As the new US administration issues executive orders en masse and seems determined to spend its way to prosperity, two things should be clear to any American with meaningful wealth: the country will continue to increase its debt load and the government will soon be looking for “creative” ways to finance its crowd-pleasing largesse.
We are at the point now - and this should be at the forefront of your mind - where citizens with wealth and considerable savings will increasingly become primary targets.
Remember how Mitt Romney, the former Massachusetts governor, was criticized publicly for keeping some of his fortune in the Cayman Islands? One could certainly argue that this was politically clumsy, particularly since he was running for president back then. However, since he had properly reported and filed the information with his taxes, there was nothing illegal about his offshore nest-egg. In fact, more and more wealthy people are diversifying their assets jurisdictionally and depositing part of their wealth with foreign custodians and asset managers. As reported recently, more and more Americans are even taking it a step further and renouncing their citizenship: so-called Plan B Strategies are in high demand.
For many states that were once great have now become small; and those that were great in my time were small before. Knowing therefore that human prosperity never continues in the same place, I shall mention both alike.
~ Herodotus, Histories 1:5
Why Offshore Diversification Makes Sense
A growing number of wealthy families - not only from America but from other countries with growing debt problems as well - ask for advice, guidance and support in setting up structures outside their tax domicile.
So, assuming that you won’t be running for president anytime soon, what are the legitimate reasons for moving part of your wealth offshore?
First of all, and contrary to popular opinion, it's not about saving on taxes, although proper planning can certainly generate tax efficiencies.
Moving wealth offshore, in and of itself, does not result in tax savings. American taxpayers are taxed on their worldwide income; whether they earn US$10,000 (or US$10 million) in interest on a bank account in Switzerland or in New York, they will be taxed the same. Furthermore, there are plenty of tax planning tools and structures available in the U.S., such as trusts in low-tax states, life insurance policies or variable annuities. These can be used offshore as well as onshore.
Another popular misconception is that the rich are somehow trying to “hide” their money through offshore diversification. It is very possible that there are still a few die-hard believers in the viability of that kind of “strategy”. However, enforcement is becoming tighter by the day and the potential penalties are severe.
Those in tune with the reporting and transparency developments over the past few years should be fully aware: the days of keeping your affairs private from your government are counted, certainly for Americans. The FATCA regime is making sure of that. And other nations are following suit quickly. The UK has adopted similar rules and has already signed its first FATCA-like agreement with Isle of Man.
There are three primary reasons why wealthy families diversify their wealth jurisdictionally: litigation risk, political risk, and institutional risk. Properly structured, your wealth is afforded a higher degree of protection offshore.
America is widely known as a litigious society. From a European perspective, the legal system and the crazy lawsuits common in America appear unreasonable. Yet they are a fact of life and a real risk for wealthy Americans. Since U.S. courts don't have jurisdiction overseas, offshore planning keeps you away from the US court system and the caprices of those courts.
What is a more recent development is the growing awareness of political and institutional risk in the United States and the need to diversify away from it. As Jim Duggan says: "…diversification from our government, policies and banking systems”.
A growing number of clients are worried about the financial system, about confiscation, capital controls – the whole enchilada. They're concerned about where the US government and American society, as a whole, are headed. There are considerable socialistic tendencies. Redistribution of wealth and financial repression in all its hidden and overt forms are on the minds of a growing constituency of wealthy Americans.
Real Danger or Not – Risk Management Demands Precautionary Steps
Some might scoff at these concerns. Many believe that America is one of the safest countries and that there is no place you will find more freedom in. I guess that could really turn into a philosophical discussion. In fact, I would even agree that America, for a lot of people, is still a great place to live. And, relative to many other countries, it might still afford a lot of individual freedom. However, we have also seen a number of political and legal developments that justify caution.
“What if” is the question to ask. Even if you’re utterly optimistic in regard to US fiscal matters, its tax regime, economic health, etc., what if you’re wrong? What is the downside of putting part of your wealth in a sheltered structure offshore? I know from experience: there is none. As long as you follow the rules and file your forms properly, there are no downsides…but a lot of upside.
A few weeks ago, I had a Zoom call with a group of very wealthy Americans in San Francisco. These gentlemen had never done anything offshore so far. In fact, I recognized a certain level of anxiety regarding the idea of sending money abroad, outside of their network of trusted bankers and managers. Yet, they also understood the need to manage risk. Wealthy Californians are already paying taxes comparable to what Germans are used to. They are being plucked by a bankrupt state, to various degrees, and there’s no reason to think this will change any time soon.
One of them has made the move - a “guinea pig” of sorts for his friends. He is setting up a structure with our support. It is a safe, long-term plan, with solid institutions, income tax efficient, and – this is where clients are always surprised – cheaper than a comparable structure in the US. His friends are watching closely and will most likely follow when he confirms that it actually works.
Offshore is Only a Phone Call Away…
It’s always refreshing and gratifying to see how our clients, once they start working with us, recognize that in this modern world, having your investment advisor in Switzerland is, as far as practical communications and interaction goes, not much different than having them “at home”.
Just like your local advisor, we are only an e-mail or phone call away. And just because your assets are held custody in Switzerland rather than, say, in New York, it doesn’t mean you have no access to them. Yes, we do wire funds to the US, even from Swiss banks, and legally. Don’t let anyone bamboozle you into believing otherwise…
Doing nothing out of fear or ignorance is not a good choice. Risk management is worth consideration. Let me or my team at BFI know if you have any questions on the “How’s” and “What’s”. Jurisdictional diversification and international investment management is what we do every day.