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Cross-portfolio investment optimization

Gifting strategies (e.g. 529s) to reduce your tax-able estate: Lifetime gifting strategies are a common method for reducing a taxable estate in the United States. Section 529 college savings plans (see Thun Financial’s research article on 529 Plans for ex-pats) have grown substantially in popularity over recent years, as parents begin to realize the tremendous long-term advantages to saving larger amounts for college in earlier years for their children, and 529 accounts allow substantial deposits (as much as $150,000 in a one-time gift from joint filers covering a five-year period) and provide Roth IRA-style tax-free growth of the investment account, provided that the 529 plan assets are withdrawn for qualified educational expenses. Moreover, grandparents and great-grandparents can employ a 529-plan gifting strategy to shrink the taxable estate and to pass on wealth to grandchildren and great grandchildren (otherwise “skip classes” that would trigger generation skipping transfer (GST) taxes in addition to estate or gift taxes). In short, Section 529 college savings accounts provide tremendous income and transfer tax-advantaged gifting opportunities to accomplish multigenerational wealth transfer. They also provide the donor with control over the use of the gifted proceeds and flexibility regarding the designation of account beneficiaries.

However, while U.S. expats are free to open and fund 529 college savings accounts, they must be aware of the local country rules in their country of residence regarding the gains that will eventually accumulate within these accounts. From an income tax perspective, it is worth mentioning here that there are no treaties between the United States and any foreign jurisdiction that recognizes the tax-free growth of investments in 529 accounts (or Coverdell ESAs – another type of U.S. savings vehicle for education expenses allowing much smaller annual contributions). Therefore, it is quite possible that the expat individual will find that gifting through a 529 plan could create detrimental tax consequences, as the donor may potentially incur tax liability on any investment gains in the portfolio going forward (recognized or unrecognized gains, depending on the local tax rules). Alternative college savings or generational gifting strategies (including having U.S. based relatives open the 529 account) may work better for expats.