PFICs: The Number One Expat Landmine That Can Easily Be Avoided | Ask An Expert with Brian Dunhill

Are your foreign investments quietly wrecking your US tax situation? They might be.

This week’s Ask An Expert show features Brian Dunhill, a seasoned financial planner based in the UK, to tackle one of the trickiest topics in expat finance: PFICs (Passive Foreign Investment Companies).

Host and founder of Plan First Wealth, Richard Taylor, and founder of Dunhill financial Brian walk you through:

What PFICs are and why they’re a major tax trap for US citizens and expats.
How IRS rules make foreign investing more complicated, and costly.
Ways to avoid harsh penalties, including using the Streamlined Filing Compliance Procedures.
Smart investment strategies that steer clear of PFIC issues while still diversifying internationally.
How the DF Direct platform lets you invest in non-U.S. currencies without triggering PFIC rules.
Brian shares real-life stories of expats who’ve navigated PFIC trouble – and how they got out of it. Brian is the founder of Dunhill Financial, a firm that specialises in cross-border financial planning and wealth management. The firm is based in London and focuses on assisting Americans living abroad and expatriates in the United States.

Brian and his firm are adept at handling financial advisory needs that cross national borders, particularly involving US and European regulations.

We’re the Brits in America is affiliated with Plan First Wealth LLC, an SEC-registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.

About Richard

Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.

As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).

Connect with Richard on LinkedIn

Transcript:

 

Richard:

[00:00:00 – 00:00:40]

Welcome to We’re the Brits in America, a Plan First Wealth podcast dedicated to helping ambitious expatriates and first generation immigrants thrive in America. I’m your host Richard Taylor and Plan First Wealth is the business I founded and run today and we work with successful expatriates, immigrants and internationally minded Americans living across the US to make the most of their opportunity and avoid the expat landmines. We’re the Brits in America consists of three show formats:

 

Richard:

[00:00:40 – 00:01:17]

We have Ask An Expert where I invite in a fellow professional to share useful and important information that expats and immigrants need to know. Always an Expat where I invite in a fellow expat immigrant with an interesting story to tell. And from the trenches where myself and my colleague James Boyle bring you behind the scenes at Plan first wealth and we share with you what we’re working on, seeing and doing as we build this business. But first, a quick disclaimer. While Plan First Wealth LLC is an SEC Registered Investment Advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.

 

Richard:

[00:01:17 – 00:01:51]

Information presented is for educational purposes only. Now if you aren’t already receiving our regular emails, please go to our website planfirstwealth.com and sign up there. It’s free and you’ll then be notified every time we drop a new episode and so much more. Okay, let’s get back to this week’s show. Welcome to our Ask An Expert show where I invite a fellow professional in the cross border space to come in and talk to me about the issues we think international folk in America need to be aware of if they are going to thrive here.

 

Richard:

[00:01:51 – 00:02:16]

My guest today is Brian Dunhill. Brian is the founder at Dunhill Financial, a cross border financial planning and wealth management firm based in London and he is a financial planner dedicated to assisting Americans living abroad and expats in the United States. Brian is an American living in London and full disclosure, our firms do have a formal relationship. We will sometimes introduce clients to Dunhill when we think they would be better served by Brian and his team. We know what we’re good at.

 

Richard:

[00:02:16 – 00:02:39]

We we know what they’re better at and sometimes it’s in the Best interest of the client, as hard as it is for us to say goodbye. So anyway, Brian is here today to talk about pfix, the humble yet dreaded PFIC which gets so many expats in the US and Americans abroad into trouble, whilst also severely limiting what Americans outside the US can invest in. So without further ado, let’s get into this. Hi, Brian. Welcome to we’re the Brits in America podcast.

 

Brian:

[00:02:39 – 00:02:59]

Thanks so much for having me. Richard, you’re going to put us right into the territory of a four letter acronym. So you know, just like any four letter letters that Mama told you about, you shouldn’t be owning these as Americans or as Brits moving into America. And I’m sure you tell every single one of your clients the same thing.

 

Richard:

[00:02:59 – 00:02:59]

I do, I do.

 

Brian:

[00:02:59 – 00:03:01]

Maybe not so crudely.

 

Richard:

[00:03:01 – 00:03:14]

We get to them too late. That’s the problem. Right, part of this, the mission of this podcast is to. Is to hopefully help prepare rather than repair. But usually, let’s be clear, by the time you and I see this problem, it’s a case of repair first.

 

Brian:

[00:03:14 – 00:03:36]

Absolutely. Anytime you can get somebody to clean up their portfolios before they get to the States, it’s going to be so much easier for them and so much cheaper from a tax perspective and even from a tax preparation perspective. So the key is, have the conversation with Richard before you get over to the United States. He’ll clean up the entire situation.

 

Richard:

[00:03:36 – 00:03:57]

If only that was more frequent. I’m obviously thinking about people leaving, leaving the uk. People take being someone like us or speaking to a tax advisor, but no one does because I don’t think it’s just a case of cost. I just think people just are utterly naive, as was I, to the complexity of moving to America specifically. And it catches so many people, the vast majority.

 

Richard:

[00:03:57 – 00:04:04]

So. But look, Bram, before we get into the details, just quickly tell us in your own words who you are and how you ended up in this unfortunate position, sat here talking to me.

 

Brian:

[00:04:04 – 00:04:31]

Thank you, Richard. I run a firm here in Wimbledon in, in the United Kingdom, which is on the southwest side of London where the tennis courts are just down the street. And we concentrate only on American expats. We concentrate on them all across the world and have a lot of clients that are British, Americans that are here in a mixed family type of relationship. And that’s where we’ve stumbled into Richard, because he does the exact opposite.

 

Brian:

[00:04:32 – 00:04:48]

You’re working with Brits that are in America, we’re working with Americans that are in Britain. So basically we get to take the inverse image of pretty much each other’s situations. And we get to enjoy each other’s company in understanding that we deal with the same problems just on opposite sides.

 

Richard:

[00:04:48 – 00:05:06]

It’s the mirror image. It’s quite the. It’s an interesting space to be in and it’s been great to find someone doing the exact opposite and then comparing notes and swapping war stories and having someone to go to with questions. And like when our clients do leave and they end up in a jurisdiction where we’re not familiar with have someone.

 

Brian:

[00:05:06 – 00:05:38]

To turn to and same vice versa. We occasionally have people going back to the States and it becomes more simplistic to have somebody in the same time zone that is being able to pick the phone up and not be calling somebody in the middle of the night. And for those American or those people that are moving to America, it’s also nicer to have somebody that’s on the ground and working just in the American products instead of us working on UK products with the mix of the old US products.

 

Richard:

[00:05:38 – 00:05:45]

Just tell us quickly, how did you end up where you are now? What’s your. What’s the journey for Brian been?

 

Brian:

[00:05:46 – 00:06:14]

Well, there’s an old expression that anytime a sentence has five words in it, when you’ve had a couple of beers, it’s probably a bad idea, you know, starting with we should have another drink. But mine ended up on a sailboat with my father down in Turkey. And the saying after a couple of beers turned into we should start a company. I’d finished off my MBA over at the University of San Francisco. I was working for UBS at the time.

 

Brian:

[00:06:14 – 00:06:45]

And essentially after finishing my mba, I decided I wanted a new challenge instead of working for just the big banks. This was just shortly after the financial crisis. My father’s firm had been just purchased by a bigger UK firm there in Belgium and he had a series of different clients in Belgium. And it came up both of us would like to work on something bigger moving forward, so we should start a company. Those five words turned into oh my goodness, FATCA just got approved.

 

Brian:

[00:06:45 – 00:07:28]

FATCA was back in 2011 by Obama and it essentially made all of these things that we’re talking about, FBAR’s, Citizens Based Taxation, pfix, very easy for the American government to uncover. So things that people had been doing as American expats for years, for decades, all of a sudden became obvious to the US government, to the IRS to uncover. So we had millions and millions of Americans abroad that all of a sudden had to adhere to all these rules that had been in place for decades but hadn’t really been followed. So that’s where everything changed at that FACA time. And we just happened to start the company right at that time.

 

Brian:

[00:07:28 – 00:07:37]

And we had a US License, we had a Belgian license. Therefore we were able to help all those individuals on their home territory throughout Europe.

 

Richard:

[00:07:37 – 00:07:41]

That’s amazing. I did not know there was a Dunhill senior involved in this. Is he still involved?

 

Brian:

[00:07:41 – 00:07:53]

Well, he’s a few years elder, so he’s, he’s having a little bit more fun in a little bit of a post retirement phase.

 

Richard:

[00:07:53 – 00:07:59]

Right. Pfix. Brian, tell us, tell us what I mean by this unpleasant sounding acronym.

 

Brian:

[00:07:59 – 00:08:26]

So PFICs are passive foreign investment companies. And it sounds just as dirty when you actually spell out the acronym as when you say the acronym. Long story short, there’s a lot of definitions that go into it. But for the majority of retail consumers, what a passive foreign investment company is, is any foreign collective. So if something looks like a US mutual fund but it’s sold abroad, it will be a pfic.

 

Brian:

[00:08:26 – 00:09:09]

Even more importantly, if you buy an exchange traded fund on a foreign exchange because it’s a collective, that’s going to be a pfic. So anytime you’re buying investments outside of the United States and they’re majority passive, they’re going to be a PFIC and it’s going to be taxed horrendously on the US side even if it’s taxed in a decent way on your home territory. And the reporting requirements to them is going to be egregious. And sometimes, most times, I think you’d agree, Richard, almost impossible to be able to calculate. So you’re having to make some estimates on how to calculate the taxes that might be due.

 

Richard:

[00:09:09 – 00:09:41]

It’s horrible. So anyone listening, this is any invest, you know, not any investment, but pretty, any collective investment, pretty much any fund, exchange traded fund, mutual fund. If it’s not a US based and by that we don’t mean invest in the S P500, I mean where the, the fund is domiciled. You’re buying the fund in the UK or Europe in pounds or any other currency than dollars, it’s almost certainly going to be a pfic. And they are a horror show.

 

Richard:

[00:09:41 – 00:10:22]

If you’re a US person and by that I mean if you’re an American abroad, well, any American anywhere, but let’s say mostly an American abroad or as, as we see it here, an expatriate who’s come to the US So you’ve come to the US from the UK or wherever your mid career. So by the time you’re mid career, you’ve built up assets through years of working pensions, savings ISAs in the UK. Whatever your equivalent is in from your country, these are going to have Pfix in them. And people arrive in the US with them thinking nothing of it and then they learn the hard way that these things are taxed punitively and there’s a boatload of reporting requirements that go with it.

 

Brian:

[00:10:24 – 00:10:52]

Absolutely. And those reporting requirements are typically charged and filed by the fund. So if all of a sudden, if you have a diversified portfolio of 10, 15 funds, you’re going to have to do 10 or 15 reports of PFIX and they’re going to charge you per document, per fund. And I’ve seen some of the accountants charging in excess of 500 or $1,000 per fund to where it gets extremely expensive.

 

Richard:

[00:10:52 – 00:11:18]

Have you seen the IRS guidance on how long they, they estimate it takes to complete the 8621? So 8621 is a form associated with these PFICs and the IRS. I can’t remember what the exact figure is, but we’re talking, it’s like, it’s like 10 or 20 hours. It might be even more than that, 20 or 30 hours, which is, seems a little excessive. But to Brian’s point, regardless of whether it’s a couple of hours or 20 hours, according to the IRS, an accountant who’s going to fill out this complex form is going to charge for it individually.

 

Richard:

[00:11:18 – 00:11:27]

And if you’ve got a portfolio of PIFCs, forget the tax, that’s going to be punitive, but the reporting itself is going to be, is going to be punitive.

 

Brian:

[00:11:27 – 00:11:40]

It becomes cumbersome, expensive and annoying. So that’s why Richard says if we can catch this beforehand and not even have to go through the mix, it’s going to be the best option.

 

Richard:

[00:11:40 – 00:12:01]

Even people who are aware of the PFIC problem so they know to jettison their. In the UK we call a brokerage account a general investment account. Right. So they know to, they know to, they know to jettison their, their Pfix before they get here. Well, it still catches these people out because they might be holding Pfix in, in an, in a wrapper, such as an ISA or, or an offshore bond or.

 

Richard:

[00:12:01 – 00:12:42]

I’m sure there’s all sorts of equivalents from other countries as well. But the, essentially the US will look right through the wrapper and see that you’re holding underlying Pfix. So the thing with a nice, where this gets so pernicious with a nicer is we’ve had clients who have got hundreds of thousands of pounds in an ISA and they think, well this is a fantastic rapid to have tax free growth, tax free withdrawals, I don’t want to lose this. So they move to the US and maintain the, the ISA wrapper, not knowing to switch up the investments within it, thinking they’re okay. We come on the scene, we spot it and we have to say, I’m sorry to say, not only is this now no longer tax free, but also it’s, it’s going to be punitively taxed.

 

Richard:

[00:12:42 – 00:12:55]

We always just assume, we assume back of an envelope. 50 Once you factor in the tax, the interest and maybe there’s going to be state tax as well. We just, we just like assume 50%. So you thought this was a tax free. No, sorry, it’s going to be taxed at 50%.

 

Richard:

[00:12:55 – 00:13:06]

Oh, and by the way, you’ve also not been filing these forms that you should have done. So now you’re also in non compliance with the IRS that has flipped it on its head. It’s gone from being a great asset to oh God, what have I got?

 

Brian:

[00:13:06 – 00:13:10]

And how many of them jump right back on the plane and come back to the UK at that point in time?

 

Richard:

[00:13:13 – 00:13:17]

Not that many. They more just kind of panic. And, and what am I going to do?

 

Brian:

[00:13:17 – 00:13:18]

Absolutely.

 

Richard:

[00:13:18 – 00:13:33]

Well, first of all, actually no, first of all what they do is they get really upset and defensive, which I understand, I really understand it because it’s completely unfair. It’s non, it’s nonsensical really. I mean I understand it now, but it’s kind of nonsensical and people will get very defensive.

 

Brian:

[00:13:33 – 00:13:50]

It’s the five stages of grief. The first, the first step is denial. And that is exactly what they’re going through, is denial. You know, you’re helping them get all the way down to the fifth step of acceptance with a big cost. Unless they’re going to be there for, for a short term period and therefore they’re able to push it through.

 

Richard:

[00:13:50 – 00:13:59]

I mean, what do you do when you, when you do meet someone and you, and you, you establish early on that they’re holding Pfix and this person wants to resolve it. What, what, what are the solutions?

 

Brian:

[00:13:59 – 00:14:36]

For the most part you have to decide whether you’re going to have a slow bleed of those taxable problems and the reporting problems or whether you’re going to go ahead and pull off the band aid all at Once. If you’re going to pull off the band aid all at once, at least you’re going to make your tax situation much easier for the following year. Because you’ve pulled off the band aid, you’ve gone ahead and simplified that aspect. The slope lead aspect is trying to manage it on an annual basis, a little piece at a time so that essentially you can minimize those taxes each each year as you’re going optimizing it over the course of time. Most of the time the band aid poll is the better way.

 

Richard:

[00:14:36 – 00:14:58]

So, so just anyone listening there are with Pfix, if anyone does any research you, you will read about the ability to take elections to reduce this problem. But, but there’s a couple of problems that I think all the elections you have to do right at the outset. So if you miss it early on too late, you have to take your medicine before you can, before you resolve it. One called mark to market. The most attractive one is QEF election.

 

Richard:

[00:14:58 – 00:15:18]

This is when everyone qualifying electing fund or something QEF election, it’s like oh, basically you can almost treat it like a regular investment. The problem with that is that requires the PFIC to furnish the investor with a summary like a 1099 style summary every year, which Pifix don’t do. So it’s not an option to you.

 

Brian:

[00:15:18 – 00:15:40]

And plus you’re having to pay the tax on each, each and every year as if you were selling it at the end of that year. But the optimization Richard, is normally in times that are not like we have right now, where we’re at all time highs. A couple years ago when the markets were quite low, it was an easier time to say pull off the band aid because the markets have one direction.

 

Richard:

[00:15:40 – 00:15:44]

To go which is up waiting until the market goes down selling to try and minimize tax that way.

 

Brian:

[00:15:44 – 00:16:09]

Well essentially if the markets are on all time highs, you might actually try to balance out your portfolio in certain regards to where on pullbacks that becomes the time that you rip the band aid so near the end of the year not as easy to optimize midway through the year you might say when are we going to go ahead and execute on this? Let’s go ahead and execute on down days instead of on all time highs.

 

Richard:

[00:16:10 – 00:16:12]

So like tax loss harvesting for Pifix.

 

Brian:

[00:16:12 – 00:16:17]

Could be a nice way to put it. You’re turning into the marketing guy, Richard.

 

Richard:

[00:16:17 – 00:16:49]

My experience has been we’ve had prospects who have done nothing who have just basically said oh my, my accountant says it’s fine, so I’m just going to carry on with that. And I understand that. I think it’s, I think it’s dangerous and because we obviously were talking about a domestic accountant around the corner from them who no idea what a PFIC is or FATCA or 8621s and they’ll so, but, but they just retreat to it wasn’t a problem before I spoke to you, therefore I’m just going to back away from you. And then we’ve had other clients who have done exactly. Who have ripped the band aid off, who have gone through that process with me on a call.

 

Richard:

[00:16:49 – 00:17:06]

The denial to acceptance, to dealing with it, to paying it, to bring it to the US to reinvesting it. It’s stressful for a minute, but once they’ve dealt with it, they dealt with it, it’s over, it’s done. They forget, they forget about it. It’s invested in the US they move on. The tax affairs get more straightforward because they’ve got fewer international forms.

 

Richard:

[00:17:06 – 00:17:16]

And in my experience, anecdotal as it might be, has always been to that those who just deal with it and move on are better for it, both financially and emotionally.

 

Brian:

[00:17:16 – 00:17:46]

Absolutely. They get to move forward and go on to the next challenge. Like you said, getting a 1099 on your US taxes means your taxes become simple versus doing a PFIC filing every single year. So I’m always a proponent of trying to clean the slate, get into a nice easy position to make life easy as, as good as possible going forward. We’ve also got to remember, most products in the United States are going to be a lot cheaper than they are going to be on a platform that’s going to be a pfic.

 

Brian:

[00:17:47 – 00:18:11]

So all of a sudden, when you’re buying a general portfolio in the US Whether you’re on Fidelity, Schwab, Trade, pmr, any of these platforms, they’re not, they’re not charging a platform fee. Most every European platform is going to charge some sort of a platform fee. And then the underlying fund management’s going to be a lot cheaper on the US side. Not to even speak of the trading charges. So you start to make up for it.

 

Richard:

[00:18:11 – 00:18:17]

It’s a full, I mean, 25, 30% less investing in the U.S. isn’t it? Maybe even more.

 

Brian:

[00:18:18 – 00:18:48]

It’s a lot cheaper depending on the country that you’re in and depending on if it’s an insurance product. I see a lot of these insurance products, one and a half, 2% easily when I look at, you know, a financial plan client going to charge about 1%. And our robo advisor clients, they’re going to charge 0.5%, half a percent. So it’s a huge savings over the course of time that you get to a much better place. And your tax filings are cheaper, your tax filings are easier.

 

Brian:

[00:18:48 – 00:18:49]

It’s the way to go.

 

Richard:

[00:18:49 – 00:18:52]

Do you have many clients who go through the streamline program?

 

Brian:

[00:18:52 – 00:19:01]

Not as many as I’ve heard of from other people. Most of, yeah, most, most of our clients, we get them as they’re coming over here, especially when they move over to France.

 

Richard:

[00:19:01 – 00:19:01]

Oh, do you?

 

Brian:

[00:19:01 – 00:19:38]

Yeah, absolutely. So we have some great partners that help us from the immigration vantage point and their first thing that they say is, you’ve got to go talk to Brian. So we make sure that we’re talking to them before they get to France and before they can have any, any conversations with a French banker, our tax accountant down in France, the first thing he’ll say is the most dangerous person you can talk to is a French banker. Not because they’re bad guys, but because they’ll try to sell you an assurance vie, which is a pfic. And I will say there’s only one time that I would recommend a PFIC for a client and that’s if they call me and they say I have weeks to live.

 

Brian:

[00:19:38 – 00:19:54]

And we put €150,000 into an assignment and we use a cash only account so that we avoid some inheritance tax in France. But if they’ve got any longer to live, there’s no sense of ever looking at an assurance fee for an American expatriate.

 

Richard:

[00:19:54 – 00:20:22]

That’s great though, that you get, you, you’re getting these people before they, before they get themselves into any, any trouble. That’s the key. That really is the key. Just if for anyone who’s listening, I referenced what’s called the streamline program and that’s for. So in my experience, unfortunately, we meet people when they, when they’ve been here a while and as I said before, if they came here mid career and they had stuff in their home country, then my anecdotal experience is almost without exception, they’re in some form of non compliance.

 

Richard:

[00:20:22 – 00:21:19]

There’s unreported gains income on there and it might just be, when I say talk about income and gains, it might just be growth from, from investments, it might be bank, a foreign bank interest. Even if there’s not that, there’s almost certainly some missing factor forms the informational reporting that’s required here in the US and unless someone took specific US UK cross border tax advice before they left, which very, very few people do, there’s going to be non compliance in there. And one of the ways, it doesn’t really go away, offshore, non compliance, it fades over time. But if these forms are missing, it can leave the statute of limitations open, which hopefully won’t be a big deal, but it could be. And some clients, and this is something I completely would understand and gravitate to, want to clear that off, want to be made aware that, okay, we’ve got this problem, I want to move forward correctly, but I don’t want this risk hanging over me, however long it might hang over me for.

 

Richard:

[00:21:19 – 00:21:47]

So there’s a program you can go through or you can apply to called the streamlined program. And there’s a. There’s a program for people who live in the US and there’s a program for people who live outside the US and there’s slightly different terms, but broadly very similar. You refile a certain number of tax returns, it’s three years worth of tax returns, six years for FBARs, and you can essentially come in from the cold. And if it’s accepted, you can, you can put that risk behind you and move forward knowing that it shouldn’t come back to bite you.

 

Richard:

[00:21:47 – 00:21:49]

So that’s what, that’s what I was referring to there.

 

Brian:

[00:21:50 – 00:21:53]

It’s a great program for, for people to be able to sleep well at night.

 

Richard:

[00:21:53 – 00:22:18]

Well, it’s also a great program. It’s particularly the offshore that. The offshore one that I’m sure you’re more familiar with because your clients are mostly outside the US is really, it’s a fantastic program, really is super generous to solve your historic problems. And I think that’s because the IRS has become aware that so much of the American expat community is in non compliance through no fault of their own, really.

 

Brian:

[00:22:18 – 00:22:31]

I read that, you know, there’s between 7 and 9 million Americans that live abroad, and last year there were only about 500,000 that actually filed their tax returns. Now there’s some that don’t have to file their tax returns.

 

Richard:

[00:22:31 – 00:22:36]

Did you say 79 million and 5,500,000.

 

Brian:

[00:22:36 – 00:22:43]

Actually filed their tax? Exactly. Exactly. So I think it’s occurred to the IRS that the majority of people are not in compliance. Compliance.

 

Brian:

[00:22:43 – 00:23:00]

And it’s not about going and catching six and a half to, you know, eight and a half million people. It’s about trying to get them in the system so that they are compliant so they don’t have to worry. Worry about those types of things. If more than 50% of people are breaking a rule. It’s not the people that are the problem, it’s the rule that’s the problem.

 

Brian:

[00:23:00 – 00:23:10]

And it’s being in compliance that’s the hard part of things. And the streamlined procedure allows us, allows people to get back into line and in compliance with the system.

 

Richard:

[00:23:10 – 00:23:48]

You know, I bang this drum all the time. The, the most people are in non compliance and I bet that’s the same for the people we see expats in the US and that you see Americans are brought outside and to be in non US compliance is a scary place to be because the penalties are, even for innocent or non willful non compliance are eye watering. Obviously I’m plugged into the UK and I was and I will see tax advisers and the like lamenting these punitive HMRC penalties that start at £100. I just have to, I just laugh to myself. They’ve got no idea it starts at 10 grand here.

 

Richard:

[00:23:48 – 00:24:16]

What the chances of you getting tapped in the shoulder I hope are quite slim. But just having that risk hanging over you is for most of us is not a risk we want, is not a risk we want to deal with. And these two programs present a palatable way to get into compliance. And so I’m always banging the drum like, look, if you’re an expat here, you’re probably in some form of non compliance, but it’s okay. There are solutions and you should take advantage of them.

 

Brian:

[00:24:16 – 00:24:46]

Absolutely. I had a client’s son who called me today because he got a letter from the IRS saying he owed 240,000. He said, I’m going to ignore it because I don’t even have 240,000 of which I nearly fell out of my chair saying, no, you cannot ignore this because they will go after everything that you have even if you don’t have as much as it’s listed on that letter. So it’s, it’s extremely important. Like you said, £100, it feels like a lot over here, but it’s a joke in comparison to some of these letters that the IRS sends out.

 

Brian:

[00:24:47 – 00:24:58]

And some of them can be mistakes. But it’s on us as the citizens to actually correct those mistakes because otherwise they’re just going to compound until they become back breaking.

 

Richard:

[00:24:58 – 00:25:06]

Brian, how many people do that? How many people don’t have a Brian to call and just, ah, I’m going to ignore this.

 

Brian:

[00:25:07 – 00:25:37]

I think it’s the majority of those American problems that when it comes to tax taxation, it’s just easier to ignore it than it is to sometimes Deal with it. The IRS let go of, I can’t remember if it was 10,000 employees a couple years ago. And at first it felt like something to celebrate. And then all of a sudden we figure out these are the people that we’re calling to have assistance from. It’s so painful not to have enough support from the IRS and to have it all digitized.

 

Brian:

[00:25:38 – 00:25:48]

And that’s what it’s really turning into. So it’s really important to get it right the first time, to get it documented the right way so that all of a sudden you don’t get these crazy letters coming to you.

 

Richard:

[00:25:48 – 00:25:54]

Do you ever find Americans abroad using one of the more popular DIY tax solutions?

 

Brian:

[00:25:55 – 00:26:27]

Full disclosure. We just put out an article about six different providers that include, you know, your, your low cost providers like H and R Block and turbotax. And they do have expat products and I’m not going to bash them across the board. If you’ve got a complex situation, it might be tough to use the software. But the majority of people that live abroad, let’s just be honest, the majority of people don’t have investments and the majority of people make under the FEIE limits, the foreign earned income exclusion limits.

 

Brian:

[00:26:27 – 00:26:59]

Therefore a low cost solution like TurboTax, H&R Block, my expat tax, et cetera, is a wonderful solution. If you have your investment structured in the correct way with the 1099, it can even work. But if all of a sudden you have foreign pensions, if you have PFICs, if you have other complexities, a foreign company or a US company, it’s probably tough to use that type of software because you have to have the overarching knowledge of how to use it and to apply it.

 

Richard:

[00:26:59 – 00:27:12]

They don’t even create some of the forms that you need. So we will hear of people who say, I use TurboTax and you just know it’s going to be a horror show. Because I know TurboTax doesn’t create 35, 20s and the like. So they’re going to be missing. It’s really frustrating.

 

Richard:

[00:27:12 – 00:27:43]

And you know, the other, the other thing I’m realizing is the amount of clients who are paying a nominal amount for tax preparation and conflating it with having a tax Advisor. And those two things are radically different. If you’re paying someone 500 to prepare your tax return, you do not have a tax advisor giving you the ins and outs and providing strategic advice or even helping you really stay in compliance. They’re just, they’re just box ticking and filling in forms. It’s very different.

 

Brian:

[00:27:43 – 00:28:33]

Absolutely, absolutely. It’s, it is a complexity of some people can’t afford it and some people need it and the number of people that use the proper product is de minimis. The majority of people are actually using the wrong products to get them to the best optimal solution. But in most scenarios your financial advisor and your tax accountant should be working together towards those forward looking solutions when it comes to tax. And when all of a sudden I get a tax accountant that doesn’t want to talk to us, the first thing I’m doing is raising my hand saying we should be working with a different tax accountant because the amount of optimization that can be done on taxes going forward with a tax preparer and financial planner together is astronomical.

 

Brian:

[00:28:33 – 00:28:34]

You know, neither one of us can.

 

Richard:

[00:28:34 – 00:29:11]

Do it by ourselves and we’ve got, we’ve also got different views like as a financial advisor we have the 90 foot view and there’s like a wide strategic view of where this is heading. The accountant has a much narrower focus and they miss loads of things and vice versa. We’ve actually started, we’ve always angled for that, although it’s hard when moshi clients have tax preparers, not tax advisors. So you have to have a different conversation there. But we’re actually about to start like really next year we’re going to really start pushing this because I just, I don’t think you can do the job properly, the tax part of the job properly unless there’s an open relationship there.

 

Richard:

[00:29:11 – 00:29:15]

And you’re meeting to talk about this specifically.

 

Brian:

[00:29:16 – 00:29:45]

Absolutely, I completely agree with you. I mean if you’re back in the States, how do you put together a proper pension for a small business if you don’t have the tax advisor working with you, all of a sudden you’re working off estimated numbers instead of the actual numbers. It’s also even just Roth conversions and such. We’re definitely playing on that, pairing those up with a donor advised fund. All of a sudden if you don’t have the tax advisor working alongside with you, your numbers could be way off.

 

Richard:

[00:29:45 – 00:30:06]

Let’s bring it back to Pfix. So we talked, we’ve explained what they are and why people, us people need to be very, very wary and stay away from them. We’ve talked about if you have this problem, what steps you can take to resolve it, which really are all quite unpalatable. It’s just get rid of them, deal with it and move on with your life. But let’s talk about bigger solutions.

 

Richard:

[00:30:06 – 00:30:27]

So you’re an expatriate in America and you want to maintain pounds or euros or Aussie dollars, or you are one of the 7 to 9 million Americans abroad and you want to invest in your home currency, wherever that is. How do you. But you don’t want to fall into the PFIC trap. How do you do it?

 

Brian:

[00:30:27 – 00:31:03]

We have our Robo Advisor, which is DF Direct, and we also have all of our portfolios listed through Morningstar, which other financial advisors can access as well as ourselves. And all of our portfolios are going to be listed in dollars, euros and pounds. We have other currencies, you know, like Australian dollars and such, but they’re just not listed publicly. And what this gives us the edge on is the ability to naturally hedge the portfolio. So not only is it going to be in those currencies, but we’re going to be able to naturally hedge those currencies.

 

Brian:

[00:31:03 – 00:31:57]

We’re at a point right now, especially with this last election, the dollar looks like it’s going to stay frothy for a period of time, just because there’s indications that we might have a little bit more inflation than what we would have expected if Trump wouldn’t have won the presidency. So naturally, we haven’t moved all of our fixed income out of dollars into euros or pounds because we’re on a long term trend of the dollar going up. But if that turned, we would be able to buy European and UK denominated fixed income inside of that portfolio. Now, that’s just for our off the shelf product, our Robo Advisor, DF Direct, or a Morningstar product. But we also have several platforms that if somebody wants to build a custom portfolio that they can show it in euros, but it’s still a US 1099 account.

 

Brian:

[00:31:58 – 00:32:02]

We can buy euro bonds, we can buy GBP bonds, absolutely no problem.

 

Richard:

[00:32:03 – 00:32:29]

But just to be clear, Brian, so these PFIC free portfolios, which allow US persons to invest in non US dollars without falling afoul of the PFIC rules, what are we investing in here? It’s direct equity is individual equity, stocks and shares, individual corporate bonds, individual Treasuries or gilts, whatever we call them out government bonds, also US stuff, US ETFs.

 

Brian:

[00:32:29 – 00:32:50]

And we’ll have a mix of. We’ve got to remember that over 50% of the world’s market cap is in the U.S. so if you go under 50% of your portfolio in U.S. dollars, you’re underweighting the U.S. which is a risky proposition to make when most of the performance in the world is coming from AI cloud computing.

 

Brian:

[00:32:50 – 00:33:02]

All of these sectors that are dominated by the U.S. market. So we shouldn’t be avoiding the U.S. we just don’t want it to be 90, 95%. Like maybe a U.S.

 

Brian:

[00:33:02 – 00:33:33]

domestic client that’s always going to live their life in the US would naturally hedge to the US dollar. We might want to be closer to the 56, 57% that the world market cap, the MSCI Global represents in the United States. So that that’s giving us a bigger share. So we definitely want to still own the United States and we can own that through exchange trade funds that are listed in the US or individual securities. It’s the choice of how we want to design that and that might be for tax reasons.

 

Brian:

[00:33:34 – 00:34:02]

Bigger clients that want to go ahead and manage the taxes a little bit more, we might direct index the S&P 500 so that we can sell off and tax harvest any of the losses. Even in a year like this year where the markets are up 25%, there’s a slew of different stocks in the S and P 500 that are down. Opportunities to tax harvest. But if all of a sudden we’ve got a IRA or such, we definitely just want to buy Voo. The Vanguard S&P500 keeps the cost down.

 

Brian:

[00:34:02 – 00:34:30]

We do the same thing in global markets. We can buy individual securities, individual stocks, or we can buy collectives. In the bond segment, there’s not as much choice when it comes to foreign bonds. There’s going to be more coming online in the next couple of years, but we most likely have to just buy for most people’s scenarios, individual bonds. So if you have a client lives in, in the US they’re going to move to the UK in three years.

 

Brian:

[00:34:30 – 00:34:54]

They know they’re going to move into the uk. They don’t want to have any currency risk, so they just want to have a portfolio of gilts that are coming, coming due in three years. To remove that currency risk, we set up a US based account, but we buy UK Gilts in there now we’re still receiving our 1099 in the US but we’ve erased any of our exposure in British pounds. No Pfix. Completely pfic.

 

Brian:

[00:34:54 – 00:35:03]

Free portfolio, but a very global portfolio meeting their needs of being able to purchase that house in Birchbounds.

 

Richard:

[00:35:03 – 00:35:07]

That sounds like a lot like do you have like minimums for this stuff?

 

Brian:

[00:35:07 – 00:35:37]

Typically when we structure a portfolio that’s customized, it’s anything over $100,000. Anything underneath that is going to be tough to put together because individual securities are going to take up Too much of a part of the portfolio. So you’re not going to get the diversification that you need. That being said, essentially if you’re building a bond portfolio, you probably want to have a half a million in there to be able to structure it correctly. Otherwise you’re just buying a SIMP qualified off the shelf portfolio.

 

Brian:

[00:35:37 – 00:35:38]

So it depends on the customization.

 

Richard:

[00:35:38 – 00:35:43]

I’m right in thinking as well, you don’t need, there’s no, is it a minimum for DF Direct?

 

Brian:

[00:35:43 – 00:36:06]

There is zero minimum on DF Direct and there’s zero commitment. So if you, if you’re straight out of college, you’re in your first job as a barista and you want to put away $50 a month, you can go to DF Direct and you can do so for most any country around the world. No cost to get the money out, no commitments in the longer term, and just half a percent per year as a, as a management fee.

 

Richard:

[00:36:06 – 00:36:27]

It’s pretty incredible solution there. So let me just summarize this for people listening. So if you’re, there are, there are a number of ways you can still invest in non US currencies and avoid the Pfix stuff. It’s usually more expensive, there’s fewer options, it’s a bit more cumbersome. But that’s just, that’s just, it just is what it is.

 

Richard:

[00:36:28 – 00:36:46]

And historically the way we’ve done that is through. There are some investment managers, Dunhill, Dunhill Financial is one of them. There are others, lgt Vestra, and they all manage PFIC free portfolios. And firms like mine can access them through a platform like Morningstar. So we’ll have clients who are definitely going back who want to keep money in pounds, who want to stay invested in pounds.

 

Richard:

[00:36:47 – 00:37:23]

And they will, they’ll utilize these portfolios. Okay, it makes perfect sense. But there’s generally, like I say, these are expensive, more expensive than a US equivalent and you need to put a certain amount of money in for it to make sense. But DF Direct now is like a robo version of a PFIC free investing. So you can be an American anywhere, not anywhere in the world, but in a lot of places and put any amount in and access PFIC free portfolios and build up investments in the currency that you’re living for, you know, a very reasonable fee.

 

Brian:

[00:37:23 – 00:37:29]

It’s the end of people getting discriminated against for banking as an American expat. That’s what it comes down to.

 

Richard:

[00:37:29 – 00:37:32]

And they get 1099 and all, they get all the, all the stuff, they.

 

Brian:

[00:37:32 – 00:38:02]

Get their 1099, they get the full reporting, they get their statements. So just like any other brokerage, it’s a nice, easy, consistent approach and we’ll be building a lot of advances in it. We’ll be receiving and sending out foreign currencies pretty soon. That’s our next big upgrade that we’re having on the system. So a very easy software and you can go to dfdirect.com check out all the portfolios for yourself.

 

Richard:

[00:38:02 – 00:38:27]

So there are solutions, folks. If you, if you, if you’re sat here listening to this and you, and you have Pfix or you’re thinking of coming to the US or leaving the US and you’re wondering how, how I’m going to invest, there are solutions. It can be done. It’s just as with all things, being an expat in the US or an American abroad, tread carefully and of course find yourself a good team of professional advisors. Right, Brian, thank you for coming on and talking to us about Pfix.

 

Richard:

[00:38:27 – 00:38:29]

Where can people find you?

 

Brian:

[00:38:29 – 00:38:40]

They can always find us at dunhillfinancial.com or df-direct.com and you can always email me at brianunhillfinancial.com and of course LinkedIn.

 

Richard:

[00:38:40 – 00:38:52]

You’re. I think, I don’t know if there’s a single person in the US or, or the UK or Europe that I connect to that you’re not already. Doesn’t already know you. You know, it pops up people you already know. He got there before me.

 

Richard:

[00:38:52 – 00:38:59]

Well, the, the cross border space is a small one, but it’s a small but a good one. So absolutely great. Right, Brian, thanks for coming on.

 

Brian:

[00:38:59 – 00:39:02]

Richard, always wonderful to see you. Thank you so much for having me.

 

Richard:

[00:39:02 – 00:39:11]

You too. All right, cheers. See you soon. All right, folks, that’s another episode of we’re the Brits in America Under Our Belts. Thank you for listening.

 

Richard:

[00:39:11 – 00:39:31]

I appreciate it and I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious expats and immigrants thrive in America, I’d ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it. That is your fellow expats.

 

Richard:

[00:39:32 – 00:40:04]

Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based lifestyle financial planner and wealth manager and we help successful American and international families living across the US to make the most of their opportunity and ultimately to retire happier if you’d like to know more about how we might be able to help you, you can find us on our website, planfirstwealth.com or you can look me up on LinkedIn. Do get in touch. Would love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show.

 

Richard:

[00:40:05 – 00:40:05]

See you next time.