Episode 79
Demats, PFICs and Provident Funds: What Indians Moving to America Need to Know
Moving to the US is an exciting step, but for Indians making that move, the financial complexity can be significant. From Demat accounts and Provident Funds to ULIPs, the assets that made perfect sense back home can quickly become compliance headaches, tax traps, and costly surprises in America. The good news is that with the right guidance – ideally before you arrive – most of these problems are entirely avoidable.
In this episode of Expat Wealth, Richard Taylor – dual UK/US citizen and Chartered Financial Planner – is joined by Manasa Nadig, Enrolled Agent and owner of MN Tax and Business Services, and co-host of the International Money Cafe podcast. Together, they walk through the most common Indian financial assets held by expats in America, what US reporting rules apply to each, and why pre-immigration planning can make the difference between a smooth transition and years of non-compliance.
Richard and Manasa discuss:
The four main Indian asset categories that matter for US tax purposes: Bank accounts, Demat accounts, Provident Funds, and insurance policies each carry different reporting requirements under FATCA and FBAR. Manasa breaks down what each one is, how it maps to more familiar US equivalents, and why simply not knowing about them is no defence with the IRS.
Why Demat accounts and ULIPs may trigger the PFIC problem: Mutual funds and unit-linked insurance policies held in India are typically classified as Passive Foreign Investment Companies under US tax law, bringing punitive tax treatment and complex annual reporting. Richard and Manasa explore why these are so hard to unwind once you are stateside, and why catching people before they arrive is so much more valuable than cleaning up afterwards.
Inheritances, gifts, and real estate – the traps people miss: From inherited property in Mumbai to gold jewellery gifted by grandparents, assets crossing borders often trigger Form 3520 reporting requirements that catch even well-intentioned expats off guard.
Richard and Manasa explain what needs to be reported, what the actual tax consequences are, and why failing to report can be far more costly than the assets themselves.
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Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.
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Expat Wealth 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.
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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 Taylor:
[00:00:00 – 00:00:19]
We’ve all got our war stories in the cross border space. We’ve all got our war stories. Right? Okay, so let’s start this from the beginning. So you’re so Indians in America. What are the, I guess, what are the most common Indian financial assets, tools, accounts that you see cropping up and how should they be treated?
Manasa Nadig:
[00:00:19 – 00:00:47]
There are ways that in India, let’s say, for example, going back to this country, there is a way that you can classify certain things. You can never, if you know there are other people that you have spoke to and they’ve already talked about this, it’s really not. You can’t go and put things in a trust, you know, just because you’re leaving that country. Because that again, triggers a whole lot of other situations which we don’t want.
Richard Taylor:
[00:00:49 – 00:02:12]
Welcome to Expat Wealth, a Plan first wealth podcast dedicated to helping ambitious expatriates in America and and Americans overseas thrive. 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 to make the most of their opportunity and avoid the expat landmines. 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 and positions of Plan First Wealth. Information presented is for educational purposes only. Now, if you aren’t already receiving our emails, please go to our website, www.planfirstwealth.com and sign up there. It’s free and you’ll 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 An Ask an expert show from Expat Wealth. My guest today is Manasa Nadig. Manasa is the owner and CEO of MN Tax and Business Services and she is also the co host with our friend Jane Meapham of the International Money Cafe podcast. And she is joining us today to discuss what engine expats in America and those thinking of coming to America need to be aware of from a tax and financial perspective. Hi Manasa. Welcome to Expat Wealth.
Manasa Nadig:
[00:02:13 – 00:02:14]
Hi Richard.
Richard Taylor:
[00:02:14 – 00:02:19]
Okay, so if you wouldn’t mind, would you just introduce yourself for the folks listening?
Manasa Nadig:
[00:02:19 – 00:03:15]
Absolutely. So I’m an enrolled agent, which means my license to practice is from the Internal Revenue Service for those who don’t know. And I have the same rights to represent my clients with the Internal Revenue Service and all of that good stuff. I live in the southeast Michigan area. And I have been practicing for a long time now, although I’ve been on my own, say maybe about around 13 or 14 years. So during this time do a lot of cross border tax compliance and foreign assets reporting and all of that because we have found that there aren’t as many people that there should be who can help out in this area. So that’s a little bit about me and you know, we can get started with whatever questions you have for me.
Richard Taylor:
[00:03:16 – 00:04:23]
You know, this is a bit of an unusual one for me actually because, because historically we’ve stuck mostly to British expat stuff, which is very much my wheelhouse. But having decided to expand the scope of the podcast, you are our first guest who is explicitly going to be talking about another expat group. So I’m actually going to be leaning quite heavily on you this time. Now the reason I decided to expand the scope was because one so much of the cross border stuff is transferable. The 80:20 rule, 80% is applicable to all expats. And it’s just more interesting I think as well to learn about all these different perspectives. So whilst I think I’m on relatively safe ground because I think I do know my stuff in the cross border world, the 20% that is very specific to Indians in America or Indians thinking about coming to America, I’m going to be leaning on you very heavily. So that’s what we’re going to talk about today is how should Indians who are already in America or thinking about coming to America, what do they need to be thinking of? What do they need to be aware of? What are the traps that exist? How can we help them avoid those traps? How can we help set them up for success here?
Manasa Nadig:
[00:04:24 – 00:05:49]
Absolutely. Definitely. For any expat coming to the us, there’s a whole list of things that needs to be done. And as far as Brits and everybody else, actually a lot of these rules apply to no matter which country you’re coming from. But then you get to a certain specific country, there are all of these terminology and maybe similar kind of assets but with different names and those are subject to U.S. tax reporting. And funny story of course is, you know, I mean, we have so many clients and they necessarily may not have had only a footprint in India. Right. They could have traveled to different countries and then they must have come to the US as well. Like for example, the last time you and I spoke, I was telling you the story about one of my clients who went from India to Australia, worked there for a few years Accumulated some retirement accounts and you know, bank accounts and then moved from there to the uk, accumulated some other pensions in the UK and stuff like that, and then came to the US and during this time they did also build their wealth in India. So now they had a footprint across like four countries. But staying specific to kind of India today, there are many.
Richard Taylor:
[00:05:53 – 00:06:10]
When they first approach you, so this is an Indian with Indian stuff, with Australian stuff, with British stuff, with American stuff. When they first approached you, what was their, what was their affairs like? Were they, were they in well order or from a US perspective, were they a bit of a disaster?
Manasa Nadig:
[00:06:10 – 00:07:11]
Surprisingly, because they were in, they were one of those high net worth individuals who had been helped by one of the big four companies, you know, until the time that they approached me, their foreign reporting, so to speak, especially because they had their footprint in so many different countries, were relatively in good order. Now there were some specifics that had kind of been missed, but I think that I take that as a win actually. Especially when you are looking at that kind of an extent of holding and there’s so many different countries involved. So unfortunately this particular person did not have a horror story to go with their reporting, but there have been horror stories from other people which I don’t know if we’ll have time to go into that today, but definitely, yeah, all kinds of, you know, non reporting, non compliance and everything which we’ve helped clean up, but not in this particular.
Richard Taylor:
[00:07:11 – 00:07:31]
We’ve all got our war stories in the cross border space. We’ve all got our war stories. Right. Okay, so let’s start this from the beginning. So you’re so Indians in America. What are the, I guess what are the most common Indian financial assets tools accounts that you see cropping up and how should they be treated?
Manasa Nadig:
[00:07:31 – 00:09:04]
So of course there are the bank accounts. That’s the no brainer. Now when there is a US person and they go and open a bank account in India and you know, India and the US have the FATCA agreement, the intergovernmental agreement. So like we always talk about fatca. When you go and you are not a person of that country, the bank asks you, you know, if you are a US person and then everything gets reported. Under fatca, if you are such a person, then you would have opened a non resident account in India because you’re not allowed to open an ordinary bank account. They already tagged that with a non resident ordinary or a non resident external account. Now you may have opened an account when you lived in India and it was an ordinary bank account. But the rules under the Reserve bank of India say if you’ve been outside India for a while, so then there is a period of time after which these ordinary accounts get converted to a non resident account. So anything, any bank account, even if you have not made that change, you know, even if they continue to be ordinary bank accounts, they need to be reported. Of course there are now mutual funds, etc. Are called differently. They are kind of the way that we have the ETFs and the brokerage accounts in India they called DEMAT account.
Richard Taylor:
[00:09:04 – 00:09:05]
What, sorry? Demat.
Manasa Nadig:
[00:09:06 – 00:09:36]
Demat, yeah. D E M A T. It’s a short form for. I think it says it’s short for dematerialization or something like that, but that’s what it is. These are demat accounts and usually demat accounts hold mutual funds, other ETFs, sometimes life insurance policies and sometimes demat accounts could also hold savings accounts within that wrapper. So these are demat accounts and we come back to that later.
Richard Taylor:
[00:09:36 – 00:09:41]
So broadly that’s what we would call a brokerage here or in the uk a gia.
Manasa Nadig:
[00:09:41 – 00:11:42]
Broadly, yeah, broadly, yes, yes, yeah. And then of course there are the retirement accounts. There are the employer provident funds which, you know, the employer contributes into and the employee contributes into. Then there are the public provident funds which are the PPFs and the EPFs earlier. Now the public provident funds are like individual retirement accounts. Here in the US there is no employer and you can contribute into the public provident fund on your own and that does lower your taxes on your Indian tax account. I mean a return if you have to file. So definitely both of those. And then insurance policies, now insurance policies in India are very popular and there are many insurance policies that are wrapped like a retirement policy and people pay premium into these policies and then they leave them alone and then there is a balloon payment after a certain amount of time. So these insurance policies are where we get into the whole gray area of reporting, but I’ll come to that later. So the big broad ones here are bank accounts, retirement accounts like the provident funds, the insurance policies like the, that we already talked about and the demat accounts. I’m sorry. So these are the four broad category of financial accounts that most Indian or they’re popular among expats in India and you know, the US residents who have in Indian bank accounts. Yeah. Financially.
Richard Taylor:
[00:11:42 – 00:12:15]
So imagine Indian moves here mid Korea. They’re going to have bank accounts, they’re going to have a demat account, they’re probably going to have at least an Employer Provident account, maybe also a public provident account, and maybe quite possibly, if they’re that popular, they’re going to have some of this life assurance, cash value, investment value, insurance as well going on, all of which can cause major headaches in America. So should we go through one by one? So let’s start with the most obvious one, the bank accounts. What does that require?
Manasa Nadig:
[00:12:15 – 00:14:13]
Well, bank accounts are actually simplest of all of these, right, because you have statements available from them. You have the, you know, the interest rates and then you have the exchange rate. And, you know, basically everything comes together pretty simple. You can get a statement from the bank which corresponds to the calendar year, whereas, you know, the Indian tax year, like the UK and Australia and some other countries are at a different cadence. They do not correspond to the calendar year, but statements are available. So to parse through the information that you need to, you know, report on a person’s US tax return is pretty straightforward. So there’s the bank account and the bank account, of course, there are the fixed deposits, the recurring deposits and all sorts of certificates of deposits that are there within that. So that’s pretty straightforward. The next one is the Employer Provident Fund. That one. And the Public Provident Fund. The Public Provident Fund is where people kind of get into this gray area, some people think, and treat it as if it is Social Security. Now, there is no guidance, of course, from the Internal Revenue Service that says Public Provident Fund is equivalent to Indian Social Security, which is. If you really just look at the language of what Social Security benefits are and you look at the Public Provident Fund, there is some overlap, but it’s not black and white. You can’t say that this is Social Security, because somebody who is high net worth can still opt to contribute into a Public Provident Fund, or I’ll call it pps.
Richard Taylor:
[00:14:13 – 00:14:16]
Yeah. When you were explaining it, it sounded more like an ira.
Manasa Nadig:
[00:14:17 – 00:14:40]
Exactly. It sounded like an ira. And I think that it is an ira. It’s not a Social Security account because you have access to the funds and you can see the money, you can see the growth and all of that. Basically, you go to any bank and you can open a PPF over there. So that’s a common.
Richard Taylor:
[00:14:40 – 00:14:52]
Yeah, that’s not. That doesn’t sound like Social Security to me. Is there a Social Security equivalent in India? Like, we have the basic State Pension in the uk, Social Security in America, Is there an Indian equivalent?
Manasa Nadig:
[00:14:52 – 00:14:53]
Not really.
Richard Taylor:
[00:14:53 – 00:14:53]
Oh, really?
Manasa Nadig:
[00:14:53 – 00:15:33]
Not really? Yeah. Yeah, there is no Social Security there. There are all sorts of welfare schemes but those are targeted to the not so fortunate strata of society, people who may not necessarily be in the us. There is nothing that would just equal US Social Security or national insurance in the uk. People like to think that the BPF is one, but I think that is not a correct assumption. I would treat it as a retirement account.
Richard Taylor:
[00:15:34 – 00:15:36]
It certainly sounds like a retirement account from what you’ve explained to me.
Manasa Nadig:
[00:15:36 – 00:16:40]
Yes, yes, yes, there is the epf, of course. Now, the EPF is where it gets tricky and it is dependent on where the person is. Now, suppose if this is a US citizen expat who is living in India and working in India and contributing into the epf, you know, actively right now, they’re actively employed. It could be treated as a defined benefit or a defined contribution plan. Right. Because it seems like it’s the similar sort of wrapper. But if this is a person who used to work in India and has now come to the US and is no longer actively contributing into it, they can still keep the EPF active, so to speak. They don’t have to, you know, close it out or take money out, but it is a reportable asset on your FATCA or F bar, all of that. So that is a regular retirement account.
Richard Taylor:
[00:16:40 – 00:16:51]
Manasa, is there also, Is there more reporting? So we’ve got F bar, you know, obviously, but is there also 8938, is there a 3520 for any of these?
Manasa Nadig:
[00:16:51 – 00:17:50]
The 3520s and the 3520 as is again, where we get into the gray with the guidance. Now, are these foreign grantor trusts and can they be classified as foreign grantor trust, or are they exclusively not categorized as such under the RevProc 2020-17? We don’t have clear guidance on that. So right now what most tax practitioners do is they do not treat this as a foreign grantor trust. It’s a like any other defined benefit, defined contribution plan which, you know, is reportable on your FATCA and fbar, of course, if thresholds are crossed in aggregate, but it does not get any other special reporting like the 86, 21s or the 3520s.
Richard Taylor:
[00:17:50 – 00:17:56]
Okay. Oh, good to know. Okay, so no 3520 and no 3528. We think that’s nice.
Manasa Nadig:
[00:17:56 – 00:17:57]
We think that’s nice. Yeah.
Richard Taylor:
[00:17:57 – 00:17:57]
Okay.
Manasa Nadig:
[00:17:57 – 00:17:59]
Yeah, good. Yeah.
Richard Taylor:
[00:17:59 – 00:18:00]
Well, I’ll take that win.
Manasa Nadig:
[00:18:00 – 00:19:04]
Yeah. And of course then there is the demat account, which holds the mutual funds. And whenever we say mutual funds, you know, we all get into that fun Which I’m saying fun in a very sarcastic way, the PFIC regime. And that’s where it gets really tricky because again here the DEMAT is a very popular holding, right? Because if you are living in India, this is one of your investment vehicles. You want to contribute into it, you want to see the money grow, you want to see the wealth grow. But then there are PFIC reporting rules to that. And you know, we do have the mark to market, most of them we have to do the mark to market because they are not eligible for the QEF election. And when you do the mark to market, yes, the unrealized capital gains, et cetera, you know, they do are subject to ordinary income tax rates.
Richard Taylor:
[00:19:04 – 00:20:39]
So let’s just bring everyone up to speed on this. So I have done dedicated episodes on Pfix before. I can’t remember the number off the top of my head. But if people go and look back for an episode with Brian Dunhill, we cover the demon that is pfix. So non US collective investments, mutual funds, ETFs are generally considered. PFIX stands for passive foreign investment companies. Not that matters. But they are in general, the rule is for US taxpayers to avoid them like the plague. In general, this is because they come with additional reporting requirements, onerous reporting requirements on each individual pfic, each individual investment. So if you have a Demat account with 10 ETFs, 10 mutual funds in there, that’s 10 individual forms. And these are not simple forms, folks. And then on top of that, the general rule is it’s pretty onerous report taxation. Punitive, I should say punitive taxation. There are elections available to your point. Right, but, but am I right in thinking even if you can get the mark to model one, you have to do that? If you miss, if you, you have to do that up front and if you miss it, you miss it, it’s gone. So and correct me if I’m wrong here, if your experience is like mine. Everyone moves to America. No one knows about this. People don’t report the pensions on the forms. Talking about people don’t report the pfix. They miss the opportunity to elect and wins are a whole. Now we have non compliance and high taxation and very little we can do about it.
Manasa Nadig:
[00:20:39 – 00:22:59]
Exactly. And you know, when it comes to India, what happens is sometimes if the holdings are pretty substantive, you know, even with the not so great exchange rate, like last time I checked it was 90 rupees to a US dollar. But even with that, you know the taxation aspect of these prefects can be like you said, punitive. So you cannot just tell somebody, oh you got to get rid of this. They may have lived, they may be in their 50s and may have lived 3/4 of their working life in India and they have these huge mutual funds. So you just have to then look at what their big picture plan is from a financial planning perspective, a cross border financial planning perspective. Are they going to live in the US long term and what do they want to do with all of these PFICs? And since we are talking about PFICs actually let me quickly insert here why we mentioned life insurance policies earlier. There is a particular life insurance policy in India called the ULEP. Now the ULIP what happens is a lot of the ULIPs are the back end, are invested in the market. So these could also be subject to pfic. You know, these are not opaque insurance policies. So then you get into all of this PFIC reporting and so you hear now take a 40 year old person who has been working since their 20s, this 20 years of accumulated wealth, insurance policies, DMAT etc and they come to the US on an L1 visa. Now they come to you and they have all of this. You know, there’s PFIC reporting and even if you started from day one, just the mark to market election is you’re looking at this and you’re going oh wait a minute, you know, and that’s when it gets into is it worth keeping this or getting, you know, selling them off? Because selling them off may not be an option. Maybe this person is here for just three years and they want to go
Richard Taylor:
[00:22:59 – 00:23:18]
back ultimately within edema. If it’s just a regular ETF mutual fund, you know, that it’s an easy process to sell if it’s determined. Am I right in thinking though insurance can be much harder to unwind, Much, much harder to unwind. It might not even, you know, without abandoning the whole policy which can have an enormous cost.
Manasa Nadig:
[00:23:18 – 00:23:19]
Exactly.
Richard Taylor:
[00:23:20 – 00:23:25]
I imagine I’m unfamiliar with the specific plans but that’s, you know, I’m familiar
Manasa Nadig:
[00:23:25 – 00:23:25]
with
Richard Taylor:
[00:23:27 – 00:23:31]
the type in general just not an option.
Manasa Nadig:
[00:23:31 – 00:24:50]
So you got to factor that in. And so I’ve had a lot of these conversations with financial planners in India where we take into account the projected growth in all of these accounts, you know, whether they are DMAT or ulips or insurance policies, whatever you have you which may be subject to PFIC treatment. We look at the extent of the holding, the exchange rate fluctuation and the projected growth in this to then determine, you know, whether this is something that people want to hold on to and whether the paying tax in the US on these is worth keeping those investments for them back in India. So I mean, I know that we’re kind of now getting into the specifics of this, but that is definitely a genuine concern for people who have these holdings in India and they then want to come to the U.S. or are coming to the U.S. you know, or sometimes they inherit or are already here or are already here and they inherit these DMAT accounts and insurance policies from their family.
Richard Taylor:
[00:24:50 – 00:27:05]
I’m excited to announce that Expat wealth has its first sponsor, the Global Financial Planning Institute. The GFPI exists to provide education, community tools, resources and ongoing research for financial planners and other advanced financial professionals working with international and cross border clients in the US And Americans abroad. I’m a GFP Institute fellow and I’ve put all our employees through their GFPI programs when they join us. I’ve met some great people, I’ve learned a ton. It’s a genuine community of internationally minded folk doing their best to serve their clients properly and critically sharing what they know in the oftentimes challenging and ambiguous US cross border environment. And as anyone in this sector will tell you, you’re always learning. So if you work with international clients and or Americans abroad or if this is an area you’re looking to get into, check out the gfpi@www.gfp.in stute you will be glad you did and I hope to see you there soon. You know, and you could have a situation where someone thinks they’re coming for two years, three years, four years, whatever, right? And they hold on to these things and imagine if you’ve got, I can imagine a scenario where someone’s got various pensions that need, various retirement accounts that need declaring, they have a demat account, it’s got a handful of, of mutual funds in it, they have some of this insurance, it’s got a handful of mutual funds in it. Each individual mutual fund or ETF needs this 8621. That adds up to a lot of reporting which adds up to a substantial cost just for your tax preparer each year before you even get into any tax. But then that’s great. Well, that’s the wrong word to use. But that’s fine I guess if they’re going to go back and they can bear that cost in the short term. But I tell you what we see a lot is people come for two, three, four years and then you know, they’re just getting started and they Decide to save for 10. So when do you pull that ripcord, you know, and 10 turns into forever. In some cases, you know, it’s that I can imagine that I’ve been. And then at that point though, you’ve got a sunk cost. You’ve been doing all this reporting for three, four, five years. Anything you might stay and then you’re going to bear the, you’re gonna have to surrender them and bear that, all that cost anyway. It puts people in a real bind.
Manasa Nadig:
[00:27:05 – 00:28:12]
Yeah, it does, totally. I agree with you. Because this is, it’s a conversation that you can’t expect that you would have this problem, so to speak. I don’t know any other word to say for that. But, you know, maybe then it’s. Hindsight is not possible here, you know, or even foresight. You just have to take it as it comes. You know, you are in India at this point of time. I’m a 25 year old who’s just got a job and hey, I think like my parents tell me, hey, you know what you should start. I mean, you know your, you know what I mean? Like that’s, that’s, that’s. The mutual funds are doing great. Our mutual funds are doing great. You just started working go do that and they start and then, you know, four or five years down the road, they’re in the U.S. okay, heads up. You have mutual funds, you need to do PFIC reporting. I think that’s where our podcasts and things like that come in. Like we are. Hopefully people listen and they’re like, wait a minute, I have mutual funds in India. Maybe there’s some reporting I need to do.
Richard Taylor:
[00:28:13 – 00:29:03]
Well, what’s the ideal scenario? Is the ideal scenario that someone. We catch people before they come? That’s why I always think about this for a British perspective, is that someone. I started it really to put this in for our clients are people who are already here. So most of the time we. You are first of all clearing up a mess, right? An inadvertent mess. But what I hope is that over time and this is starting to happen, is that more people catch us before they leave. You know, they put it into Google or into AI whatever it is, they find this episode or they find a different episode and they become aware of these issues and they reach out to us before they’ve left or they’re still. Before they’re a tax resident in the U.S. and that so much of the problems we talk about can be averted before they arrive here.
Manasa Nadig:
[00:29:04 – 00:29:05]
Absolutely.
Richard Taylor:
[00:29:05 – 00:29:12]
Can be averted entirely or we can put them into a position where the problem can’t be averted, but it can be managed while they’re here.
Manasa Nadig:
[00:29:13 – 00:29:49]
Exactly. Because there are ways that in India, let’s say, for example, going back to this country, there is a way that you can classify certain things. You know, you can never. If you know there are other people that you have spoke to and they’ve already talked about this, it’s really not. You can’t go and put things in a trust just because you’re leaving that country. Because that again, triggers a whole lot of other situations which we don’t want. And there’s a time frame, I believe
Richard Taylor:
[00:29:49 – 00:30:07]
each country, each country should have a different name for trusts because I think the general public thinks, oh, it’s a trust, it’s a trust there, it’s a trust there, it’s a trust there, it all works. That is not the case. I think each country should have its own name that another country cannot use so that people don’t fall into this trap of thinking it works everywhere.
Manasa Nadig:
[00:30:07 – 00:31:22]
Exactly. They’re definitely going back to your point earlier. Pre immigration planning, whether it is into the US or out, inbound, outbound, like we like to say, is a must. I think that it definitely is something that you should be thinking about. Because money, I mean, you know what, we are all in this business of money. I mean, there is the other ethereal side of things. But when you come to this, you worked hard for it. You’ve, you know, this is something that you need to do. You cannot not pay taxes. You have to pay taxes. But at the same time, there is a smart way of doing things, which you are reporting this, but you’re keeping the investments. And then at some point, like you said about pulling the cord, I think that as long as you’ve been compliant with the reporting aspect of it, if you are at some point in time, this doesn’t make sense to you anymore. At least, you know, the paper trail is there to show the government that this is where everything happened and this is the story.
Richard Taylor:
[00:31:22 – 00:32:21]
You know, do you have anything like an isa? So an ISA is a particular PFIC trap for Brits where they have this isa. They think it’s tax free and it’s like a Roth ira. I mean, I know you know, but it’s tax free gross in the UK and tax free withdrawals and they moved to America, keeping them intact because no one’s sure how long they’ll be here. They don’t want to give up something they’ve been saving for you. Know, 10, 15, 20 years into it, super valuable not realizing that once I get into America, America doesn’t recognize the isa. America looks right through the ISA wrapper, sees you’re holding a portfolio of Pfix and this tax free account turns into, not only is it taxable, but it’s also punitively taxed. And very often, no, there’s certainly additional reporting requirements and also very often because you’ve not been doing those reporting requirements, you’ve fallen into non compliance. So the ISA is a particular trap for Brits. Is there anything like that? It sounds like the life insurance policy you mentioned might be that.
Manasa Nadig:
[00:32:21 – 00:35:18]
Yes, exactly. The life insurance policies. Especially if they are these so called ULIPs which are the unit linked insurance policies. That’s what they stand for and that’s, that’s a common one because they called all sorts of things and people use them for all sorts of, they use them for children’s education funds, for their own retirement, for sometimes to just spark extra money in. Because you know what, that’s their plan. Five years down the road I’m going to buy a flat in Mumbai, let’s say, or whatever. You know, that’s, that’s what they use the ULIPS for. Which in that context is a great idea. Right. I mean it couldn’t be better than that. Like what’s, you put 100k rupees in it for five years and then five years later you have a million. You know, I mean I don’t even know how that works, but it does apparently. But that’s a common one that gets people all riled up when you have to tell them that, oh, now there is a PFIC reporting and like you said earlier, it’s not easy to unravel. Yeah, actually I have a, I have a story about the public provident fund which kind of is again like we were talking about the gray area which, and it’s, it’s a, it’s, it’s very, very common. You have grandparents in India putting money into a PPF for their grandkids who are U.S. citizens and who live here. Now. That’s a big no. No. But people in India don’t know that, you know, for them it’s an act of love is to go open a PPF and put money into it for their grandchild. But if you’re not a U.S. i mean if you’re not an Indian tax resident you cannot put money into a ppf and if you’re not an Indian tax resident, you cannot hold a ppf. So after a certain period of time, if you have now stopped being an Indian resident and your plan is not to go back, then those PPFs are the first ones that need to get converted or liquidated. And if you have not reached a certain age, you know, just like here in the US, you know, if you take money out of an IRA before you’re 59 and a half, there are all of these penalties. Then there are other penalties associated with that. So that’s, that’s a common one as well. I see that quite a lot. People come and then they’re like, oh, I have a ppf, you know, and then we have to talk about, can you keep holding on to that? You know, possibly you cannot. You need to close that out. Yes.
Richard Taylor:
[00:35:18 – 00:35:19]
What about real estate?
Manasa Nadig:
[00:35:19 – 00:37:38]
Oh, that’s a good one. You know, Mindy, clients love their real estate. I love real estate. Yes. So many, many aspects to it. Of course, real estate by itself is not something that is of reportable asset. But of course if this is a rental property, than it is. So again that happens when either you have built a, you know, or you bought a flat or you built a property, lived in it for a while and then you come to the US. Now of course the section 121 exclusion, which, let me explain, is the exclusion that you get if, if a property was your primary residence and you sold it and depending on your married filing status or your single stat status, you get a certain amount of money which is not taxable. And so the, the proceeds from the sale of these properties need to be within the threshold to be non taxable. Right. So that’s an issue. Now if the person has a flat which they have purchased and then that was their primary residence, now they are in the us, they may be renting it, then that rental property is reportable on their US return. If they are not renting it, then it’s not a problem at all, but it’s growing in value and appreciating. That’s a great reason to maybe hold onto it. Then of course there’s the inheritances. And some of these properties, depending on which city that they are in, can be very, very valuable. And so if they cross the $100,000, then of course there’s the one time reporting for inheritances from non US persons and that you report that and then it depends on what you’re going to do with that inheritance. Are you going to leave it, you’re going to sell it, it’s capital gains, you get the step up in basis or you’re going to keep renting it, then the rental income is reportable on your U.S. taxes. The depreciation treatment is different.
Richard Taylor:
[00:37:38 – 00:38:41]
So let’s just to be clear for people. So if you, this is if you’re in the US or you’re a US person and you’re going to inherit property or assets from India, you know, a relative has passed away in India and has left you money, assets, property, real estate, whatever. There may be tax to pay in India, but there shouldn’t be, you know, there’s not, there’s not going to be tax on you inheriting this. But, but if you are inheriting or being gifted assets, cash, property worth more than a hundred thousand dollars, this needs to be reported to the irs on Form 3520. This is something that we people miss all the time. Right. And they don’t really. People are scared that it means they’re gonna get taxed. No, you’re going to potentially incur penalties just for not reporting it. But just reporting it doesn’t mean you’re going to incur taxation. You’re not going to incur taxation. So this is, this is another the PFIC, I’d say PFICs are the scourge of cross border advisors. But this, receiving gifts, receiving inheritances, this is another common trap we all see.
Manasa Nadig:
[00:38:42 – 00:40:01]
Definitely. And there’s no way of kind of getting around that. The only good thing is of course there is the step up in basis if that, if any of your inherited property gets sold, you do get, you can take advantage of that if it were to be taxable. Now there’s also the gifts in India, gifts from, and there’s a whole explanation to it. But there are the blood relatives, there’s the first circle, second circle, etc. And there are certain relatives that you can receive or give gifts to that are non taxable. So if my father gave me a gift, that would not be a taxable gift, but if my father were a resident of India and if this was more than $100,000, then yes, it needs to be reported to the IRS just because I received it in that year and it was more than that threshold. And that goes even with a lot of my Indian clients get, you know, jewelry and other collectibles in as inheritances and gifts. So those all, I mean, you know, you don’t want to talk about the gold and silver prizes today, but there’s
Richard Taylor:
[00:40:01 – 00:40:05]
a lot more people being caught by this is what you’re saying, right? With gold prices where they are.
Manasa Nadig:
[00:40:05 – 00:40:22]
Yeah, yeah, yeah. So if you are going to go get that jewelry valued. And if it’s going to cross $100,000, you know, it wouldn’t have been reportable on your Indian tax return or Indian gift, but it would be on your US Tax return.
Richard Taylor:
[00:40:22 – 00:40:44]
It’s a mindset shift as much as anything. People got to think just because it’s okay in one jurisdiction doesn’t mean okay is the wrong word. Just because there’s no requirements or issues on this side is not on this side. And even you’ve always got to double check, but on both sides to being compliant in America. And it catches everyone out because it’s kind of unique in the way it does this.
Manasa Nadig:
[00:40:44 – 00:40:45]
Absolutely.
Richard Taylor:
[00:40:46 – 00:40:48]
This has been fantastic. Thank you. Where can people find you?
Manasa Nadig:
[00:40:49 – 00:41:10]
I am on LinkedIn. People can find me on LinkedIn. People can go to my website, mntaxbusiness. That’s pretty straightforward. I do dabble in other social media, but not as much as I am on LinkedIn and easily reachable. So those are some of the places.
Richard Taylor:
[00:41:10 – 00:41:15]
And as I mentioned at the beginning, you have your own. You have a podcast as well with
Manasa Nadig:
[00:41:15 – 00:41:19]
Jane Mefam, one of my favorites. Yes, yes, we know.
Richard Taylor:
[00:41:19 – 00:41:55]
Jane, friend of Plan First Wealth. Thank you for leading me on this journey out of my own comfort zone. This is the first, you know, this is my first time really exploring a group other than Brits. And as I, as expected, massive similarities. The names of the products are different, but the problems are identical in many ways. And hopefully I hope there’s someone in India who’s yet to move to America who picks this up and avoids a lot of heartache, a lot of emotional strife and hopefully a lot of potential savings as well, result of finding this podcast. So thank you.
Manasa Nadig:
[00:41:55 – 00:41:59]
Absolutely. Thank you, Richard. Thanks for having me. This was absolute fun. Of course, yes.
Richard Taylor:
[00:41:59 – 00:42:00]
Come back.
Manasa Nadig:
[00:42:00 – 00:42:02]
Of course. Please, please have me back again.
Richard Taylor:
[00:42:03 – 00:42:04]
I will.
Manasa Nadig:
[00:42:04 – 00:42:05]
Thank you. Yes.
Richard Taylor:
[00:42:05 – 00:42:05]
See you soon.
Manasa Nadig:
[00:42:05 – 00:42:06]
Yeah. Bye.
Richard Taylor:
[00:42:07 – 00:43:04]
All right, folks, that’s another episode of Expat wealth under Our Belts. Thank you for listening. 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 thrive in America and 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, to your fellow expats. Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based 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, www.planfirstwealth.com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next week.
Production