Career taking you abroad? Appreciate the opportunities
In addition to a rewarding lifestyle, professionals who move to a new country may also discover exciting financial benefits.
By Mike Moodie, Managing Director,
Royal Bank of Canada (Caribbean) Corporation, Barbados
AS THE CORPORATE TREND towards globalisation increases, many senior executives and professionals may be presented with the chance to work with their company outside its home country. Should you find yourself in this fortunate position, it represents a great opportunity for you, your family — and your financial well-being.
Here are some financial planning strategies for international executives and professionals to explore.
Get a fresh financial start
A move abroad is an excellent time to take a “big picture” look at your financial affairs. You may find that structures or strategies you currently have in place are no longer suitable. For example, your current financial plan may be based on less disposable income or a higher tax rate than you’ll have after you move abroad. In addition, the move may give you access to more sophisticated investments that can enhance both portfolio safety and potential investment returns.
You also have an ideal opportunity to consolidate a fractured financial plan so that it is more efficient. Over time, many investors accumulate investments that are scattered over many different accounts and financial institutions. This can make it difficult to track investment performance, and result in unnecessarily high management fees for multiple accounts.
By taking the opportunity to consolidate your assets, you may be able to enjoy economies of scale in addition to easier record-keeping.
Seek tax efficiency
Many senior executives who have worked or lived abroad for some time have discovered that a period away from home can potentially enhance their tax status. Proper planning is imperative, however.
Tax laws vary widely from one country to another, and your personal situation plays a key role in determining the most tax-efficient arrangement.
Factors to consider include the following:
Tax laws. To determine the tax treatment of your investments, the tax laws of both your home country and of the country in which you’re working must be examined.
Tax treaties. Many countries have entered into bilateral tax treaties dealing with a variety of issues, from policies on double taxation to the co-ordination of social security benefits.
Any treaties that apply to your personal situation must be examined to determine their impact.
Residency. Residency and taxation tend to go hand in hand. Leaving your home country does not necessarily alter your country of residence. In most situations, a determination of your country of residence is critical to the taxplanning process.
Length of stay. Tax implications can change based on how long you will be outside your home country, and how long you stay in your new country. Any time restrictions that apply must be factored into your taxplanning process.
The tax issues can be complex in certain cases, but the potential long-term benefits are substantial. Professional guidance is essential.
Estate planning benefits
Having beneficiaries or assets in different jurisdictions increases the need for a comprehensive estate plan. It also increases the opportunities for advantageous planning.
For example, trust structures — where legal ownership of assets is transferred to a domestic or international trust — offer several potential benefits:
Tax mitigation. If your will leaves the proceeds of your estate directly to your beneficiaries, income earned on the proceeds may be taxable on an annual basis, depending on where your beneficiaries live. By using your will to transfer assets to an international trust, it may be possible to accumulate undistributed income and/or realise capital gains on trust assets with little or no tax payable by the beneficiaries.
Confidentiality. In many countries, a probated estate becomes public record. However, if you establish a trust during your lifetime, the assets transferred do not form part of your estate. As a result, assets held in trust will remain confidential.
Reduced probate fees. If probate fees apply to estate assets in your country of residence, assets previously transferred to a trust do not generally form part of your estate and are not used in the calculation of any probate fee.
Ease of distribution. Assets previously transferred through a trust are not subject to the estate settlement process. Subject to the terms of the trust, the trustees may be able to distribute assets to the beneficiaries sooner than would be possible in a probate situation.
In addition to trusts, a variety of other international corporate structures can accomplish many of the same tax planning and estate planning goals. Typically based in international financial jurisdictions, these structures can be used to hold assets, real estate, investments, or intellectual property. They are particularly useful in civil law jurisdictions where trust concepts are not generally recognised.
Get the advice you need
While an international move can yield significant financial benefits, it can also increase the complexity of your financial affairs.
From short-term issues, such as lowering your tax liability on investment gains, to long-term strategies for your estate plan, professional advice can help you steer clear of any pitfalls, and take advantage of all the opportunities.
Moving abroad? Make sure to
- Review your financial plan
- Plan for tax efficiency
- Maximise estate planning benefits
- Seek professional advice
On Our Cover: Hourtide. Edward Henry Potthast. Private Collection. Art Resource, NY.
Managing your wealth
I’m 40 years old and plan to retire to the Caribbean in 15 years. How large a pool of assets will I need at that time to generate an annual income of US$100,000?
To make a realistic assessment, you’re best to sit down with a retirement planning professional. The two of you can review your overall financial plan and current status and work through a number of potential scenarios.
However, based on the information provided, we can make a few generalisations that are likely to apply in this type of situation. For example, with 15 years to build up a pool of assets, you’ve got sufficient time on your side to comfortably ride out fluctuations in interest rates and financial markets.
As a rule of thumb, a pool of US$1 million will generate approximately US$35,000 in income at current interest rates.
To generate $100,000, you’d need close to US$3million.And don’t forget about the impact of inflation. In projecting your retirement income needs, there are two additional points to keep in mind.
First, if you are saving in a currency other than U.S. dollars, you should consider a currency conversion strategy to minimise the impact of an unfavourable exchange rate at the time of your retirement.
Second, be sure to factor in the tax status of the country in which you will be retiring.
Three sectors whose time is coming
Large industrials
By Paul Johnson, Senior Portfolio Manager, and
Christine Poole, Vice-President and Portfolio Manager,
RBC Global Investment Management Inc.
THE CLOUD HANGING OVER big-business accounting practices has hampered performance of the large global industrials, such as General Electric.
Investors have been much more attracted to the small and mid-sized industrials, with their simpler accounting practices.
European accounting practices, however, have not suffered the same loss of investor faith. On a regional basis, European industrials were up 3% while U.S. industrials were down 11% for the year to May 26. Overall, the MSCI Industrial Sector Index was down 4.1% for the period.
Industrial stocks were fully valued by the end of the first quarter of 2002, reflecting the market rally after September 11. Since then, despite pockets of strength in automobiles, housing, and defence spending, companies have not seen strong demand in their order books, and stocks in the sector have remained flat.
If the U.S. dollar continues its decline against the euro and yen, it will help U.S. industrial exporters, but will hurt the profits of industrials in those regions that export to the United States.
In the short term, stock prices in this sector are likely to remain volatile. Over the longer term, provided global demand increases in the second half of this year, earnings among industrials should also strengthen. Many of these companies have cut costs in response to the lingering profit recession and are now in a solid position to capitalise on a global economic recovery.
Telecom leaders
By David Cooke, Vice-President and Portfolio Manager,
RBC Global Investment Management Inc., and
Patrick Lau, Global Equity Analyst
A COMBINATION OF INCREASED competition and reduced demand has led to lower profits and less stability in the telecommunications sector, even for the largest companies.
From integrated telecommunications leaders such as Deutsche Telekom AG to wireless leaders such as Vodafone, rapid expansion and growth have given way to a more internal focus.
There are good reasons for this. Anti-trust and other regulatory restrictions have limited the opportunities for consolidation in the industry, a strategy that is often essential for achieving the cost efficiencies needed when economic growth is slow.
Instead, companies in this sector are restructuring to lower their capital and operating costs and boost their cash flow. Some companies, such as Deutsche Telekom and France Telecom, also have high debt levels from previous expansion efforts, and need to sell assets to reduce their debt burden.
The companies that successfully restructure should be in a stronger position to prosper as economic growth accelerates. Many of the alternative providers who entered the sector in recent years have been marginalised or gone bankrupt.
With a stronger economy, more efficient operations, and less price competition, profits for the more established telecom companies should improve.
The media sector
By David Cooke, Vice-President and Portfolio Manager,
RBC Global Investment Management Inc., and
Patrick Lau, Global Equity Analyst
MEDIA SECTOR GROWTH IS cyclical, with much of its health dependent on the advertising industry.
Advertising revenues are important not just to the advertising agencies themselves, but to broadcasters, publishers, and multi-media companies such as Viacom, Disney, and AOL Time Warner. As advertising revenues fell during the recent economic downturn, many large media companies suffered in terms of both profits and share price.
There are now signs of a turnaround. The upfront market, which pre-sells advertising for the U.S. fall television season, was 70% to 80% sold. The signs of a stronger economy suggest even stronger demand for advertising, and higher revenues for media companies.
Still, individual companies within this sector may face challenges. AOL, for example, must contend with a declining market for dial-up Internet subscribers. The company must either migrate subscribers to its own high-speed Internet options, or face a significant erosion in its subscriber base.
Other companies that carried out aggressive expansion strategies during the boom times, such as Vivendi Universal, entered the recession with a high level of debt and are facing financial challenges.
While the outlook is positive for media as a whole, weak performance by a few companies could dampen overall returns for the sector.
Diversify without selling to reduce a portfolio risk
BETTER POSITIONED THAN MOST to build significant net worth over time, executives and entrepreneurs often face a significant portfolio challenge.
Frequently, company shares or stock options form a significant part of their compensation package. As a result, their assets may be overly concentrated in the securities of a single company.
Too much of a good thing
The concern with a highly concentrated portfolio is that it entails greater risk. In general, a portfolio highly concentrated in a single stock will experience far greater volatility and investment risk than a more diversified portfolio.
If you’re in this situation, selling a portion of your holdings is not always a practical solution. Executive employees, for example, are often required by the terms of their employment to hold a certain number of shares.
If you hold shares in a company you founded, you may want to maintain a significant stock holding to demonstrate your faith in the continuing prospects of the company. In addition, depending on the jurisdiction, selling shares could trigger a taxable capital gain.
Monetisation may help
One alternative to selling is to enter into a monetisation contract that allows you to borrow against a portion of the stock’s value. This can make it possible for you to diversify without giving up ownership of the original stock.
A monetisation contract can be structured in a number of different ways, but typically involves a forward contract with a financial institution in which you agree to sell your shares at a set price at the end of a certain time period. In return for that pledge, the financial institution agrees to lend you a specified amount, which you can then invest in other assets.
While you lose some of the potential upside associated with your concentrated stock, you will enjoy exposure to the potential gains — and lower risk — of a more diversified portfolio.
To find out how equity monetisation could benefit your portfolio, please complete and return the enclosed Fax Back form.
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