Helping retired, outside US dad with his liquid investments

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
boglehat
Posts: 22
Joined: Mon Jul 14, 2014 9:31 am

Helping retired, outside US dad with his liquid investments

Post by boglehat » Thu Jan 10, 2019 1:13 pm

Hi all,

I am helping my dad (healthy, 78) with his liquid assets. Currently lives in Chile (LCOL). Summary:
- Yearly pension of ~$15K
- Owns home, plus a ~$220K investment property yielding ~4% in rent
- About $80K in liquid assets in Chile (actively managed with fees of 2%+, which I want to help him get out of), probably around 50-50 bond-stock allocation
- About $140K in liquid assets in the US. In the past he's actively traded based on news, now I'm helping him change to a low cost, diversified 70-30 bond-stock portfolio
- Lives with my mom who still works with a good income, but may retire next year (her pension will be higher than his)

Given his limited experience managing a balanced portfolio, I want to keep things as simple for him as possible.

Based on volatility tables I shared with him and my mom, we determined their desired asset allocation is 70-30 bonds-stock. To keep things simple, we invested the $140K in the US on the following two funds:
- 70%: Vanguard Intermediate-Term Bond ETF (BIV)
- 30%: Vanguard Total World Stock ETF (VT)

Questions:
- I am not sure about investing so much in US bonds. Given my dad lives in Chile and will do so for the rest of his life, would diversifying into international bonds make sense to reduce his exposure to the US Dollar?
- Any tips from folks outside the US to invest their locally held money internationally? I am not happy about his current asset manager in Chile, but I am unsure of how to locally buy US ETFs without incurring huge fees (e.g. a local broker I consulted charges 1.2% for buying, 1.2% for selling)
- Say we find a way to invest his Chilean money in low cost, diversified, international ETFs - could VT be a good fit for his entire stock allocation? Unlike living in the US, holding the local Chilean market is not ideal from a risk standpoint

Thanks all beforehand for your help

User avatar
celia
Posts: 8757
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Helping retired, outside US dad with his liquid investments

Post by celia » Thu Jan 10, 2019 2:11 pm

boglehat wrote:
Thu Jan 10, 2019 1:13 pm
Questions:
- I am not sure about investing so much in US bonds. Given my dad lives in Chile and will do so for the rest of his life, would diversifying into international bonds make sense to reduce his exposure to the US Dollar?
How strong or volatile is the Chilean currency? That would be the most important factor in all of these decisions. In addition, how strong is the local economy and government? What does history tell you? (Sorry, I'm not familiar with any of this but would want to find this out before investing there.) At least, international bonds should give him some diversity across currencies.

In other words, you need to consider the currency that the investment is held in rather than his own currency or the broker's currency.
- Any tips from folks outside the US to invest their locally held money internationally? I am not happy about his current asset manager in Chile, but I am unsure of how to locally buy US ETFs without incurring huge fees (e.g. a local broker I consulted charges 1.2% for buying, 1.2% for selling)
Have you considered using the money that is in the U.S. for US ETFs and money he holds locally for international bonds?
If he buys the ETFs and plans to hold them for 10 years or so, this commission is not bad, as long as he doesn't have to pay "management fees" every year.

TedSwippet
Posts: 1948
Joined: Mon Jun 04, 2007 4:19 pm

Re: Helping retired, outside US dad with his liquid investments

Post by TedSwippet » Thu Jan 10, 2019 2:26 pm

Is your Dad a US citizen? You don't make it clear either way, but it is crucial.

If yes, then the US domiciled ETFs that he currently holds are fine, but the 'locally managed' investments look like they might be a US PFIC tax nightmare in waiting. Check carefully that he does not hold any non-US domiciled funds or ETFs in this part of his investments.

If no, he risks substantial US estate taxes on holdings above a miserly $60k, and is overpaying US taxes on dividends from US domiciled ETFs, to the tune of more than double what he could pay if he held non-US domiciled equivalent ETFs. Chile has no tax treaties with the US.

More in this section of the wiki:
Outline of Non-US domiciles - Bogleheads

Topic Author
boglehat
Posts: 22
Joined: Mon Jul 14, 2014 9:31 am

Re: Helping retired, outside US dad with his liquid investments

Post by boglehat » Thu Jan 10, 2019 2:52 pm

Non-US citizen.
Dividend taxes are not an issue, he gets 30% withheld, but gets all of them refunded after filing US taxes and then pays taxes in Chile.

Topic Author
boglehat
Posts: 22
Joined: Mon Jul 14, 2014 9:31 am

Re: Helping retired, outside US dad with his liquid investments

Post by boglehat » Thu Jan 10, 2019 2:57 pm

celia wrote:
Thu Jan 10, 2019 2:11 pm
How strong or volatile is the Chilean currency? That would be the most important factor in all of these decisions. In addition, how strong is the local economy and government? What does history tell you? (Sorry, I'm not familiar with any of this but would want to find this out before investing there.) At least, international bonds should give him some diversity across currencies.
I'd say among the strongest / most stable in LATAM, but it's still LATAM and it is an emerging economy. Huge dependance on Copper prices, though.
Government has been capitalist since 1973 and will continue being so in the near future. However, neighboring countries such as Argentina and Brazil have had big crises over a decade ago that they still haven't recovered from.
celia wrote:
Thu Jan 10, 2019 2:11 pm
Have you considered using the money that is in the U.S. for US ETFs and money he holds locally for international bonds?
If he buys the ETFs and plans to hold them for 10 years or so, this commission is not bad, as long as he doesn't have to pay "management fees" every year.
Really good idea. What would a prudent division be between US and international bonds? 50-50?

TedSwippet
Posts: 1948
Joined: Mon Jun 04, 2007 4:19 pm

Re: Helping retired, outside US dad with his liquid investments

Post by TedSwippet » Thu Jan 10, 2019 3:29 pm

boglehat wrote:
Thu Jan 10, 2019 2:52 pm
Non-US citizen.
And also not a US green card holder?

... in which case, avoid US domiciled ETFs and use only non-US domiciled investment vehicles. The risk of losing up to 40% of the balance over a stingy $60k is too great. Vanguard's Ireland domiciled ETFs offer similar returns, but without any wealth-destroying US tax baggage.
boglehat wrote:
Thu Jan 10, 2019 2:52 pm
Dividend taxes are not an issue, he gets 30% withheld, but gets all of them refunded after filing US taxes ...
I am unsure how this is possible (unless your Dad holds a green card and files taxes as a US person, in which case he may have other issues). The US dividend tax rate for NRAs outside of treaty countries is a flat 30%. From IRS documentation (emphasis here is mine):
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income.

Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
From the sound of things, he may be (mis-)filing a 1040NR as if his dividends from US domiciled ETFs are ECI rather than FDAP income. Either that, or (incorrectly) filing a 1040 as if a US citizen or resident.

Post Reply