Wealthy Americans are living in political wildfire zone: What should they do to protect their family wealth…. and well-being?

The Growing Concerns of Wealthy Americans in the US Political Wildfire Zone

Hopefully, my American readers can forgive the fact that a Canadian is writing a blog about wildfires. However, it is important to note that as Americans in some parts of the US are living through the impact of real wildfires, they are also all living in the middle of a political wildfire zone. And just like real wildfires, political wildfires are subject to constantly shifting winds. In the later case those of public sentiment and the electoral calculation and success of politicians.

The causes of the current political Wildfire in the US are many. In fact, the particular concerns of any individual HNW American for themselves and their family vary tremendously depending upon their viewpoint. However, there are enough areas to keep Wealthy Americans of all political stripes awake at night.

The Impact of Political Wildfires on Wealthy Americans: A Range of Concerns

As I have outlined in a prior blog, wildfire concerns include increased violence against specific groups based on religion, ethnicity, sexual orientation and even membership or support for a specific political party. Almost every client who has retained me has stated they are worried about living in a US which is governed by “the other party”. In another blog, I discussed the impact of the current nightmare of frequent and random mass shootings on the psyche of children and their parents and grandparents. As one client put it,

“I understand that statistically my children will not be involved in a mass shooting event. However, I know with 100% certainty that they will have to learn active shooter drills and that my wife and I will wonder if today is the day…every time they walk out the door”.

Other frequently cited concerns center around political polarization and gridlock, reproductive rights, voting issues, etc. etc.

SCOTUS and the “Tax the Rich” Proposals: Assessing the Potential Risks

Consistently, one of the most frequently cited concerns of my HNW clients, of all political persuasions, centers around the “Tax the Rich” proposals contained in President Biden’s 2023 Green Book. This is the document which sets out POTUS’s wish list of future tax proposals. Previously I have both blogged and published an article on this topic.

However, this concern has now been elevated as SCOTUS has decided to hear the case of Moore v. US. This case centers around the concept of whether or not the US government can tax unrealised capital gains and/or income. Lower courts have upheld that they can and there has been extensive press discussion around whether or not SCOTUS will overturn these prior decisions. This attention is in recognition that if upheld, this decision would open the door for a Wealth Tax or the taxation of unrealized capital gains which is the centerpiece of the Billionaire Tax proposal. Unfortunately much of the discussion seems to center around what the author would like to have happen or thinks is “fair”, rather than a clear analysis of what SCOTUS is most likely to decide.

When I was first called to the bar in 1990, my mentor drilled into me,

Your job as a lawyer is not to tell your client what they want to hear or what you would like the law to be. It is to tell them what the law is and to make a reasoned agnostic prediction of how you think the law will be interpreted in the future“.

Strategic Planning: Thinking Ahead to Protect Family Wealth in the Political Wildfire Zone

In a recent discussion with a seasoned US tax lawyer, his prediction is that SCOTUS would NOT overturn the lower courts in Moore. He based his analysis on the chaos such as decision would have on the US taxation. Specifically that it would overturn everything from the Transition Tax; to tax on GILTI; to the Expatriation “Exit Tax” under IRC s.877a. Such a fundamental and far reaching change would cause tremendous business uncertainty with an significant adverse impact on US markets. Even though it would open the door to a Wealth Tax and Biden’s Billionaire Tax on unrealised capital gains, he still thought that they wouldn’t overturn the decision given these precedents and the impact of overturning. His clear eyed analysis has been echoed by other premier tax commentators.

Whichever the majority decides, the key problem for Wealthy Americans is that SCOTUS will not make this decision until June 2024. This is only 5 months before the November 2024 US general election. Like competent chess players, given this reality HNW Americans and their advisors should be thinking a several moves ahead.

This means first noting the distinct possibility that SCOTUS could refuse to overturn the lower the court decisions in Moore. Second, recognizing that if the political winds blow the right way the Democrats could win a trifecta of majorities in both houses and POTUS. If these two distinct possibilities occur then “Tax the Rich” proposals like the Wealth Tax and/or the Billionaire Tax could be introduced as early as the first quarter of 2025. Furthermore, they could be made retroactive to Jan. 1 2025. If this occurs then it will be HNW Americans who will suffer the greatest damage to their fiscal house!

Fire Prevention, Fire Insurance, and Fire Escape Plans: Safeguarding Family Wealth and Well-Being in Turbulent Times

Just as with real world wildfires, no matter the specific concerns about the US political wildfire, the same approach to prevent this damage should be taken. Namely, Fire Prevention, Fire Insurance, and a Fire Escape Plan.

Fire Prevention can be domestic tax planning such as GRATs, gifting highly appreciated assetsQSBS, donor advised funds, moving to low tax states, etc. For non-tax concerns, Fire Prevention can take the form of relocating to lower crime areas, increasing personal security awareness and education etc.

However, prudence also dictates that should a specific Fire Prevention measure fail, Fire Insurance should be in place. In a political wildfire this takes the form of alternative citizenships and residences. This is appropriate for both Americans who want to temporarily relocate until the wildfire conditions change or those who want to permanently and legally leave the US tax system behind them.

The premium/cost to acquire this type of Fire Insurance varies from zero (for those who already have a second citizenship and/or residence) to minor (for those who have claim to a citizenship by descent or move to a “retiree” destination) to more expensive for those who need to acquire a residence or citizenship by investment. When considering the acquisition of a second residence and citizenship, one must compare the cost against the potential damage to wealth and well-being in the event of a wildfire affecting unprotected finances and family. This assessment parallels the evaluation of value propositions in real Fire Insurance.

Fire Escape Plan: Charting the Path for Living Abroad or Leaving the US Tax System

Lastly, one should combine Fire Insurance with a “Fire Escape Plan”. For a political wildfire, the plan should first determine whether the family is looking at simply living abroad or leaving the US tax system. One should note that if circumstances or goals change, it is possible to adapt Fire Escape Plans of the first variety to the second.

As with real wildfires, having Fire Insurance and a Fire Escape Plan for a political wildfire does not require the client to be mentally at the point of actually triggering a departure. Rather it is to give themselves and their family the comfort of knowing that should the political winds conspire to blow an adverse way, they have the optionality of triggering the Fire Escape Plan when they feel the fire is getting too close for comfort.

Ensuring Timely Action: The Importance of Acting Now

A key point for success is to recognize that it takes a minimum of 6 to 8 months to acquire Fire Insurance and a viable Fire Escape Plan. Waiting until a fire chief confirms your home is engulfed before calling your insurance agent is not advisable. Similarly, residing in the US political wildfire zone requires acknowledging that waiting for the June 2024 SOCTUS decision in Moore will not provide sufficient time to acquire a second residence or citizenship and devise an effective exit strategy. Waiting for more certainty in the polls or the announcement of election results is clearly a delayed response. Given the time needed to acquire Fire Insurance and design a Fire Escape Plan, Wealthy Americans should not wait for the decision in Moore to acquire this optionality but should begin to act immediately .

It is also worth acknowledging that these political wildfire concerns will probably not disappear, no matter the outcome of the November 2024 elections. Like real world wildfires, the causes of the US political wildfire will continue to smolder, ready to burst into flame given the right conditions in the future. Those Americans with Fire Insurance and a Fire Escape Plan in hand will have the comfort of always knowing that they have the optionality to avoid a coming political wildfire at a moment’s notice.

Fire Insurance and Patriotic Responsibility: Balancing Personal Precautions with Active Political Engagement

Finally, since I began using the concept of acquiring Fire Insurance and a Fire Escape Plan as prudent when living in the US, I have drawn criticism from some that my advice is somehow advising my client to be unpatriotic. The argument is that taking these precautions somehow undermines “firefighting”efforts such as supporting certain politicians, lobbying or working to get out the vote.

In response, I note that the acquisition of Fire Insurance and a Fire Escape Plan does not mean that one cannot continue to give their all in trying to help fight the US political wildfire. It is simply a recognition, that no matter how noble the firefighting effort might be, there is no guarantee that it will be successful in completely extinguishing the political wildfire.

It is worth noting even the National Wildfire Coordinating Group insists that real world wildfire fighters have AT LEAST one escape path….do you have one for your family?

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