Wealth preservation for foreign nationals
Strategies to help maintain and protect your US-based assets from inflation, taxes, and other risks to family wealth.
It takes one set of skills to grow wealth, and another set of skills to preserve wealth. Wealth preservation strategies can help safeguard the personal and family assets you've worked hard to build and protect them from potential risks like economic downturns, inflation, and taxes. Prudent, calculated decisions that mitigate risks and maximize returns are the key to ensuring long-term growth and stability. It's important for all high-net-worth individuals, but can be especially challenging for foreign nationals, who may face unique tax issues.
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.
The Global Citizens Program
Guardian provides specialized life insurance solutions and services designed to meet the unique demands of high-net-worth international clients. Our Global Citizens Program allows qualifying clients to tap into a dedicated team that specializes in the more complex financial protection needs of clients with multinational interests – and provides white-glove service with the backing of one of the world's largest mutual life insurance companies. Clients must be non-resident, non-US citizens who demonstrate financial connections, holdings and/or family ties in the US. A dedicated case concierge team is assigned to help each applicant, and submissions are evaluated by specialized underwriters. Other amenities include a complimentary US trust review, translation services, law firm referrals, and more. To learn more, contact a Guardian financial professional.
Get help finding the right life insurance solution for your situation
If you're a foreign national with US residency, a Guardian financial professional can help you explore the range of coverage options available. Or, if you're a non-resident with ties to the US, ask about the Global Citizens Program.
Wealth preservation methods vary, but they often involve working with one or more financial professionals to implement a mix of the following strategies:
Diversification of assets across sectors and geographies
Utilizing tax-efficient investment vehicles
Estate planning and using trusts or insurance products designed to help minimize tax liabilities
Wealth preservation refers to strategies aimed at safeguarding assets from various risks like market volatility, inflation, and taxation. It involves the prudent management of financial resources designed to help ensure their growth and stability over the long term.
Wealth accumulation is where assets are actively accumulated, and this often involves higher levels of risk and aggressive investment strategies. Wealth preservation, on the other hand, is the management of existing assets designed to help ensure their safety and longevity, often by reducing exposure to risk and implementing tax-efficient strategies.
Tax system complexity: Navigating multiple tax systems, each with its own regulations and rates, is a significant challenge.
Financial reporting: Complying with FATCA and CRS mandates extra diligence in financial planning and reporting.
Double taxation: The risk of being taxed twice on the same income can occur, although some countries offer tax credit mechanisms or have estate tax treaties to mitigate this.
Business interests: Maintaining business interests across borders can expose foreign nationals to varied and sometimes volatile financial systems.
Estate and inheritance: Proper planning is essential to navigate differing inheritance laws for family members across jurisdictions.
Tax benefits: Life insurance proceeds are generally tax-exempt, offering relief from the US tax system and sometimes even providing tax credit benefits for foreign nationals.
Liquidity and estate planning: Permanent and term life insurance can both provide immediate liquidity to cover potential estate taxes.
Income: Permanent life insurance policies include a cash value component, which can be accessed as a form of tax-deferred income.
Diversification: Cash value life insurance is a conservative asset that can complement a diversification strategy.
Family considerations: Proper planning through life insurance can help ensure financial confidence for family members, fulfilling both immediate and long-term needs.
With life insurance, foreign nationals can address many challenges in the tax system, safeguard income, and secure the financial well-being of their business interests and family members.
2 https://www.investopedia.com/ask/answers/06/nonusresidenttax.asp
3 Whole Life insurance is intended to provide death benefit protection for an individual's entire life. With payment of the required guaranteed premiums, you will receive a guaranteed death benefit and guaranteed cash alues inside the policy. Guarantees are based on the claims-paying ability of the issuing insurance company. Dividends are not guaranteed and are declared annually by the issuing insurance company's board of directors. Any loans or withdrawals reduce the policy's death benefits and cash values and affect the policy's dividend and guarantees. Whole life insurance should be considered for its long-term value. Early cash value accumulation and early payment of dividends depend upon policy type and/or policy design, and cash value accumulation is offset by insurance and company expenses. Consult with your Guardian representative and refer to your whole life insurance illustration for more information about your particular whole life insurance policy.
5 https://www.thetaxadviser.com/issues/2023/may/us-estate-tax-not-just-for-us-citizens.html
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.