel cell property, small wind energy property, geothermal heat pumps and battery storage technology expenditures all fit into the Residential Clean Energy Credit.  This credit is 30% of the qualified expenditures and has no annual or lifetime maximum credit amount.  The excess credit carries forward.

The Energy Efficient Home Improvement Credit covers windows, doors, building envelope (insulation), central air conditioners, water heaters, furnaces, boilers and heat pumps, biomass stoves and boilers, and home energy audits. Different items in this category have different lifetime credit limits but they are generally 30% of the expenditure. The credit claimable in this category has an annual $1,200 limit with an additional $2,000 annual credit amount for heat pumps, biomass stoves and boilers. There is no lifetime limit for credits in this category, but the credit is non-refundable and does not carry forward. If you have insufficient tax liability to offset with this credit, consider spreading your improvements over several tax years in order to get full credit for your improvements.

There are Clean Vehicle Tax Credits for new and for used clean energy vehicles. Here is the IRS landing page for Clean Vehicle Tax Credits. If you are a U.S. citizen living in Canada, be aware that this credit is for personal vehicles purchased for use mainly in the U.S. Maybe this becomes your snowbird vehicle.

For vehicles placed in service between January 1 and April 17, 2023, the credit is generally a maximum of $7,500 made up of three components. First, we have a base amount of $2,500 for EV, plug-in, hybrid and fuel cell vehicles.  If the vehicle doesn’t have 7 kilowatt hours (KWh) of battery life, $2,500 is the maximum. Then we have $1,251 for the first 7 KWh of battery capacity and $417 per additional KWh over 7 to a maximum of $7,500.

For vehicles placed in service after April 17, 2023, the maximum credit of $7,500 has only two components: critical minerals and battery components.

There is a price test and an income test.  If Modified Adjusted Gross Income (MAGI) is no more than $150,000 for singles ($300,000 married filing jointly) in the year of purchase or the immediately prior credit, you may take the credit.  It is non-refundable.

The possibility of MAGI disallowing the credit for the first purchaser of the vehicle leads us to the credit being available for Used Clean Vehicles.  If the seller can certify that they did not take a credit for their original use purchase, that credit may be available for the next buyer of that vehicle.

SECURE 2.0

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019. SECURE 2.0 was passed in December 2022. As you might infer from the name of the legislation, it concerns itself with promoting retirement savings.

Participants in retirement plans such as IRAs and 401(k)s must take an annual Required Minimum Distribution (RMD) once they reach a certain age. The required beginning date for RMDs was April 1 of the year after you turned 72.

  • If you turned 72 in 2022, your first RMD for 2022 was due on April 1, 2023, and your second RMD for 2023 is due by December 31, 2023, and annually thereafter.
  • The certain age is now 73. If you turn 72 in 2023, your first RMD is due April 1, 2025, and your second is due by the end of 2025.
  • On January 1, 2033, the certain age will be 75.

For more on how Required Minimum Distributions are calculated,  check out our blog

Inherited IRAs are generally required to continue annual RMDs if the original holder was already required to do so at the time of their death. The plan also needs to be fully distributed within 10 years (five years if there is no designated beneficiary). Eligible designated beneficiaries (spouse, minor child or a disabled or chronically ill individual) may still stretch the IRA distributions over their lifetimes.

The IRA contribution limit for 2023 is $6,500 ($7,000 for 2024). Individuals 50 years and older may make an additional $1,000 catch-up contribution. There are additional general catch-up contribution limits for individuals aged 60 through 63.

401(k) contribution limits for 2023 are $22,500 plus up to $7,500 in catch up contributions if the employee is at least 50 years of age. The contribution limits rise to $23,000 plus $7,500 for 2024. Consider making your maximum contribution to take advantage of employer matches where available. As a reminder, Cardinal Point Capital Management is now able to manage your 401(k) program.  Speak with your Private Wealth Manager for more information.

There are multiple and complicated changes to the catch-up contribution limits for employees who are participants in a 401(k). If they earn over $145,000 in 2024 their catch-up contributions must be treated as Roth contributions.

After paying for education, do you have leftover funds in your 529 (college savings) account? Beneficiaries of 529 plans are permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA.  These rollovers are subject to Roth IRA annual contribution limits and the 529 plan must have been open for at least 15 years.

Beneficial Ownership Information

Do you, or did you, have an interest in a Limited Liability Company, small corporation, limited partnership or some similar entity?  If so, the U.S. government now wants to know who the beneficial owners are or were.  It may not matter that you put the entity on the back burner, haven’t thought about it for a long time, or that it may be dormant and unused.  Beneficial Ownership Information (BOI) reporting must still be addressed, starting in January 2024.

Although this is not a tax measure, we believe that you should give the U.S. Corporate Transparency Act and the required Beneficial Ownership Reporting a few minutes attention.  It’s happening and it’s starting in January 2024.  It may not apply to you at this moment, but you do need to be aware of this reporting requirement in case you open a company in the future. Since the purpose of the legislation is to combat money-laundering and funding crimes, penalties for non-compliance are significant.  Reporting is through FinCEN – the Financial Crimes Enforcement Network.  Here is FinCEN’s landing page for Beneficial Ownership Reporting.

There is an article on our blog titled “Will the U.S. Corporate Transparency Act Affect You?”

The only significant changes since this article was posted are that the time to report a new entity has increased from 30 to 90 days before penalties will be imposed and the exceptions for dormant companies have been expanded.

We suggest that you apply for a FinCEN ID early in 2024 as that will protect your personally identifiable information from those who don’t need to know.

Miscellaneous – Good to Know

The drop in the 1099-K reporting threshold from $20,000 to $600 has been delayed another year per Notice 2023-74. The IRS plans to drop the threshold to $5,000 in 2024 as part of a phase-in. In case you are not familiar with 1099-K, this is an information reporting form that reports ‘gross receipts’ to you through credit card, PayPal and similar payment platforms. The presumption is that the gross receipts are income, but they could very well be reimbursement from your friends for concert tickets or reimbursement from your family for that cottage vacation you booked on their behalf.  All of this is a bit problematic since the 1099-K number will have to go on your tax return even if it is backed out with an explanation.

The maximum compensation (wages and net self-employment income) subject to Social Security Tax is $160,200 for 2023.

If you are drawing early Social Security Benefits and are under your full retirement age, you may earn $21,240 from work in 2023 and still collect the benefits without a claw-back.

Kiddie Tax applies to children under age 19 or under age 24 if a full-time student with unearned passive income and whose gross income is less than $12,500.  In the situation where the child does not have any earned income, the first $1,250 of investment income is not subject to tax. The next $1,250 is taxed at the child’s marginal tax rate and the remainder is taxed at the parent’s marginal tax rate.  For 2024, $1,250 becomes $1,300 in both instances.

Here is some random minutia for trivia night. There is a U.S. federal tax on the first sale by a manufacturer, producer or importer of Arrow Shafts. It will rise from $0.59 to $0.62 per shaft in 2024.

Hedging Currency in Your Portfolio: Strategies & Insights

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Portfolio management requires many decisions. One decision that many investors don’t give much thought to is how much of their financial net worth should be in their “home” currency. For example, if you’re living a cross border lifestyle, or have assets in two or more countries, how should you manage the different currencies you have in your portfolio? At Cardinal Point, we think about this a lot. The portfolios we manage are internationally diversified, and many of our clients invest in, and spend money in, more than one country.

Summary and Takeaways

One component of portfolio management worthy of exploration is how much foreign currency exposure is helpful. That is also a key question to ask if you live a cross-border lifestyle where you often rely on access to more than one currency. Nevertheless, the goal of currency hedging is the same – to try to achieve financial stability and avoid volatility.

Key Takeaways

  • For Canadian investors, holding U.S. stock positions that are not hedged can benefit from a strong U.S. dollar.
  • But when the Canadian dollar is strong, a hedged position can be advantageous.
  • Timing the movement of any currency ahead of time is difficult, so a good strategy may be to partially hedge stocks, based on the objectives of the portfolio.
  • Keep in mind that compared to equity investments, a bond portfolio invested for fixed income will have significantly lower volatility.
  • In that case, additional exposure to underlying currency through hedging may actually increase unwanted volatility.
  • When thinking about currency exposure, consider your future needs for a particular currency – and the implications of doing a currency exchange in order to access the preferred currency.

When buying foreign stocks and bonds, you are really making two investment decisions. First, you are deciding to make the investment. Second, you are deciding to buy the currency. Or you can make the investment but “hedge” the currency. If you like the company but not the currency, then a professional manager would buy the company but hedge the currency risk. Hedging can be done in several ways though the concept is always the same. The end goal is to immunize the currency movement so that you are only exposed to the movement of the investment and not that of the currency as well.

All investment managers investing outside their “home” country are faced with currency hedging decisions. Cardinal Point is unique because we invest from two different countries and have clients that live and work in both. Not only do we have to make the currency hedging decision as it relates to the foreign content in portfolios, but we also have to consider how our client’s capital will be able to maximize returns and minimize risk when they may need retirement income in the other currency.

In order to explain how Cardinal Point approaches currency hedging from our unique vantage of serving investors in the U.S. and Canada, we will start with the basics that all portfolio managers should consider when investing in foreign stocks and bonds.

A Short History of Currency Hedging in Portfolios
When international investing first started, only very sophisticated investors like huge pension funds could hedge currency. The costs of hedging were too high and the types of products that allowed for it were underdeveloped. Currency hedging became more prevalent in the 1970s with the development of publicly available options and futures. In the early 1990s, some believed that you shouldn’t hedge your stocks because not doing so resulted in greater diversification.

One of the classic studies that was done in this area was Froot 19931. Kenneth Froot did research on portfolios and found that hedging the currency of a foreign stock portfolio did not decrease the variability as was previously believed. In fact, a stock portfolio that left the currency “un-hedged” had lower volatility.

This led to the concept that currency volatility actually reduces the volatility in foreign stocks. The concept goes something like this.

  • The return path of the currency moves independently from the return path of the stock.
  • So, if you pair the time series of the return of the stock with the time series of the return on the currency, you will get a time series with lower volatility than the return of the stock by itself.

This is similar to the concept that investing in two stocks will be less volatile than one because there are some days when the stocks will move in opposite directions. For stocks, the currency exposure can act as a further diversifier. The volatility of a portfolio of two or more foreign stocks can actually be reduced if the currency is left “un-hedged” in the portfolio.

This relationship can vary over time and can also change depending on which currency is the “home” currency. For Canadian investors, holding un-hedged U.S. stock positions can benefit from the USD strength that often accompanies broad market sell offs. But in times of CAD strength, the currency hedge can boost returns. It is tough to know in advance if the hedge will help or hurt, so we look to minimize the uncertainty by partially hedging stocks depending on the goals for the portfolio.

For bonds, the standard theory is different. The volatility in fixed income is much lower than equities. In fixed income, the addition of currency exposure may add greater volatility. The actual direction or return of the currency in any given year may far exceed the return of the underlying fixed income asset (bond or bond fund). Therefore, it is generally recommended that you hedge out your currency exposure of your fixed income. It has been the case over long periods of time that currency volatility can both help and hinder your portfolio returns. The rationale for currency hedging fixed income is because the currency volatility can swamp the income returns. Fixed income is supposed to reduce portfolio volatility, so we should not have currency exposure in bonds.

Cardinal Point’s Philosophy on Currency Hedging in Portfolios
Because we have investors in both Canada and the U.S., we had to rethink the conventional wisdom about hedging to your “home” currency. Many of our clients have spending needs in both countries. We believe it is important to think about the future portfolio cash outflows when developing a hedging strategy.

Literature on currency management is surprisingly thin on whether to hedge or not based on future cash outflows from portfolios. The idea of tying investment decisions to future cash outflows is known as an Asset Liability Management (ALM). There is a whole body of literature about managing with an ALM framework for pension plans. But very little of that relates to hedging currency with the specific intent that the income you earn matches the currency of future cash outflows. All literature on hedging or not hedging looks at risk vs. return of the decision and does not relate to the currency of future cash outflows.

We talk to clients about currency needs as part of their investment policy statement and portfolio construction process. Where appropriate, we encourage clients to keep their portfolio denominated in a manner that balances their future income needs. If currency exchange is needed, we have resources to help them convert their currency at more competitive exchange rates. We do not receive any financial compensation from recommending currency exchange providers, and we have negotiated competitive currency exchange rates with custodians on behalf of clients.

We deploy some currency hedging in most portfolios. Most of the bond exposure is hedged back to the currency of the portfolio, and some of the stock exposure is typically hedged. Currency management is one of the many ways we provide additional value to our clients. By taking a systematic approach to currency management, we believe our clients are more likely to have successful investment outcomes.

1 Froot, Kenneth A., 1993, Currency hedging over long horizons, NBER Working Paper No. 4355.

Cross Border Retirement Income: Canada Pension Plans, Canadian Old Age Security, U.S. Social Security and the Windfall Elimination Provision

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Calling all eligible benefit holders of the Canada Pension Plan (CPP), Canadian Old Age Security (OAS) and U.S. Social Security (SS)…

Does your or your spouse’s story narrate a history of employment in both Canada and the U.S.? If so, you may have the privilege of drawing from SS, OAS and CPP. The confusion lies amidst the qualifications and how these benefits interact with one another given the Windfall Elimination Provision (WEP).

Let’s break it down…

Social Security (SS)
To qualify for retirement benefits under U.S. Social Security, you must have 40 credits of covered work.  Each credit represents a quarter (i.e. 3 months) of full-time employment.  Thus, generally speaking, you must have 10 years of full time employment in order to qualify for retirement benefits.

All monthly benefits are based on your Primary Insurance Amount (PIA), which is the amount you would receive if you retired at your full retirement age (FRA). The FRA is age 65 for people born before 1938, gradually increasing to age 67 for those born in 1960 and later. You can choose to take it as early as age 62, resulting in a 25% reduction in benefits. At a more granular level, the monthly PIA is reduced by 5/9ths of 1% for each of the first 36 months before your FRA. You can also choose to earn delayed retirement credits (DRCs) for any month from FRA up to age 70. DRCs increase the benefit for the retired worker but not the spouse (if utilizing the spousal benefit). If you were born in 1943 or later, you earn 8% DRCs for each full year (prorated for months) up to age 70 for a maximum increase of 32%.

Individuals have the opportunity to take a SS benefit on the greater of their own record or 50% of their spouse’s SS benefit.

Canadian Old Age Security (OAS)
The rules to qualify for full OAS benefits under the Canadian system are centered on residency in Canada beyond the age of 18, not employment history. A full benefit is received when an individual has accumulated a Canadian residence history of 40 years. The pension can commence as early as the month following one’s 65th birthday or be delayed as late as age 70. By deferring one’s OAS, the benefit increases by 0.6% per month/7.2% per year, which equals a 36% increase if OAS is deferred to age 70. Partial OAS benefits may be available in certain situations. Let’s review a few scenarios:

Let’s assume you’ve lived in Canada less than 40 years and you are currently residing in Canada. As long as you are 65 years or older, a legal resident of Canada or Canadian citizen, and have lived in Canada at least 10 years since the age of 18, you are eligible for a prorated OAS benefit.

To take it a step further, let’s assume the same scenario with a bit of a twist. Instead of currently residing in Canada, you are now living in the U.S. These circumstances dictate you must have resided in Canada for a minimum of 20 years since the age of 18 in order to receive a partial benefit.

If neither of these examples apply to you, there may still be an opportunity to collect on the benefit if the country in which you currently reside has a social security agreement with Canada.

One final item on OAS; if one were to reside in Canada at the time of receipt of the OAS benefit, the individual may be subject to the OAS clawback. This would be created when your income exceeds certain threshold levels. For the 2019 tax year, the OAS clawback kicks in when income exceeds, $77,580. On the other hand, if OAS payments are made to a physical resident of the U.S. – and not a Canadian physical or tax resident – the clawback provisions are eliminated, and the entire benefit is paid to the recipient. No OAS clawback would apply.

Canada Pension Plan (CPP)
Unlike Old Age Security, CPP is based upon your pension contributions through your employment record, subject to certain maximums. As long as you’ve made at least one contribution to the plan, you are entitled to receive a CPP benefit. This benefit is available at age 65, but one can opt for a reduced benefit as early as age 60 (reduced by 7.2% annually) or a delayed benefit as late as age 70 (increased by 8.4% annually). In addition, the CPP benefit is not subject to any clawbacks.

How then do these benefits tie in with the Windfall Elimination Provision (WEP)?

Understanding the Windfall Elimination Provision
Under Title II of the Social Security Act, the Windfall Elimination Provision was born. It authorized the Social Security Administration to reduce an individual’s Social Security benefit in the event the recipient was also receiving a foreign pension (e.g. CPP). To understand the “why” behind the WEP, it’s important to comprehend how the SS benefit is calculated, specifically the Primary Insurance Amount (PIA).

A worker’s PIA is based off their average monthly earnings separated into three amounts. These values are then multiplied utilizing three distinct factors. Here’s an example:

For a worker who turns 62 in 2018, the first $895 of average monthly earnings is multiplied by 90%, earnings between $895 and $5,397 by 32%, and the balance by 15%. The sum of these three amounts equals the PIA, which is then either increased or decreased depending on when a worker decides to draw SS. This is how the monthly payment is determined.

Social security was meant to replace part of an individual’s pre-retirement earnings. With the previous calculation in mind, one can conclude that workers with lower average monthly earnings have a higher percentage of their pre-retirement earnings replaced via Social Security than those with higher average monthly earnings. For example, a 62 year old worker with average earnings per month of $3,000 could receive a benefit at FRA of $1,479 (49 percent of their pre-retirement earnings), increased by cost of living adjustments. For a worker with $8,000 of average earnings per month, the benefit starting at FRA could be $2,636 (32 percent of their pre-retirement earnings) plus cost of living adjustments.

For those individuals whose primary job wasn’t covered by Social Security, yet had their benefits calculated as if they were a long term, low-wage worker, they would end up receiving a benefit that would cover a higher percentage of their earnings, plus a pension from a job for which they didn’t pay Social Security taxes. This is true for someone who spent time working for an employer in Canada, earning CPP credits.

Under the Windfall Elimination Provision (WEP) the calculation for a worker’s Social Security benefit needs to account for the CPP payment. The 90% factor on the first $895 of monthly average earnings (when estimating PIA), could be reduced depending on the number of years of U.S. earnings history. The WEP is eliminated once a worker has 30 or more years of substantial earnings in the U.S.

The U.S. Social Security Administration has an Online WEP Calculator that is available here.

Despite the current provisions of WEP, a U.S. Class Action lawsuit has been filed on behalf of Canadians who receive SS benefits and have been impacted by WEP.  The suit was recently filed in the State of Indiana against the SSA. The crux of the lawsuit is whether the application of WEP against individuals who also receive the same benefits in Canada is lawful.  The Plaintiffs in the Class Action are claiming that the application of WEP to U.S. benefit recipients is unlawful and presents a violation of the plain meaning of the U.S. Social Security Act, U.S. Social Security Act Regulations and the Social Security Agreement (1983-1984) between United States and Canada (the “Social Security Agreement”). The Plaintiffs are seeking retroactive payment of the amounts that have been deducted through the application of WEP and the ending of the application of WEP moving forward.  The claim has been certified but has yet to move forward at the trial court level.

In Summary: Although a worker’s Social Security is potentially reduced by CPP, the good news is that OAS does not factor into the WEP calculation. Whether the WEP impacts your Social Security depends on the uniqueness of your individual circumstances and the potential result of the Class Action Lawsuit. If you think you might be impacted by WEP, we recommend you have a cross border financial planner such as Cardinal Point analyze your situation.

 

 

 

Don’t Settle: Choose wisely when selecting a cross-border wealth management firm

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Your whole life you have done things correctly: worked hard, saved and prudently invested your money. Then one day, out of the blue, you receive a letter from your U.S. investment management firm saying they no longer want to work with you because you reside outside of the U.S. Worse yet, they give you 90 days to transfer out your account or risk having your holdings liquidated. Whether it is a taxable or tax-deferred investment account, a forced liquidation and closure of your account can have  severe tax consequences. Furthermore, it can have a devastating effect on your long term retirement and savings goals. While the above scenario sounds  dire, it does not mean you should make a rushed decision and simply partner with the first firm that confirms they can take over the management of your account(s). Instead, take the opportunity to rethink what advisory firm would best serve your long-term interests as a non-resident. In other words, seek out a true cross-border wealth management firm that can not only deliver on the investment management piece but also provide ongoing value added cross-border financial, tax and estate planning solutions. The last thing you want to do is work with another firm that does not specialize in working with non-residents of the U.S., only to find out down the road you are once again being terminated from their platform.

So what characteristics should you be looking for in a true cross-border wealth management firm? The following checklist is a good starting point for selecting a company that’s right for you:

Cross-border platform – Make sure the firm and its advisors are legally licensed and registered in the jurisdiction you reside. Confirm they are not restricted on how your investment account can be managed based on your non-resident status.

Fiduciary vs. Suitability – It is important to confirm that the firm’s advisors operate under the fiduciary standard of care, which is a legal requirement that an advisor act in the best interest of his or her client. The fiduciary standard helps eliminate conflicts of interest. In contrast, the less stringent suitability standard adheres to a rule in which recommended investments must merely be “suitable” for but not necessarily in the best interest of a client. Most large investment brokerages, banks and wire houses operate under the suitability standard.

Fee-only – Finding an advisory firm that is fee-based and is not compensated by commissions, trading fees or financial products can eliminate conflict of interests between the advisor and the client.

Business Model – You cannot be all things to all people. Advisors who claim they work with four or five different categories of clients (retirees, small business owners, professionals, divorcees, expats, etc.) fall back into that “generalist” category. If you want to be an expert in what you do, focus on your niche. A financial firm with a business model of working exclusively with cross-border clients is typically better suited to handle expats or non-residents of the U.S.

Credentials, Experience and Education – Just because an advisor has a certain credential, doesn’t mean that they are an expert. That being said, when looking to partner with a cross-border financial advisory firm, make sure to review the bios of the individuals working at the company.  Have they been working with cross-border clientele for a long time? Do they have education or credentials in certain areas that focus on assisting cross-border clientele?

Cross-border Team – When building and preserving wealth, you’re only as strong as your weakest link. In other words, you may find a firm that can deliver on the investment management piece, but can they provide the ongoing cross-border or expat financial, tax and estate planning services you require? Look for a cross-border team that has dedicated portfolio managers who specialize in managing money for expats, and has international or cross-border tax experts and cross-border financial planners. All of these individuals have unique skill-sets that complement one another. Finding a firm that can provide comprehensive cross-border financial planning services in an integrated and coordinated fashion ensures no stone is left unturned when reviewing your situation.

Understanding of Tax – Understanding the tax rules and regulations of the jurisdiction in which you reside is extremely important when providing investment management services to non-residents. Further, if you are a U.S. citizen living abroad, you must also ensure the investment management strategy is tax managed based on U.S. tax rules. For example, the Passive Foreign Investment Companies (PFICs) rules will impact almost all foreign-traded mutual funds and ETFs. Ensuring you are not subjected to the punitive tax rules associated with holding a PFIC is critical. Make sure the firm you choose has a strong understanding of tax rules impacting non-residents and expats.

While no one wants to be faced with a surprise “move your investment account or else” deadline, don’t feel pressured to move your account to the first firm you speak to. Do your homework. Look to partner with a true cross-border wealth management firm that is positioned to provide long term value in addressing your unique and ongoing cross-border financial planning requirements.

Terry Ritchie featured in The Insurance & Investment Journal article, Managing Cross-Border Clients

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From the Insurance & Investment Journal article:

Managing cross-border clients is a challenging area for advisors that requires thorough knowledge on how to handle life insurance, investments, taxes and pensions while respecting two countries’ rules and regulations.

The Insurance and Investment Journal spoke to U.S-Canada cross-border expert Terry Ritchie, a director at Cardinal Point Wealth Management, who’s specialized in the field for more than 25 years to find some answers. He says if you don’t have knowledge or experience it is very easy to mess things up for your client.

Read the article here