“We fear things in proportion to our ignorance of them.”
~ Christian Nestell Bovee
As the US shutdown discussions in Washington DC go on in their regular fashion, lifting America’s debt limits to new heights like clock-work on each round of these media spectacles, a few things should be clear to any American with meaningful wealth: The country will continue to increase its federal debt and, therefore, after lifting the debt ceiling again and again, will be looking for “creative” ways to finance the growing appetite tax dollars of the US government.
We are at the point now - and this should be at the forefront of your mind - that citizens with wealth will increasingly become primary targets.
Remember how Mitt Romney, the former Massachusetts governor, was criticized publically 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. However, assuming he had properly reported and filed the information with his taxes, there was nothing illegal or immoral about his deed. In fact, more and more wealthy people are diversifying their assets jurisdictionally, i.e. depositing part of their wealth with foreign custodians and asset managers.
More and More Wealthy Families Moving Assets Offshore
So, assuming that you won’t be running for President anytime soon, what are the legitimate reasons for moving part of your wealth offshore?
Jim Duggan, a partner at the Chicago law firm Duggan Bertsch, in a recent presentation to some of our clients, confirmed that a growing number of wealthy people are looking into moving some of their money offshore. "The interest in offshore planning has increased considerably over the last ten years," he said. Based on my experience, I would concur. More and more 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 their affairs outside their tax domicile.
Why Offshore Diversification Makes Sense
Back to the question of why would investors move their assets out of their home country? Well, first of all, and contrary to popular opinion, it's not about saving taxes, although proper planning can certainly entail 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 available in the U.S., such as trusts in low-tax states, life insurance policies or variable annuities. These can be used equally offshore as well as onshore.
Then, are the rich “hiding” their money? It is very possible that there are still a few hard-to-die believers that trust 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 rules to copy the US lead and has already signed a 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 risks. Properly structured, your wealth is afforded a higher degree of protection offshore.
Litigation in America is an unfortunately old and well-known story. America is clearly known as being a litigious society. From a European perspective, the legal system and crazy lawsuits common in America appear unreasonable. Yet they are a fact of life and 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. 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 the US 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. America is one of the safest countries and nowhere will you find more freedom than here. I guess that could really turn into a philosophical discussion. In fact, I would even agree that America, for many, is still a great place to live. And, relative to many other countries, it might still afford a lot of individual freedom. However, there are certainly 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 your follow the rules, file your forms properly, there are no downsides, but a lot of upsides.
A few weeks ago, I met privately 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, out of their network of trusted bankers and managers. Yet, they also recognize the need to manage risk. Wealthy Californians are paying taxes comparable to what Germans are used to. They are being plucked by a bankrupt state, at various levels.
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 and will supposedly 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 him “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, doesn’t mean you have no access. 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.