Dear Mr. Premack: Our daughter has just graduated from college and has taken a job overseas. She will be gone for at least two years. We were trying to help her set things up so both she and we can still access her brokerage account, but the broker told us that they are not willing to maintain an account for her while she lives outside the US. Is there a legal way to set up her account the way that we want? What about her taxes? Does she pay US taxes on her foreign income? – C.P.
When someone leaves the U.S. for work purposes, they are still a U.S. citizen and still a legal resident of the state in which they lived before relocating. Regardless, some financial institutions are nervous about allowing account access to someone outside the U.S. The Patriot Act does not expressly bar them from maintaining those accounts, but the banks and brokerages are wary.
One very useful solution is for your daughter to create a revocable grantor trust. She will be both the grantor of the trust (who owns it and controls its purpose) and the beneficiary of the trust. But she can name you as the trustee, so that all management issues while she is abroad can be legally handled by you. As trustee, the brokerage treats you as though you are the account holder and uses your local mailing address.
The revocable trust should allay any concerns the brokerage or bank has about the account. They are not concerned about and do not have any liability to the beneficiary; they deal only with the trustee. All the statements they mail can go to the trustee, so they are dealing with a local address. You as trustee can then carry out any instructions given to you by your daughter – making withdrawals, changing investments and distributing funds for her needs. The trust should be accompanied with a Will, durable power of attorney and medical directives for her.
She will likely open one or more bank accounts in the foreign country where she got the job. The tax laws of every country are different, but it is very likely that she will pay some form of income tax or other tax on her foreign paycheck.
Does she have to pay taxes to the U.S. on her foreign paycheck? The U.S. Internal Revenue Code grants a “foreign earned income exclusion” to qualifying U.S. citizens working overseas. To qualify, the foreign country must become your daughter’s bona fide residence – meaning she must physically reside there for 330 days of that tax year. The days do not have to be consecutive, just cumulative. If she returns to the US for vacations, the total days in the US cannot exceed 35 days in a 12-month period.
Once she qualifies for the exclusion, she does not have to pay US income tax on the first $95,100 of her foreign earnings. She should still file a US income tax return, even if she has very little income. Why? First, the IRS will be getting 1099’s on her US brokerage and bank accounts. Even if they earn very little, it is best to have a matching 1040 on file. Second, filing a return triggers a statute of limitations for the IRS after which they cannot inquire into those past tax year transactions.
If she is lucky enough to have a well-paying foreign job, she will hopefully also save some of her earnings. She can send money back to the US to invest here, but if she holds any foreign account with a balance that ever exceeds $10,000 she must file a report with the US Treasury Department. It is “Form TD F 90-22.1, Report of Foreign Bank Account.” The form can be obtained from the IRS, but it is not filed in April with her 1040; rather, it is due before June 30 each year, and is filed directly with the Treasury Department.
Paul Premack is a Certified Elder Law Attorney practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, January 16, 2012