How to Prepare for Financial Challenges When Retiring Overseas

The US has tax treaties with more than 60 countries. But these tax treaties may not completely protect expatriates from taxes that can arise as a result of differences between their new country’s tax system and that of the US. For example, the tax-free status of Roth retirement accounts in which some foreign tax treaties protect the tax-free status while other foreign tax treaties do not.

Most expatriates also have to submit a report to the Treasury Department called the Foreign Bank and Financial Accounts (FBAR). The FBAR is required to be filed in years in which the cumulative balance of a US citizen’s foreign-based financial accounts exceeds $10,000 at any time during the year. The penalties for willfully failing to declare this amount on an FBAR are the greater of $100,000 or half of the account value for every year an individual failed to file.

US citizens with more than $200,000 and couples with more than $400,000 in foreign financial assets on the last day of the year, or more than a respective $300,000 or $600,000 at any time during the year must report these accounts to the IRS via IRS Form 8938 (Statement of Specified Foreign Financial Assets).

With respect to state income taxes, a US citizen who retires overseas must “break his or her domicile” in order to not being liable for any state and local income taxes. This means that the individual has no intention of returning to his or her state. To satisfy that requirement, an individual should sell his or her home, cancel his or her driver’s licenses and voter registration.

Health Care Options

Medicare generally does not cover health care services outside the US. Federal employees who retire overseas must therefore look into other options to pay for their health care.

Those federal employees who are eligible to keep their Federal Employees Health Benefits (FEHB) program health insurance coverage in retirement are advised to check with their FEHB program health insurance carrier to find out whether the carrier will pay for medical services performed overseas.

The carriers should be of the “fee-for-service” type rather than a health maintenance organization (HMO). There is a strong possibility that in the event a federal retiree and/or family member living overseas needs medical care, the retiree will likely have to pay a doctor for the medical services provided and then submit a claim for reimbursement with the FEHB insurance carrier.

Many foreign countries with public healthcare systems allow expatriates to join the public healthcare system after a waiting period at little or no cost. Some countries with public healthcare systems also have private hospitals. In order to help cover private healthcare services, retirees who live overseas may want to consider purchasing an international health insurance policy.

In spite of the fact that Medicare does not cover medical services overseas, Federal employees who retire overseas are highly encouraged to enroll in both Medicare Part A (Hospital Insurance) (no monthly premium cost) and Medicare Part B (Medical Insurance) in which an enrollee pays a monthly premium. They should still enroll in Medicare Part B (paying the monthly premium) even though Medicare Part B will not pay for medical services overseas. Otherwise, they will be subject to a hefty late enrollment penalty if they return to the US and want to enroll in Medicare Part B at that time.

Estate Planning

Employees planning to retire overseas should make plans to have a new estate plan created. Included in making a new estate plan are a new will or living trust, a living will, financial power of attorney, and a health care power of attorney.

Currently under US estate tax laws, US citizens with a gross estate exceeding $12.92 million ($25.84 million for married couples) are liable for US estate tax above those thresholds, even if they live in another country. Individuals who are above those thresholds are allowed to gift money and other financial assets each year during their lifetime, up to certain amounts without incurring any gift tax. But they must be aware of the gift tax rules regarding the gifting of money and other financial assets to non-US citizens. They are advised to contact an estate attorney about these gift tax rules.

Most foreign countries impose an inheritance tax instead of an estate tax on their citizens, often at far lower threshold levels compared to the US estate tax threshold levels. For example, in France each child can receive from a parent about $108,000 inheritance tax-free. Any inheritance amount above $108,000 will be subject to an inheritance tax of up to 45 percent. The inheritance tax imposed in foreign countries is due even if the individual’s money is held in US-based accounts and the individual’s heirs live in the US.

It is therefore important when an individual moves overseas, he or she meet with an estate attorney in that country in order to re-establish a proper estate plan. It should also be noted that many European countries do not recognize US trusts.