What mix of investment assets should I explore to support my parents who are retired and migrating to the United States?
My parents will be migrating to the U.S. next year and I will be supporting them financially. They are retired and have limited income. What are the financial risks, trade-offs, and strategies I should be aware of, so that I can preserve their assets for the long-term, minimize the financial burden on my family, and maximize the current income potential of their assets? I need to be able to cover their essential expenses like health care and food. My parents are 72 and 64 years old. They are currently living abroad, but I am petitioning on their behalf for U.S. permanent residency. They live on fixed income from two non-U.S. real estate properties. They have a combined net worth of $400,000 (liquid and non-liquid), all earned abroad. My wife and I plan on supporting them financially through old age. Our annual HHI is over $200,000 and we file taxes jointly. We have two children under eight years old. Me and my wife are U.S. citizens and Virginia residents. How can I help my parents transfer their assets to the US and minimize their taxes and the taxes for my family? What mix of investment assets should I explore to generate income for them to cover living expenses?
Your question has a lot in it. It is the age-old question, how to maximize income, preservation of capital and future income growth, all at the same time. The simple answer is you can’t. Not with just one investment.
This is because there are usually trade-offs. If you want high income, you give up safety of principal. If you want income growth, you usually have to give up high current income and preservation of capital.
But then, it all comes down to definitions. What do you mean by preservation of assets? Do you mean no principal value fluctuations at all, or do you mean preservation of buying power, which would mean you want the principal to grow and keep pace with inflation? Is high current income 3%, 5%, 10%? One investor may view 3% as high current income if all they have invested in for the past several years was bank CDs which have had yields under 1%.
Some back of the napkin planning is needed. How much are your parents receiving in income from the 2 properties? Will they be keeping the properties or selling them? Do they have any other sources of income? (Not including income from financial investments.) What are your parents’ current monthly expenses? (Average in any annual or quarterly expenses.) What will their expenses be in America? Are any expenses expected to rise or decline?
The difference between the expenses and income is the amount that has to be made up by financial investments, (or you, since you are planning to help them out financially.)
Of the $400,000 in assets, how much of that is the real estate and how much is in financial assets? (bank deposits, stocks, bonds, mutual funds…)
The formula is simple. X is expenses and Y is income. Y minus X equals Z. Z is the amount of income they need each month from their financial assets and/or you; or the amount of surplus income they have.
I have sat across the kitchen tables of hundreds of retirees doing exactly what I just showed you, and you would not believe the number of people that were shocked to find out they actually had a surplus. You never know until you do the math.
The first thing we do is determine the needs and then talk about how to satisfy the needs. The investments flow from the needs. I have seen retirees that needed 15% cash flow from their investments because of medical needs, there was nothing they could do, they knew they were going to go broke eventually.
On the other hand, we’ve seen investors that want 10% cash flow and also regularly take thousands of dollars out of their portfolio for vacations. When we talked with them about reducing their expenses and cutting back so that their money could last, they refused. They seemed determined to spend their money as fast as they could.
Depending on your parents own risk tolerance, a managed portfolio of stocks and bonds may be right for them, giving them current income and future income growth. An annuity of some kind may be right for them if they are more concerned about a lifetime income and not about growing their income to keep up with inflation.
As for the tax questions, you will need a qualified CPA to answer those questions.
Your question had a lot in it, but as you can see, to determine what is right for your parents will require much more information. I hope I helped put you in the right direction at least and if you have any further questions, please feel free to contact me.
John Riley is a registered Research Analyst and has been the Chief Investment Strategist at Cornerstone Investment Services since 1999. (In the business since 1986.)
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Your questions involve many different pieces. Unfortunately, I cannot give you any specific answers based on the very limited information you provided here. And I bet that the most common and probably the best answer you could get here is to talk to a comprehensive financial planner who specializes in cross-border financial planning issues. The good news is that you are asking the right questions at the right time. Based on my experience, the best time to do these plannings is always before the migration. Having said that, here are a couple of things on top of my mind that you should consider.
1. Do your parents have any potential income/gains can be realized before they get the green card? You may already know that they will be taxed on their worldwide income once they become permanent residents in the U.S.
2. What's the best timing to move to the U.S. next year? The first year tax U.S. treatment can be planned based their specific situation.
3. Do your parents have any investments like mutual funds in their home countries? Maybe it is beneficial to liquidate any investments fall under the definition of Passive Foreign Investment Company (PFIC) due to the complicated and penalized tax treatment here in the U.S.
4. What health care options they have? When do they qualify for Medicare here in the U.S.? How much will it cost? Is it better to enroll in traditional Medicare or Medicare Advantage plans?
5. Do your parents have other income like social security or pensions from their home country besides the rental income? Is it enough to cover their living expenses here in the U.S.? If not, what's the best way to invest and withdrawal from their savings? How much do you need to save and help them? How much can you afford without sacrificing your own financial well being?
Again, there are so many things I have to take into considerations in order to give you any specific answers. Hope this could give you a good start.