Exploring the Hidden Dimensions of Backup Plans: Beyond Tax Benefits
As noted in Part 1 of this new series on notable Backup Plans, most of our clients have more than tax savings on their mind when seeking the “fire Insurance” of second residences and citizenships as part of a their “fire escape plan” to protect their family’s wealth….and well-being.
In the first blog we described how an American family used the second residence component of their Backup Plan to escape the life-altering impact of a major climate event…something that is becoming almost commonplace in many parts of the world. In this second blog, we will look at an example of an even more dramatic event for one wealthy family caught out by events at home.
Navigating Life-Altering Events: A Kuwaiti Family’s Tale
In August 1990 I received a desperate phone call from an ultra-high net worth (UHNW) Kuwaiti client. Like many wealthy Gulf Nationals, this client was in London with his immediate family and extended entourage (nannies, maids, security people etc.) to avoid the searing heat of an Arabian Gulf summer when Saddam Hussain invaded Kuwait. Sounds like they were fortunate to be out of the country…and they were…but they also had a BIG problem.
Caught in a Crisis: Stranded Wealthy Kuwaitis and Frozen Assets
Unfortunately one or two junior family members remained in Kuwait to “mind the fort” while the rest of the family vacationed. Now the Iraqi occupiers were blackmailing the absent family…demanding money to save their new Kuwaiti captives’ lives. In order to prevent “bargaining with terrorists”, the US and the UK governments froze Kuwaiti assets to prevent wealthy Kuwaitis from paying ransoms. As a result, my client was suddenly in dire financial straits because his family and entourage were occupying almost an entire floor of a luxury London hotel….but his credit card was blocked, and he had no access to his private banking assets.
A Creative Solution: Leveraging Second Residences in Toronto
Fortunately for my client, he had previously retained my Canadian firm to assist him in the purchase of several luxury penthouse condos in Toronto off plan. As a result, he had placed approximately US$5M in our firm’s trust account to be paid out as construction milestones were reached. As Canada had NOT frozen Kuwaiti assets, he decided to cancel his condo deals and lose the 10% deposit. Over the next year, from his funds in our trust account we paid his various bills until he had regained access to his frozen funds after the Gulf War.
A Holistic Backup Plan: Establishing Residences, Citizenship, and Financial Safeguards
After the dust from the Gulf War had settled, I worked with this client to identify and prioritize all his needs. First, we secured the insurance of having several backup residences in jurisdictions where he and his family could live and thrive should there be another invasion of Kuwait. And since he was also fearful that there might be a revolution in Kuwait similar to the one in Iran in 1979, every backup residence included a home, the immigration right to live in that country, and access to safe funds which would allow him to pay for his family’s expenses. Key to the planning was the requirement that maintaining these alternative residences would NOT subject him to worldwide taxation or excessive physical presence requirements.
Crafting a Comprehensive Safety Net with Second Citizenship
We also immediately secured the insurance of a second citizenship for himself and every member of his family. I had previously informed him that passports are the property of the issuing government…in other words his Kuwaiti passport was the “property” of the Kuwaiti government that allowed him to use it. He understood that in the future should there be an overthrow of the Kuwaiti government, a new revolutionary council would likely cancel the passports of all members or top supporters of the prior regime. If this were to occur while he was in Kuwait, he would be unable to travel abroad. And if he were outside of Kuwait, he would be “invited to return home” to renew his cancelled travel document. Accordingly, he came to understand that the possession of second citizenship for himself and his family avoided such a potential catastrophe.
Similar to the Houston family I described in my previous blog, the “fire insurance” of alternative residences and citizenship was an essential part of a flexible and effective “fire escape plan” that also included planning for all the financial, educational and emotional needs of himself and his family.
Lessons from History: The Importance of Comprehensive Backup Plans
To the great distress of many wealthy families throughout history, preparation for adverse events is too often non-existent or incomplete. This failure of fundamental planning has been repeated over the centuries and quite dramatically several times during the 20th century through pogroms, WWII, various smaller wars, expulsions and genocides. And even those wealthy families smart enough to have the fire insurance of second residence or citizenship and escaped alive often found themselves destitute. This was the result of not having developed and implemented a holistic Backup Plan that included all the necessities of re-establishing their prior life in a new location.
Resilience Amidst Global Uncertainties: Adapting to Ever-Evolving Threats
Unfortunately these natural and manmade life-altering events have continued unabated. Present day examples include the disappearance of business and political figures in China, the unwanted invitations to the Riyadh Ritz Carlton extended to numerous members of the Saudi elite, and the Russian invasion of Ukraine. (In fact, we have a client whose business and personal life were grounded in Kyiv at the time of Putin’s invasion. How we worked with the client to address his dramatic situation will be covered in a future blog.)
If you are still un-persuaded about the possibility/probability of a threat to your family, then I suggest that you read MegaThreats: Ten Dangerous Trends That Imperil Our Future, And How to Survive Them by renowned Economics Professor Nouriel Roubini of Black Swan fame. You may then want to think long and hard whether the cost of a Backup Plan is worth the peace of mind knowing you have “fire insurance” and a “fire escape plan”.
In closing, if you are concerned about:
- Protecting your assets over multiple generations,
- Providing education and career opportunities for children or grandchildren,
- Ensuring security for yourself and your family…to protect against economic, political, social and climate uncertainties,
- Reconnecting with your family lineage,
- Enhancing your lifestyle,
….and yes, possibly looking at your current tax structures,
then please contact us directly or have one of your trusted advisors do so to discuss how a Backup Plan might work for you.