Wealth preservation for foreign nationals

Who counts as a foreign national in the US?

A foreign national is typically defined as a person who resides in this country but is not a citizen. However, for the purposes of wealth management, a foreign national could also include a non-citizen who lives abroad but has significant financial or family ties in the US. Also, expatriates – Americans living abroad – are often treated as foreign nationals by financial services and life insurance companies, at least in terms of the products and services available to them. And importantly, for tax purposes, foreign nationals are generally treated differently from citizens of the country in which they live. Because they have financial interests that span multiple jurisdictions, wealth preservation for high-net-worth foreign nationals comes with unique challenges.

Wealth preservation issues specific to foreign nationals

The financial landscape for foreign nationals can be quite complex due to a range of tax implications, restrictions, and regulatory requirements. Key issues include:

• Citizenship-based taxation
  Most countries have residency-based taxation, meaning that individuals are taxed on their income that is earned or sourced from the country in which they reside. The United States is one of the only countries with citizenship-based taxation – US citizens are taxed on their worldwide income, regardless of where they live.¹ This can result in double taxation for US expats and foreign nationals alike. For example, an expat who works abroad and earns $100,000 may be taxed by their country of residency and the US government. Or, a foreign national who owns a US business (or has US investments such as stocks and bonds) will be taxed on the income from those holdings by the United States, even if they do not live in this country. There are other tax implications as well, for example, when it comes to estate and inheritance taxes.
  
  There are a number of tax treaties in place between the United States and other countries that can help to reduce double taxation. However, tax treaties can be complex, and it is important to seek professional advice to ensure compliance with US tax laws.

• Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)
  FATCA is a US tax law that obliges foreign financial institutions to report accounts held by US taxpayers or by foreign entities where US taxpayers have significant ownership. Failure to comply may result in hefty penalties and withholding taxes.
  
  CRS is a similar international standard for the automatic exchange of financial account information, designed to combat tax evasion. It involves over 100 countries and territories, requiring financial institutions to collect and share information about accounts held by residents of other participating countries.
  
  Both FATCA and CRS increase the reporting requirements and administrative burden for foreign nationals who hold financial accounts abroad.

• Taxation of non-US accounts
  High-net-worth foreign nationals usually have holdings outside the United States, including non-US mutual funds and hedge funds, foreign trusts, non-US businesses, and other holdings. Foreign nationals may be subject to US taxes on their accounts – for example, on dividends paid by US companies² – even if they do not live in the United States. This can be a complex issue, and it is important to seek professional advice to ensure you comply with all applicable tax laws.

Using US-based life insurance for wealth preservation

Life insurance – and in particular, permanent universal or whole life insurance that can build cash value³ – can potentially provide a number of advantages for foreign nationals, especially when it comes providing a death benefit and this helps with estate planning and preserving family wealth.

• Overcoming the estate tax disparity
  While US residents enjoy a federal estate tax exemption of $12,920,000, the exemption for non-residents is limited to just $60,000.⁴ Non-resident life insurance can help bridge this disparity, because death benefit payments are generally exempt from federal estate taxes. This feature makes life insurance an attractive wealth-transfer vehicle for many foreign nationals with US-based assets.

• Covering potential estate taxes with life insurance
  The US government imposes estate taxes on worldwide assets for US citizens, and on US-situated assets for non-residents.^5,6 US-denominated life insurance can help provide the liquidity needed to cover potential estate taxes without having to sell all or a portion of these holdings, preserving the estate's value for heirs.

• Portfolio diversification and risk mitigation
  Permanent, whole life insurance builds cash value at a guaranteed life insurance rate and is among the more conservative financial products available. A policy can build³ US-denominated assets that can be accessed while the policyholder is still alive, potentially acting as buffer against economic downturns in one's home country, fluctuating exchange rates, and other forms of geopolitical risk.

• Asset protection
  Life insurance policies are generally protected from creditors and bankruptcy. This can provide an additional layer of protection for foreign nationals' assets.