DURING THE LAST two weeks, the wealthiest man in the world – Elon Musk – has been named “the world’s richest freeloader.”
Unedifying media bites include Senator Elizabeth Warren of Massachusetts branding Time Magazine’s Person of the Year 2021 with this catchy sobriquet while proclaiming “Let’s change the rigged tax code so that the Person of the Year will actually pay taxes.”
It sounded authoritative… until Musk replied on December 20th with the ultimate put-down: “For those wondering, I will pay over $11 billion in taxes this year.”
Whatever Mr. Musk’s future actions regarding his citizenship, residence and taxes, he will undoubtedly have to endure extensive political pressure being applied to him along with hundreds of other US billionaires and HNW families. And after 30 years in the field of international tax and citizenship, I see no sign of this pressure diminishing.
The Tax-the-rich wildfire zone
Throughout the ongoing tax-the-rich political environment, I’ve been using the analogy that my wealthy American clients are living in a “Tax-the-Rich” wildfire zone. Therefore when advising how they should protect themselves, I have guided them toward the logic of having a particular kind of Grab & Go bag. This should include a fire prevention plan, a comprehensive fire insurance policy, and an up-to-date fire escape plan.
A recent Silicon Valley founder client is a perfect illustration of the effectiveness of this 3-pronged approach. We have prepared him for the current situation over an extended time period. Now he has the flexibility and control he desires.
Step One – Prevention: moving from high-tax California
A few years ago, we started with a Fire Prevention plan. We moved him from high-tax California to Texas. We also advised him to gift some of his founder shares to family members. In doing so he used up his $11.7 million unified credit. He also spread the benefit of giving them Qualified Small Business Stock. At the time, he was able to use some discounting of the value of his pre-IPO shares.
Step Two – Insurance: New Citizenship and Residence
In the last two years, we advised him to secure a comprehensive Fire Insurance policy. This took the form of a citizenship-by-investment in a European Union country along with residence-by-investment in New Zealand, Singapore and Canada. He has the right to live in any of the latter countries. Furthermore, his EU country gives him the ability to live in any one of the 27 countries of the European Union.
It is worth noting that none of these acquired citizenships or residences automatically made him tax resident in any jurisdiction.
His future tax residency will be a function of whether he decides to spend more than six months in any one country in the future. The amount of tax he would pay would depend completely on the laws of that country. Indeed, many of them have tax regimes, and/or legal pre-immigration tax planning; these will allow him to limit his future global tax liability to zero or a tiny fraction of his U.S. tax liability.
He can also effectively spend 120 days (more if he avails himself of a tax treaty position) in the U.S. without reacquiring the status of a U.S. taxpayer.
Step Three – Design of an asset-by-asset Escape Plan for an expatriation strategy
The final step for this client was to design an asset-by-asset Fire Escape plan. This would be initiated should he decide to use his Fire Insurance and leave the U.S. tax regime through an expatriation strategy. Since this client was clearly a “covered expatriate,” he was going to be subject to the Internal Revenue Code s.877a expatriation tax regime. Simply put, this would be a deemed disposition of unrealized capital gains.
Turning Plans into Action
Throughout 2020 and 2021 this fully prepared client watched the political and legislative events unfold. He saw the Democratic Party win the trifecta of the White House and both houses of Congress. Following this he decided that the wildfire was getting too close for comfort… so he put his well-considered plans into action.
Firstly, we arranged a renunciation appointment at a U.S. mission abroad for him. Given the number of residences and EU citizenship that he now had, even with the Covid travel restrictions, he could travel relatively easily to any one of many U.S. Embassies for his appointment.
Secondly, when he expatriated he was deemed to have sold his worldwide assets as of that day’s fair market value. Therefore on that date, he fixed his capital gain. However, he does not need to actually pay this tax until April 2022! This gave him ample time deal with lock-up restrictions and selling enough of his shares to have the liquidity to pay the tax. His other option was to fully or partially take advantage of the current low-interest rates; he could borrow against his shares to meet his tax obligation. As an added benefit, any increase in value of his shares that occurs after his renunciation is not subject to U.S. tax.
As it turned out, President Biden’s proposed increase in the top federal capital gains rate from 23.8% to 43.4% has yet to become law. Even so, our client can now relax; he no longer needs to monitor potential changes to the US tax system. Any further “moving” of “the goalposts” will not matter to him because he has already “left the game”.
Is it time for you to get prepped?
It’s not getting any cooler out there! Proposals such as Senator Ron Wyden’s Ultra-Millionaire Tax and Senator Elizabeth Warren’s Wealth Tax are still lingering. As such, we are witnessing several other clients also getting Fire Insurance and preparing their Fire Escape plans. They are ready to spring into action if any Tax-the-Rich embers ignite with the help of increased political oxygen. These clients know that, compared to the potential hit to their fiscal house, the “premium” they will pay by investing in their fire prevention, insurance and escape plan is minuscule. They appreciate knowing that they have a fully stocked and up-to-date Grab & Go bag at the ready in the event the wildfire gets too close for comfort.
Is it time for you to get a quote from an expert on a Fire Prevention, Insurance, and Escape plan for your family’s fiscal health?