Keats says that his Canadian clients are excellent savers and virtually all have registered retirement savings plans (RRSPs). "But when they come to the United States, the IRS doesn't recognize the tax deferment. Tax preparers don't know anything about it," he says. "Clients don't know. It can cause very large tax penalties." By keeping these accounts in Canada when they're living in the United States, they also can miss out on an opportunity. They risk paying close to 50% in income taxes when they take distribution, he says. "If they move it to us while they're a resident of the United States, they can take it out at a tax rate of 15% to 25%." Sometimes they can bring it down to as little as zero by recovering even more than that in the form of foreign tax credits.
Nevertheless, it's not easy to convince clients to realize these tax savings because many already have financial advisors in Canada, who dissuade them from moving the business. Keats says he will talk with the advisors and explain why it's in the client's best interest "if they sincerely want to know, but it's not always that way."
Keats says his firm has a staff of 11, including financial and tax professionals. Although they are cross-trained in Canadian and domestic work, he still uses outside firms. Unfortunately, he says, it's tough finding reliable legal and accounting help on cross-border issues-particularly if it is needed for individuals rather than businesses.
He has learned to rely on Canadian firms that have a presence in both countries. For law firms, he uses Goodman & Carr in Toronto and Olson Lemons LLP in Calgary. For international firms, he relies on some of the big firms like Bryan Cave LLP, based in St. Louis, Mo., and with offices around the world.
Estate taxes are a major issue for those born outside the United States. Hill maintains a home in Mexico City and goes back and forth. He developed a major niche working with clients with Mexican-American connections, and estimates that more than 30% of his business is with non-U.S. citizens. Once you are a resident alien (a non-U.S. citizen with permanent resident status), what you own is subject to U.S. taxes, Hill says. "Non-resident aliens (those not U.S. citizens and not permanent U.S. residents) can invest in offshore mutual funds not subject to U.S. estate taxes. ... Sometimes they erroneously think, 'I'm really a Mexican citizen, so a $2 million account in the United States is not subject to U.S. estate taxes.'"
Also, Hill says, if his clients own property in both the United States and in Mexico, there must be a will in both countries. So you need to be particularly mindful that standard legal language, indicating that a will "revokes all other wills," doesn't wind up in either the client's U.S. will or the Mexican will.
Hill says that he is under strict rules when it comes to contacting his clients about offshore investments. For example, one Mexican citizen was recently in Vail, Colo. skiing. While there, Hill says, U.S. securities laws prohibited Hill from talking to him on the phone about his Franklin Templeton Growth Fund, based in the Bahamas. However, it's fine to talk to that client in Mexico City about that same fund.
He also must help his clients determine how much of their money to keep in pesos. A hard lesson was learned in the mid-1990s when the peso devalued, and Hill recalls that even doctor-lawyer spouses suddenly found themselves eating rice and beans. Hill might suggest that a client, who is independent without much family in Mexico, keep most money in dollars. On the other hand, someone with a house in Mexico who needs to pay water, gas and servants, might need to keep more money in pesos.
John Olmstead, principal of Lau Olmstead LLC in Wilmington, Del., warns that when dealing with non-U.S. citizens there may be a myriad of combinations of residences and citizenships, and each may be subject to entirely different rules. Expect variances in regulatory exchange control and tax rules. "You have to look at the specifics of every situation," he says. Contrary to American clients, his high-net-worth foreign clients typically want to see the tax consequences and legal analysis before the risk-return analysis of an investment, he notes. Their concern in high-tax jurisdictions is whether they will file double taxes.
Another important issue for immigrant clients: Establishing credit in the United States. U.S. credit bureaus typically can't compute a credit score, necessary to qualify for virtually any form of credit, unless a credit account at least six months old shows up on a credit report. Also, a lender must have reported on the borrower's usage to a credit bureau within the prior six months.