Bringing Cross-Border Planning Expertise to the Advisory Profession

The CFP, PFS and CFA designations require advisors to learn about domestic planning issues in the U.S. or inside the borders of other nations in some detail, but they leave aside cross-border planning – for good reason. Every nation has its own tax regime, retirement income program similar to U.S. Social Security, and ways to tax assets left in an estate. If a person’s financial situation mingles domestic and international assets in any way, he or she will have to navigate a bewildering maze of tax treaties. Entire books are written about how to navigate the issues encountered by people with mixed assets or mixed marriages in the U.S. and a single other country; dealing with every permutation of the U.S. and the 192 other sovereign nations would require a couple of encyclopedias – and, of course, there are people who possess mixed assets in two or more foreign domiciles.

If the traditional designation training doesn’t equip advisors to deal with these issues, where do they turn? Over the past two years, Murphy has been assembling a variety of subject matter experts who are building a curriculum that will fill the void, through an organization he created called the Global Financial Planning Institute. His most ambitious project has been to create a program of study that would lead to the GFP designation – the only cross-border credential in the world.

Advisor students who aspire to the GFP would enroll in a series of 10 90- to 120-minute Zoom presentations hosted by a number of cross-border professionals, including Marina Hernandez of Swiss American Wealth Advisors; Katrina Haynes of Haynes & Associates; international attorney Melvin Warshaw of the Blake Harris Law Firm; Andrew Fisher of Cerity Partners (author of The Cross-Border Family Wealth Guide); Allen Koski of The New Nomad podcast; and Jonathan Mintz of Evergreen Legacy Planning.

Murphy teaches the first lesson (“Tax Systems, U.S. Treatment of Foreign Income and Passive Foreign Investment Companies (PFICs)”), and the tenth (“Education Planning, Real Estate & Case Studies”). “The first lesson is going to affect everyone who invests money overseas for a client,” Murphy explains. “Anything that is not U.S. domiciled, we need to worry about the PFIC treatment.”

The what? A PFIC is a foreign corporation where at least 75% of its income is derived from passive investments – a definition which covers most foreign-domiciled mutual funds. For people unfamiliar with foreign tax and reporting provisions passed by Congress in 1986, individuals with these holdings can be taxed, in the U.S., at the highest marginal income tax rate each year the investments are held. Other assets can be even more dangerous. “If they have rental property or businesses abroad, there are huge, huge tax issues,” says Murphy.

The second lesson offers an overview on the issues of residency, domicile and sources of income. “When does someone become a U.S. tax resident?” Murphy asks rhetorically. “Legal residency differs from tax residency,” he continues, “which is how it is possible for someone who may be an undocumented immigrant in the United States to be legally obligated to pay taxes – because their legal residency is unrelated to their tax residency. There is also a definition for estate planning residency,” Murphy adds. “The lesson includes some interesting examples where it is possible that someone who is not even a green card holder would be subject to global U.S. estate taxes.”

Lesson three covers pre-immigration planning. “That’s an interesting one,” says Murphy. “I just had a prospect that I was speaking with last week, who has a venture capital fund startup, likely to be extremely successful, and he wants to move to the U.S.” Murphy is counseling him on steps he needs to take before the move, so he won’t get caught by an exit tax when he returns to Australia.

From there, the lessons move to international treaties and reporting on tax compliance (including how and when to submit form 8938, and the draconian penalties if the IRS thinks you willfully did not); and foreign exchange issues and Social Security. “What does it mean to claim Social Security as a non-U.S. person?” Murphy says. “Do non-U.S. citizens or green card spouses living overseas get Social Security benefits? It turns out that they do.”

Also: foreign and domestic investments and banking issues; retirement account transfers; risk management and cross-border insurance issues; and international estate planning. Each lesson comes with recommended readings on the topic.

The foreign exchange topic happens to relate to one of the benefits of becoming a member of the Global Financial Planning Institute – and illustrates how advisors might inadvertently cost their clients thousands or even millions of dollars with their lack of global sophistication. Murphy offers the not-uncommon example of a U.S. citizen working abroad who has $1.4 million Australian dollars sitting in an Australian bank that he wants to bring back into the U.S. “At the ATM rate, exchanging those funds would cost you 2% of the assets – or $28,000,” says Murphy. Compare that with the rate that the GFP Institute has negotiated through the Associated Foreign Exchange organization, of ten basis points, or $1,400.

But that’s not the whole story on these asset conversions. “There is extreme volatility in foreign exchange,” says Murphy. “If you convert it at whatever the spot rate happens to be, that could wind up, in retrospect, being a poor rate.”

Instead, Murphy will have the client develop a two-year plan, where every quarter, at the beginning of the quarter, he would set up limit orders on the upside and on the downside. “We are capping it so that if the rate weakens, it won’t hurt the client, and if the rate takes off, we can capture that as well,” says Murphy. “We were doing smaller periodic conversions as the rates were coming down, and as it has come up again, we have been doing larger ones,” he adds. “In the end, we got a better overall average rate and saved the client thousands and thousands of dollars.”

Murphy’s goal is to help the advisor community raise its level of knowledge and understanding when confronted with any of the many millions of clients who have cross-border issues. “The main motivator, for me, is seeing these clients properly handled,” he says, noting that CFP Board enforcement of its own ethical standards – that advisors should refer to experts when they encounter situations that are outside their expertise – is not being enforced in the cross-border area. “There needs to be a solution that offers education in this area,” he says, “so that advisors working with these people know what they’re doing.”

In a world where advisors are becoming increasingly specialized, the GFP designation might also help its practitioners target a group of clients who are not receiving sophisticated advice, who might be motivated to seek out someone who can save them thousands or millions of dollars with a little bit of paperwork, advance planning and some limit orders. “A cross-border specialist in a given country,” says Murphy, “can begin to target that specific demographic.”

And he points to the 10 lessons, the reading materials and the more detailed specifics as evidence that this is not one of those specialties where you need a weekend course to get up to speed. “The reason cross-border planning has failed to penetrate the broader psyche of the advisor community is because it is fundamentally a different type of financial planning,” says Murphy. “You need to be gathering different kinds of information, right from the very first interaction you have with the client. What is their work history? Where have they accumulated entitlements in other countries? Where are their assets? Is the spouse a U.S. citizen, a green card holder, or a nonresident alien? Depending on the answers, you could be giving very different advice.”

“The ultimate goal is to have three different levels of the GFP designation,” says Murphy. “The first of which is what we’ve already gone to market with; the inbound/outbound curriculum. It’s still pretty general,” he adds. "If you are an American person moving abroad, or a foreigner moving to the U.S., here are the planning issues that you need to be concerned with.”

The second level, still being worked out, would address specific combinations of countries, with (at least initially) the U.S. being the hub, and level three would be a deeper dive into the specific tax and other interactions between assets in two countries. Murphy notes that in Australia, there are very different tax and retirement systems, financial products, and strengths and weaknesses involving insurance compared to the U.S. That’s level two. “Once you have done level 2 in Australia,” says Murphy, “then in level three, it’s about what does Australian taxation say about moving a 401(k) over? What is the tax treatment of someone who has just become an Australian resident? What does the U.S. say about moving over the assets in a superannuation account?”

The master class costs $3,395, which includes membership in the GFP Institute (normally $445 a year) and access to, among other things, those favorable exchange rates for clients, an exit tax calculator, Murphy’s own multi-currency client investment plan, and access to the organization’s “Professional Services Network” of international and cross-border CPAs, tax attorneys, estate attorneys, banking and insurance professionals. The June 3-August 12 series of courses has already started, but the following master class will be scheduled for the fall. Advisors who want to bone up on these topics can look through the blog posts on the GFP Institute website, or go to some recommended reading materials here:

Save More on Your US Expatriate Taxes with Foreign Tax Credit

Is the Foreign Earned Income Exclusion the Best Way for You to Save?;

How PFIC Tax Rules Affect Most Americans Abroad

How different types of ‘Residency’ affect Financial Planning for Expatriates

Tax Treatment and Planning Strategies for Non-Resident Individuals

The Potential Tax Consequences of Renouncing U.S. Citizenship for Affluent Individuals

The Year of Transparency's Tipping Point

The tax treaty table

Once the new course is completed in August, there will be a few dozen fewer “dabblers” in cross-border planning than there are currently. Murphy expects that eventually, as the master class becomes more widely known and more advisors join the GFP Institute, a cadre of subject matter professionals will emerge in the cross-border space. He hopes that when advisors run into a client who has non-domestic issues, they’ll refer at least those aspects of the advice out to one of the new experts.

Meanwhile, he’s looking for level two subject matter experts – the advisor in the UK who can create specific material relating to people who have assets in the U.S. and the UK, and somebody in India, South Africa, and Mexico. Isn’t that going to be overwhelming? “We’re lucky enough to have relationships in the academic community, which is well-networked internationally,” says Murphy. “I have no doubt that if I put my feelers out there and focus on it for a couple of weeks, I could get a short list of people in Singapore, or in China, who could point me in the right direction.”

He’s also working on material that could be presented pre-conference at national meetings, potentially over a full day or more. “The goal is to raise awareness of the issues that affect all of these clients whose financial lives cross borders,” he says. “These people tend to be wealthier than the average, and so there are probably more of them than we realize who are already working with financial planners,” Murphy adds. “And I worry that they aren’t being well-served by our community.”

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

Read more articles by Bob Veres