In almost three decades of assisting Golden Geese (aka High Net Worth individuals) with their Back Up Plans, I have often observed certain behaviours by the clients themselves that undermine their ability to fully achieve their goals. This article is the third and final blog in a series and examines how high net worth individuals can under appreciate risks, and hurry destination choices when creating their Back Up Plans.
LESSON SIX: Opportunities are overlooked and risks under-appreciated:
In the early 1990s I spent a great deal of time working in the Arabian Gulf Region. During that time Golden Geese parents considered it a great gift to give their children a second passport by arranging their birth in a country which granted instant citizenship (aka: Birthright citizenship). With the 1990 Gulf War fresh in their minds, this was considered a smart hedge for the future.
By far, the jurisdiction of choice was the US, with the parents arranging for the mother to travel to New York City months before the due date. With the child’s new American passport safely placed in a safety deposit box, mother and child then flew back to the Gulf.
As I had grown up in Canada in a border town, I was very familiar with this strategy, . Many of my schoolmates and close relatives had dual citizenship, simply by the fact that their mothers had travelled to the US when they felt the birth contractions begin.
Complications of US Tax Laws
In addition to “dual citizenship”, I was also very familiar with US tax laws. In fact, my own father and many of his peers worked in the US, but lived in Canada. Therefore, by the time I was called to the Bar, I was very familiar with the fact that the US is almost unique in the world in using citizenship as one of its automatic qualifiers for worldwide taxation. As a result, when my Gulf-based clients disclosed the US citizenship of their children, I was bound to advise them that this was a ticking financial time bomb.
At the time, most of my Gulf-based clients dismissed my concerns by saying that while I might be correct legally, the US did not have the means to locate the child’s non-US assets or to collect US tax on same. For practical purposes they were correct….until 2007. Then the UBS Whistleblower tax evasion scandal completely rewrote the rules of the game.
Today, as a result of the Foreign Account Tax Compliance Act, and other US government tax-evasion detection techniques, these children are now readily identified as US taxpayers just as they reach an age when their parents would have begun to pass assets into their hands.
Given that the parents have operated their entire lives never having to make any financial disclosures to anyone and paying tax to no government, the sudden exposure of the entire family’s wealth through their American children is a financial disaster beyond their experience or comprehension.
Other dangers: countries who do not allow dual citizenship
While the uncovering of hidden American taxpayers, is an example of a danger which can take a few years to materialize, other landmines are easier to spot. For example, some of my clients are from countries with strict rules against dual citizenship. If their home country was to discover they had acquired a new citizenship, they would have been automatically deemed to have lost their original citizenship. This could be politically dangerous or even financially devastating in countries where business or land ownership is restricted only to citizens. On more than one occasion, I have stopped a new client from acquiring a second citizenship from a country in a manner which could have resulted in disclosure, either directly or through on-line publication.
Another often overlooked landmine is acquiring a residence or citizenship which will bring the client and family members into an unfavourable family law regime. Even if the client’s own marriage is solid, statistically half of the next generation will divorce. Next generation divorce has a devastating impact on long-term family wealth. Remember that Tax is a percentage of Income….Divorce is a percentage of Capital!
The threat of natural disaster
While there are many potential dangers which must be identified and avoided in developing a Back-Up Plan, there are also many ancillary opportunities and benefits which are not generally appreciated. These include the ability to move to a safe temporary location in the case of a natural disaster.
Recently, a client who had acquired a Back-Up residence in Toronto was able to move his family there in the wake of a hurricane which devastated their Texan home and office. The schooling and business operations were able to continue without missing a beat.
Given that there is over a 90% chance of a major earthquake in the California in the next 2 decades, a Back-Up Plan that includes a viable second residence outside the danger zone may not just be convenient but actually essential to survival.
Advantages of Back Up Plans – the freedom to live the life you want
Another benefit of a well-conceived Back-Up Plan is that it gives the client and their family the opportunity to live, study and work permanently or temporarily in other countries. Whether used for a “Gap Year” or a career or educational opportunity, this is a gift both to the client’s family and future generations.
LESSON SEVEN: The Back-Up Plan is not “Liveable”:
Several times a year, I will receive a call from a Golden Goose who has just gone through an audit, lawsuit or divorce. Their initial question is “Can you move me to a rock in the middle of the ocean where there is no tax and no lawyers?” My standard response is “Certainly…but you better pack a gun…..because within 6 months either your family will want to kill you or you will want to kill yourself”.
This opening exchange inevitably leads to an invaluable discussion about the essential elements of the client and their family’s personal and business lives. This may include access to certain types of medical, educational, travel and business services. After covering the essentials, we then move onto preferences such as weather, language, time zone, culture and urban/rural lifestyle.
This type of discussion is critical to the ultimate success of a Back-Up Plan as it will require different levels of commitment from various family members to acquire and possibly maintain elements of their Plan. A full examination of the dangers avoided and opportunities realized is essential to being able to sell the Back-Up Plan both at the boardroom but also the breakfast table.
In conclusion, our ancestors’ decision to leave “the old country” and immigrate had a profound impact on their lives and the lives of their descendants. Similarly, the quality and effectiveness of a Golden Goose’s Back-Up Plan could be THE major financial and lifestyle choice that they make for themselves and their families. By following the Seven lessons contained in this three part blog series, you can rest assured that your Back-Up Plan will be optimized. The decisions made now will undoubtedly avoid personal and financial catastrophes and reap enormous benefits for their children, grandchildren and beyond….if done properly.