As the wags say, “Tax lawyers are usually people who don’t have enough personality to be accountants”. It was with this in mind that I tried to go out of my way to inject a certain level of reativity and levity into a recent presentation that I gave to a group of international tax lawyers in New York City. Here is the result.
Enjoy!
David S. Lesperance, Barrister and Solicitor
Within the last month, I have seen a tremendous upswing in the number of individuals who are retaining me as a response to recent events in the Middle East and North Africa. They range from local nationals to Arab expats to International expats and they each have their own reasoning behind their desire to “have a back-up plan†for their families and their fortunes. In brief here is the reasoning:
1. Local Nationals: This group ranges from wealthy business owners to high income professionals. Even if they support greater democracy in their home country, they are frightened by the unrealistic expectations of the protestors that throwing out the existing regimes will instantly bring financial prosperity and employment. As one new client said, “Any country is just four missed meals away from revolution. My fear is that the protests have left many protesters on the brink of financial disaster. They expect instant prosperity after a regime change and when that does not happen and they get hungry they will start looting my neighborhood. The fact that I was in the square handing out food and water and also protesting for democracy will fall on deaf ears, as they attack my home and my family. Therefore, I am taking the prudent precaution of getting my family the right to live somewhere else and remove more and more of my assets out of my home country.”
2. Arab and Sub-Continent Expats: Groups such as Indians, Pakistanis, Palestinians, Lebanese and Iranians, who have lived in the Gulf States for decades, are worried not only about protesters, but also that some people in their host country may take advantage of the upheavals. In the six nation Gulf Cooperation Council (GCC), these individuals live year to year on annual residence permits. This is despite the fact that they or their children may have been born in the host country or spent the vast majority of their lives living there. Their “home country†is alien to them and it is not possible to have the business opportunity or lifestyle there that they have been enjoying in their host country. Recently, I was retained by one gentleman who did not have his annual residence permit renewed despite having lived in that particular country for over 45 years and having built up a prosperous business that employed several hundred people. He was told that he had one week to leave the country. When I asked him why his residence permit wasn’t renewed, he speculated “The officials would not give me a reason but I strongly suspect that a business person who owed my company a great deal of money used his extensive connections with ‘the powers that be’ to have me ‘go away’. The scoundrel did give himself away by already being at my office when I returned from the immigration office with an offer to buy my company at a deep discount (including a forgiveness of his indebtedness).â€
3. International Expats: Wealthy foreigners and highly paid executives were enticed to buy property in many gulf countries with an implied or even explicit promise of automatic permanent residence. When this promise was not fulfilled and the property market turned sour, they quickly discovered that they had few rights relating to the property and that debt default was actually a criminal offence. When this reality is combined with the economic turmoil of current or anticipated protests and disruptions, the decision to leave their new Middle East home has become a surety. However, many are reluctant to return to their high tax home country. As a result, they have retained my firm to help them locate the next oasis which balances lifestyle, business opportunity, security and reasonable taxation.Â
It goes without saying that these “Golden Geese†are critical to any future economic stability or recovery in the region. The “unexpected outcome†of them securing and possibly executing a “back-up plan†in response to the current pro-democracy movement definitely merits attention.
David S. Lesperance, Barrister and Solicitor
Well it looks like the U.S. President and Congress have decided to extend the Bush tax cuts for two more years for ALL taxpayers. This only happened after the President and Democratic members of Congress finally relented on their previous demand that the “Golden Geese†(i.e. top 1% of taxpayers) not be included in this extension.
So what has been the reaction of the Golden Geese?
So far, the feedback that I have received from my Golden Geese clients is that they feel like they have been granted two more years of runway in order to arrange their orderly legal departure from the U.S. tax net. This feedback is from Golden Geese of all political stripes because they acknowledge certain Facts:
1. The U.S. tax revenue model is very skewed and relies on the 1% Golden Geese for over 40% of the total federal individual tax burden. This is situation is even more skewed at the state level, read this WSJ blog;
2. The fiscal needs of the U.S. government are dramatically increasing simply because an aging population will be placing ever greater demands on Social Security, Medicare, and Federal Government retiree benefits. Banning earmarks, cutting defense spending, and other expense cuts are just rearranging the deck chairs on a ship which is on a collision course with these fiscal icebergs. The reality is that neither party currently has the political will to address the problems that will be caused by these sacred cows; and as a result
3. When the U.S. federal and state governments look for the additional money they will need, they will turn to their best customers…..the Golden Geese. This reality is confirmed by the almost universal agreement by both Republicans and Democrats that this tax cut extension was only temporary in order to avoid the risk of a double-dip recession;
Furthermore, for Golden Geese as for everyone, their perception is their reality. While the above are agreed upon Facts, the following are the perceived realities that my Golden Geese clients see:
1) If a Golden Goose wants to address a societal need or problem, government is not a very efficient means of execution. They feel that every tax dollar saved, is another dollar to put into a strategic philanthropic vehicle (either their own or outside existing ones) which will be a more effective, sustainable and accountable method of addressing the need; and
2) If an individual Golden Goose ever had thoughts of engaging in tax evasion, they know that in a post UBS world this is not a smart thing to do, as can be read on my website. Those who were foolish enough to try this in the past, read this Bloomberg article for some examples, are now paying the price in taxes, interest, penalties. In addition, the threat or realty of incarceration along with the personal humiliation of wearing the scarlet letter of “tax evader†is just too high a price to pay for these types of games.
The bottom line is that until politicians and voters tackle the three Facts outlined above, their will continue to be an acceleration of the phenomena known as “The Flight of the Golden Geeseâ€!
David S. Lesperance, Barrister and Solicitor
A US hedge fund client who had been toying with the idea of setting up a personal and business back-up plan finally hired me this week. What was the “tipping point†for him in moving forward? Specifically he cited the recent subpoena request made on several high profile hedge funds, including Steven Cohen’s SAC Capital [READ MORE HERE] seeking information about their relations with outside researchers regarding pretty routine “channel checking†due diligence procedures [READ MORE HERE]. He noted that in light of the Madoff case, the power to issue subpoenas to even junior SEC officials to go on “fishing expeditions†had been vastly increased. While his fund had not been served in this round of requests, he did indicate that at a previous hedge fund he worked at, he had seen first-hand the enormous costs to answer a general subpoena. Millions were spent on legal fees to review a room full of documents; determine which may be relevant; and then have endless meetings with officials to discuss why certain documents were produced and why others were not. In addition to legal fees, the disruption cost and loss of reputation (Investors thought “Where there is smoke there must be fire!â€) was incalculable. At the end of that fishing expedition, no charges were ever made but the damage to the fund had already been done. His conclusion is that, for hedge funds and many other types of businesses, operating in the US was becoming Kafka-like and financially unviable. His solution, just like his computer system, he was going to set up a “back-up plan†for himself, his family and his business.
My discussion with him prompted me to revisited a recent issue of The Economist which had a cover story article [READ MORE HERE] which underscored this reality for my American clients. The article examined why this was happening and concluded that the high US incarceration rates run counter to the claims of being “the land of the freeâ€. Violent criminals aside, there are often cases where prosecutions and punishments are grossly disproportionate to the social ill they are trying to prevent. High net worth US citizens are often the targets of unfair civil lawsuits with the simple intent to push them into an out of court settlement to keep the legal glare away from media and shareholders. I often quote the statistic that over 90% of civil litigation worldwide occurs in the US and it always creates a jaw-drop moment. Now they also have to look at government actions which may have more to do with abuse of power or making a name for an elected official as “law and order†than with any genuine attempt to protect society from wrongdoing. Having the IRS place a neon target on your back is distraction enough. If the SEC or other government agencies can also subpoena at will, the exit gates out of the US may become as busy as the entry gates to the prisons.
David S. Lesperance, Barrister and Solicitor
Well there is alot that can be said about Tiger Woods’ extra-marital behavior and divine retribution. However, the thing that sticks out in the legal professional part of my brain is how poorly advised he was. His much hyped advisors took a great deal of credit for their cleverness in negotiating an extra basis point here and there on his endorsement contracts. However, while they were helping Tiger pick nickels up off the sidewalk, they failed to notice or warn him about the economic steamroller that was bearing down on him. Presumably he spent a great deal of money on legal advice relating for a prenuptial agreement to try and limit the amount of money his wife would get after 10 years of marriage (rumored at 10 million). This probably included independent legal advice to her to ensure that it would stand up to future challenge. However, when he mentioned that he would like to buy a home in California, where were his clever advisors?
As one high powered divorce lawyer I work with quips , California treats prenuptial agreements as “not even an interesting starting point for discussionâ€. If I was Elin’s advisor (presumably she is hiring someone much cleverer than me!), the strategy would be very obvious. I would call Mr. Woods and his team and lay out the following options:
“Option A) Mr. Woods, my client will be bringing a divorce action in California. As your advisors can confirm, in this jurisdiction your prenuptial is meaningless and we will be seeking 1/2 of all the assets accumulated during the time of the marriage, along with substantial child and spousal support. That number is (insert outrageously high figure here). As your advisors will confirm, the numbers I quote are quite a realistic outcome in California.
We will agree to a settlement of (insert completely outrageous figure here) to settle this matter right now. We will agree to giving equal access to the children, non-disclosure of the settlement, and a mutual agreement not to discuss the marriage, your infidelity, or anything other than what a wonderful father I am sure you will continue to be in the future. This will allow you to immediately get off the front pages and get on with the job of rebuilding Brand Tiger in order to regain your wealth.
Option B) You can fight on the California jurisdiction issue. You may win or you may lose. However every day you fight, you will be tabloid fodder. As a man who is already 16 over par in the marriage department, this will probably kill forever your ability to generate significant future revenue from Brand Tiger. In addition, if we win or almost win on the California jurisdiction for family law, you can rest assured that the state of California will take great interest in trying to apply California State tax against your past and current income. As a result of even getting into a legal discussion about jurisdiction, you may very well end up losing even more than our offer in Option A), along with destroying your ability to make money in the future.
As someone who named his yacht, “Privacyâ€, I am glad to see that you have appreciated the wisdom of Option A). Please sign the agreement here, here and here. My client’s new bank details are on this piece of paper and we look forward to immediate receipt of your liquid assets and the balance of the settlement by the end of January. This should certainly give you time to sell or mortgage your non-liquid assets.â€
The moral of the story is that individuals who are relying on pre-nuptial or co-habitation agreements to protect their wealth in case your current relationship falters, should have in the forefront of their minds the dangers of making connections with jurisdictions like California, New Jersey, New York or the U.K. Are your advisors on the ball?
Once upon a time, it was possible to stop by a bank in a jurisdiction with “bank secrecy†and set up an account which you could reasonably expect would never come to the attention of tax authorities in your home country. However, most experts would agree that those days are over and all those accounts (even if they were set up by your grandfather) will be flushed out within the next year or two. This is a result of a combination of factors including the Qualified Intermediary Regime, Mutual Legal Assistance Treaties and better data mining capabilities of authorities. In addition, the actions of Whistleblowers such as Heinrich Kieber who turned over all the names of account holders for Liechtenstein Bank LGT, and Rudolf Elmer, chief operating officer for the Julius Baer Swiss bank office in Grand Cayman LINK has resulted in a flood of previously concealed non-compliant accounts coming to the forefront.
The most public example of this phenomena of noose tightening on non-compliant offshore accounts is UBS. Yesterday, UBS announced a long awaited agreement with the U.S. Justice Department where they agreed to pay an extraordinary $780 Million and turn over the names of holders of undeclared accounts. However UBS is just the crest of a tsunami of disclosure as every financial institution in the world is feeling the pressure LINK. Former gaps in the Qualified Intermediary Regime are also rapidly being closed and investigative powers are being beefed LINK LINK up by Carl Levin and his colleagues in the U.S. Congress.
Carl Levin
Non-American account holders should also be nervous, as they may be the “dolphins in the tuna nets†whose accounts are first discovered by the U.S., Germany or the U.K. who then turn the information over to the relevant home jurisdiction. This international sharing of information is exactly what happened in the LGT case, where Germany was the first recipient of the stolen information.
As the authorities close in, wise account holders are taking advantage of the fact that their portfolios are currently depressed to engage in voluntary disclosures with tax authorities LINK. In many cases, given that only the last 5 or 6 years of income and capital gain need be brought up to date, the tax bill (with interest) is relatively palatable. Certainly more palatable then having the window of voluntary disclosure closed when the authorities get their names and will take nothing less than full tax, interest and civil and criminal penalties. In addition, once the account holder “comes clean†they can then plan to properly and legally reduce or eliminate their future tax liability through expatriation or relocation.
However for those holders of non-compliant accounts who continue to hope that their accounts will somehow avoid pending discovery because of the traditional helpfulness of their personal account managers, I wish to point out the fact that Mr. Kieber was not an account manager. Rather he was someone in the IT department who had access to computer files. In today’s modern financial institution, one’s “secret account information†is available to a large number of employees. As Mr. Kieber discovered, stealing information and selling it to tax authorities is highly profitable (in the millions) for disgruntled former bank employees. Given layoffs in that industry, one doesn’t have to be a conspiracy theorist to believe that at least one or two of those boxes leaving in the arms of discharged employees contains more than family photos.
David S. Lesperance, Barrister and Solicitor
Now that it appears that he has won a narrow victory that will keep President Chavez’s in power in the future, wealthy Venezuelans know that they will be asked to stump up to pay for his government’s policies. This is especially true as plummeting oil prices means that this traditional source of bread and circuses is no longer available. It is for this reason that they are already looking to take themselves and their assets out of his ever tightening grip.
Given its familiarity, the wealthy often first look to Miami as a destination . In fact there has been a well documented transfer of wealth and people from Venezuela to South Florida since Hugo Chavez took power LINK. While most immigrants will be able to comfortably reestablish themselves in Southern Florida, this strategy is not the wisest move for the wealthiest members of Venezuelan society. High US income, capital gain and estate taxes, liberal (by Venezuelan standards) divorce settlements and no financial privacy (which can expose family members remaining in Venezuela to kidnapping) makes a move to Miami like a jump out of the pot and into the fire. Strategic planning rather than reactive panic is essential.
Recently I was part of a team of lawyers who advised a wealthy family on how to establish themselves outside of Venezuela (including an estate in Florida) is such a way as to reproduce their prior standard of living while preserving their assets that they can pass on to their children and grandchildren. We also ensured their continuing ability to travel even if Chavez decided to cancel their Venezuelan passports in an effort to exert pressure on them. Finally we devised a legal practical strategy to get their assets out of Venezuela and protect their remaining investments in that country. As with an well thought out and executed strategy the key is to start as early as possible to avoid the mad rush out the door.
During recent trips to London and New York City, I noticed that usually crowded high-end restaurants are now half-empty LINK. It is not only the absence of vanquished “Masters of the Universe†that is causing this phenomena. The remaining wealthy who used to want to be out at the trendiest hotspots to “see and be seen†are now much more shy about displaying their wealth. And for good reason.
Ostentatious behavior can make one an excellent target for eager tax authorities, divorcing spouses and hungry fellow citizens who are desperately looking for the few remaining deep pockets LINK.
Already the Inland Revenue in the UK has formed a special unit to target “fat cats and celebs†LINK.
Prudent UHNWIs are increasingly taking steps to protect their remaining wealth. Home security systems may work fine for keeping out home invaders LINK but they will not stop tax authorities or divorce petitions, no matter how unjustified their claims may seem. The smart ones are busy putting into place possible future exit strategies of foreign citizenships and residence to protect them should the “legal†muggers start to get too close. Given the speed and enthusiasm of legislators for increasing tax rates and for divorce lawyers to draft divorce petitions, time is of the essence to start to put together these plans. Even with all due speed and diligence they require months to properly construct.
As one recent client from California said to me, “My financial house is not on fire yet, but I can smell smoke coming down the canyon. I am not waiting to hear sirens before I get fire insurance and make sure my suitcase is in the car and gas is in the tank.â€
David S. Lesperance, Barrister and Solicitor
One can hardly turn on the news or look at the magazine stands without hearing about another high profile nasty divorce. Sometimes it’s between the rich and famous and sometimes just the rich. However, for those going through the ordeal, there is no doubt that the process takes a tremendous toll on each parties mental health, not to mention the wealthier partner’s bottom line. Obviously, planning for separation when getting married allows for a smooth predictable transition from marriage to single for both adults and a much great easier time for the children.
The current edition of the Economist, details the decisive impact of residency and citizenship on divorce and custody LINK. As the article outlined, the venue chosen to petition a divorce will have a dramatic effect on the final financial and custody arrangements. Furthermore, different venues will treat pre-nuptial agreements and asset protection trusts (including custody arrangements) quite differently.
With divorce being better than 65% in marriages of the UHNW and an almost certainty when one looks at multiple generations, pre-marital planning for custody, asset division and alimony arrangements is as essential as planning for the other certainty….death. As one of my happily married clients pointed out to me, my principal worry is not my husband and I getting divorced, it is just that we have no control over who our cute 14 year old daughter will eventually marry. We just don’t want the family’s wealth, privacy and happiness compromised in case there is a future “son-in law shot†. In other words, like in golf, when your children marry, it is sometimes not what you were hoping for.
David S. Lesperance, Barrister and Solicitor
As world and local economic conditions worsen, the ethnic Chinese community in Indonesia are again getting nervous. Although they are leaders in the business community and control large parts of the Indonesian economy, the challenging global economic crisis is causing political leaders to again attack them rather than accept blame for some of the economic woes. As with the Jewish Diaspora in Europe during the 1920s and 1930s and the Indonesian Ethnic Chinese during the previous Asian economic crisis of 1998 LINK, politicians are able to convince the masses that their problems are caused by the visibly wealthy amongst them. The result can be not only harassment, but nationalization of property and businesses, and even threats to physical safety.
UHNW Ethnic Chinese in Indonesia are deciding that it is the better part of prudence that they spend a small portion of their wealth diversifying their Passport Portfoliosâ„¢. Recognizing that they are vulnerable if their only passport is an Indonesian one that can be cancelled at any time, they are looking to immediately secure another citizenship and passport that will give them the ability to leave Indonesia or continue travelling while they are abroad. In addition, they are discovering that this additional passport allows them better visa-free travel then their existing Indonesian passport. Along with a second citizenship, they are also securing homes, offices, and residence permits that will allow them to immediate reproduce their Indonesian lifestyles at safe locations abroad. During a recent business trip to Singapore, various private client advisors I met with confirmed the increasing interest in this area. As with the logic behind buying fire insurance, it is prudent to plan for what may be a remote possibility, but one that if it occurs is devastating.
David S. Lesperance, Barrister and Solicitor
