Tax Exile Planning 101: Seven Steps to Effective Second Citizenship/Residence Strategizing for High Net-Worth Individuals

"Failure to Plan is Planning to Fail"Stephen Covey

If you are or aspire to be a High Net-Worth Individual ("HNI"), you have different attributes, needs and concerns than the general population. Along with wealth, a HNI typically has a great deal of real life experience in business, wealth management, proper use of qualified professionals, and geo-politics. A HNI also tends to have a more complicated business/ financial life and has established a personal lifestyle that is beyond the reach of most of society. Unfortunately, the "deep pockets" of a HNI also make them the preferred target for tax revenue, property theft and lawsuits.

Properly husbanded, these attributes can allow a HNI to fulfil all of their needs and isolate/reduce or eliminate their concerns. This article will examine the use of residence/ citizenship and domicile planning for HNIs.

In order to consider this type of planning, it is important to have a thorough understanding of the above key terms.

Residency generally has both a tax and an immigration element to it.

Tax residency is usually based upon a count of the number of days a person spends in a jurisdiction or a review of various indicators/ symbols of residence (i.e. home, bank accounts, vehicles, club memberships etc.). Immigration residency is usually granted on a temporary or permanent basis. It may allow an individual physical presence, re-entry, employment or study rights.

Domicile is an estate tax concept, which concerns a person’s "ultimate home". All persons, even "perpetual tourists" are deemed to have a domicile. A person acquires a "domicile of origin" at birth. They may acquire a "domicile of choice" by changing residence and acquiring long-term trappings of a new home, such as gravesites and new wills. It is also possible to acquire a subsequent "domicile of choice" by severing ties in the first "domicile of choice" and re-acquiring them in a new jurisdiction.

So a person might leave the United States for Ireland and after several years in the Emerald Isle move to Canada. If a person abandons their last "domicile of choice" without acquiring a new one (e.g. becomes a "yachtie"), then under U.S. law their domicile reverts back to their last domicile. This is different from British law, which states that a person, who has a U.K. domicile of origin, reverts back to the U.K. domicile of origin, upon abandonment of their last domicile of choice.

Citizenship is a status granted by a country and may include various rights such as travel documents (passports), voting, land ownership, and the ability to hold public office, etc. A country may grant citizenship in various ways including:

• Birth in the jurisdiction;

• Lineage (through parents and grandparents);

• Marriage;

• Naturalization;

• Religious affiliation (i.e.: law of return to Israel);

• Meritorious service; and

• Economic benefit to the country (i.e. economic citizenship programs).

Let us now examine the proper steps in order to devise, evaluate and implement an effective strategy.

Step 1: Self-evaluation of personal and business necessities and preferences: The following is a sample list of possibilities:

• Lower current income and capital gains tax liability

• Eliminate future estate tax liability

• Increase quality of life (may apply to either current third world conditions or deteriorating first world conditions)

• Expand business or investment opportunities outside of home country

• Increase personal security while at home and abroad

• Ease of travel (may not be able to currently get visas or may be experiencing unwanted difficulty traveling on current passport e.g. Arab or U.S. passport)

• Low profile travel after entering a country

• Ease of banking (i.e. some financial institutions make it difficult or impossible to open and operate accounts for nationals of certain countries i.e. U.S.)

• Increased ability to enter and reside within certain trade blocks (e.g. EU and NAFTA countries)

• Decrease litigation target profile

Step 2: Evaluation (by self and *domestic professional advisors) of issues related to departing or expanding out of your current location. These issues may include:

• Evaluating potential tax savings opportunities e.g. price sharing, declaring non-residence, expatriation and anticipating possible "triggering events" such as deemed dispositions and "expatriation" tax;

• Limits on ability to remain in current location for extended periods of time after a strategy is implemented;

• Determining the need for new residence, citizenship and domicile to deal with issues in current locale.

Step 3: Evaluation (by self and international professional advisors) of issues related to entering, acquiring or expanding into several likely new locations. These issues may include:

• Confirming the legal ability of a new location or combination of locations to supply the appropriate status(es)**;

• Review of personal lifestyle and business requirements of new location(s), if you will need to limit your future physical presence or connections with your current locale. This will include:

• Cost of living;

• Private (e.g. shops, restaurants) and public (e.g. hospitals, roads, airports) infrastructure;

• Accessible quality health care and educational facilities (if there are children or continuing education);

• Ability to carry out business or hobbies;

• Personal security;

• Accessibility if you travel or people travel to you;

• Rule of law;

• Climate and language;

• Availability of suitable short and long-term housing; and

• Culture and recreation.

(**Author’s Note: The international advisor should be able to provide the HNI and their domestic advisors with appropriate copies of legislation and/or opinion letters confirming the target country’s enabling legislation. A HNI should run from anyone who talks about "special discretion from a passport official". This is a code phrase for bribery. Along with becoming entangled in Corruption of Foreign Official legislation; using a passport/ residence permit acquired in such a fraudulent manner will result in a sizeable jail term in most western countries. Canada will hand you a five-year jail for simple possession of such a document.)

Step 4: Work with domestic and international advisors to determine the best possible apparent destination and do a preliminary examination of costs to implement a strategy relating to departing/re-organizing current locale and setting up/ expanding into target country(ies). It is better to spend a small sum to fully explore the costs of implementing a strategy before spending even larger amounts in implementing an inappropriate strategy.

Step 5: Travel to target destination(s) and personally review your list of business and personal necessities/preferences and confirm their availability, cost and quality. In short, take a "test drive".

Step 6: Execute the fully explored and confirmed strategy. It is best if the strategy can be implemented in stages so that the HNI can evaluate its effectiveness and suitability on an on-going basis. This gives the HNI suitable comfort prior to proceeding with the cost and effort of implementing the next stage.

Step 7: Continue to monitor on-going changes in home country and new locations to determine if there are any required modifications to the initial strategy.

There’s a mythic fascination with the "perpetual tourist" (PT) strategy. It’s a simple notion. A person simply moves out of a high tax jurisdiction like the U.S., U.K., or Canada and begins the life of a vagabond, traveling from jurisdiction to jurisdiction every few months. Its advocates claim that by maintaining this "low profile" lifestyle they will be able to avoid any tax liability anywhere.

However there are some significant problems with this strategy. Firstly, moving from place to place with few possessions; no home (either mentally or physically); and not really having any long-term plan, is not the type of strategy that would be an acceptable lifestyle for most HNIs. Even the most nomadic HNIs like having friends, country club memberships, and a place to call their own. And clearly, this doesn’t work if the HNI has a family in tow.

Secondly, the PT strategy relies completely on secrecy or low profile for success. With decreasing bank secrecy; John Doe credit card subpoenas and the increased use of government databases in the search for terrorist money launders, it is less likely these people will be able to successfully live a "cloak and dagger" existence.

Finally but most significantly, unless an individual acquires a new domicile and a new residence, their last "home country" would still consider them resident and domiciled. After all, the ties were never severed and no new "tax home" has been established. In other words, shedding of the trappings of residence and domicile in one jurisdiction is not enough to sever residence and acquire a new domicile of choice. You must re-acquire and re-establish all these ties in another jurisdiction.

Constantly changing domestic rules result in long-term uncertainty and "change fatigue" for many HNIs as domestic advisors suggest expensive on-going revisions to their "estate plan". Continuing government actions will become triggering catalysts for increasing numbers of forward thinking HNIs to take the required legal steps to fulfil their needs and goals while eliminating or isolating dangers to their situation.

Throughout history, events such as the Irish Potato Famine, the Scottish Highland Clearances, the Russian Pogroms, and World War II were major historical events that drove HNIs to seek out new possibilities. The modern "War on Terrorism" and on-going domestic, regional and international tax "fairness" initiatives may well be remembered as the factors which inspired a new generation of HNIs to review their current lives. The resulting changes to their current residence, domicile and citizenship will certainly greatly enhance the lives of the generations that follow them.

Undertaking these changes in an effective, timely, and cost-efficient manner is the immediate and major challenge for these pioneers and their advisors.

Recognizing the impact and predictable fallout of current events is the first step. Taking action is the second.

Copyright © David S. Lesperance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.