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Effective Backup Plans Part II: The 3 Indispensable Components


Reasonable Doubt
With David Lesperance

A contrarian expert on contingency plans for the wealthy delivers uncomfortable truths.


This is the second installment of a two-part series. Read the first installment here: Effective Backup Plans Part 1: Back to Basics

An effective Backup Plan includes the following components: 

  1. Alternative Citizenship(s);
  2. Alternative Residence(s); and
  3. International Access to Wealth.

Component 1: Alternative Citizenships
When developing this first part of a Backup Plan, it is important to determine upfront whether the family’s current citizenship recognizes the concept of “dual citizenship”. Many countries – such as the US, Canada, and the UK – legally recognize the right of their citizens to retain or acquire additional citizenships. Other countries, however, such as China, India, and the GCC nations, either do not allow or significantly restrict dual citizenship. In these cases, special care and protocols in the acquisition and maintenance of alternative citizenships are essential.

Citizenship is granted pursuant to the domestic law of the country granting that citizenship. Many countries incorporate one or both of the legal concepts of Jus Sanguinis or Jus Soli. Jus Sanguinis (Latin for right of blood) is a principle of nationality law by which citizenship is determined not by place of birth but by having one or both parents or grandparents who are citizens of the state. Jus Soli (Latin for right of the soil) is commonly referred to as “birthright citizenship”. It is the right of anyone born in the territory of a state to nationality or citizenship.

In addition, many countries also incorporate into their domestic nationality laws a method for an individual to “earn” citizenship through naturalization. Naturalization laws can take many forms and can include the following:

  • Meeting certain religious criteria: e.g. Israel’s Law of Return;
  • Meeting certain physical presence, tax residence, language, and local knowledge criteria, i.e. traditional naturalization in western countries;
  • Citizenship by investment: The traditional naturalization requirements are waived where specific economic contributions are made; and
  • General Authority: In many countries, the power to grant citizenship is granted to some government office or body based on their own criteria. This might be a contribution to the state in sports, humanities, art, economic benefit, etc.

When developing a robust citizenship component of a Backup Plan, it is essential that an in-depth examination of the family history be undertaken. If possible, the family history should go back at least to the great-grandparents of the current oldest family members. In certain situations (e.g. Sephardic Jewish claims to Portuguese citizenship), certain surviving family or cultural indicators are looked at to establish a more distant claim.

Generally speaking, lineage citizenships that can be acquired through family or religious means are from large, developed countries. These countries often offer excellent rights such as visa-free travel, the right to live throughout the EU, and credibility. Too often, families who have not stayed current with the ever-changing legal landscape in this area wrongly assume they are ineligible for lineage citizenship. As a result, they overlook this avenue while simultaneously reading in the press or on-line about countries that sell citizenship. Consequently, they may end up unnecessarily wasting hundreds of thousands of dollars on a citizenship by investment program, rather than spending a fraction of this amount on professional advice to explore their potential claim through lineage.

Component 2: Alternative Homes and Business Locations
As noted in Rules #1 and #2 of the first part of this series, when choosing the right alternative home or homes, an effective Backup Plan must consider all the essential financial and family requirements. But sometimes, there are added benefits. For example, these alternative residences might also give some family members the ability to relocate temporarily or permanently for educational or career opportunities.  

One key point worth noting is that alternative homes should “Do No Harm” to the family’s tax position. The family’s advisors must examine the tax ramifications (and opportunities) that would arise should all or some of the family decide to make this location their new “tax home”. This includes legal pre-immigration tax planning and assessment of any tax treaties with the family’s current tax jurisdiction. Consideration also needs to be given as to the “physical presence cost” of each alternative residence. 

Finally, the future ability to convert residence status into citizenship through naturalisation is an important feature to consider and plan for if citizenship is of interest. 

Component 3: International Access to Wealth
Having your family safe in an alternative residence but not having the financial means to maintain them or your business is far from ideal. The only thing worse would be that your assets are safe, but you and your family are in danger or trapped.

To avoid both of these situations, the family’s financial advisors must ensure that appropriate alternative financial resources are available for the family’s use if needed. It is worth noting that the location of these alternative resources does not necessarily need to be in the same jurisdictions as the family’s alternative residences. In fact, given tax and privacy issues, they often should not be in the same jurisdiction. 

Given the significant amount of time required these days to complete a new financial institution’s “Know Your Client” process, it is definitely worthwhile to establish these new relationships outside of the home jurisdiction at the same time as the citizenship and residence elements are being put into place. In that way, any delay is avoided should there be a sudden requirement to move the bulk of the family wealth out of the home country.

In closing, in today’s world of rapidly rising threats to family wealth, well-being, and mobility, a properly designed and sustainable Backup Plan could well be the difference between future happiness and misery.

More From Reasonable Doubt

In this second installment of David Lesperance’s series on effective backup plans, the writer outlines three indispensable components.

History is replete with examples of wealthy families who lost everything for lack of a comprehensive backup plan, writes David Lesperance.

Vanuatu’s deputy PM concedes the country’s CIP investors are still just honorary citizens and that he plans to give them a yellow passport.

 

Our readers are the best-informed professionals in the investment migration industry.
Once a week, we’ll send you a curated newsletter with the week’s top stories.

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The post Effective Backup Plans Part II: The 3 Indispensable Components appeared first on Investment Migration Insider.

Effective Backup Plans Part 1: Back to Basics


Reasonable Doubt
With David Lesperance

A contrarian expert on contingency plans for the wealthy delivers uncomfortable truths.


Over the last two years, a relatively new group of wealthy* families have started to look at alternative citizenships and residencies as a tool to protect themselves against threats to their wealth and well-being. That new group is Americans. While I have been assisting Americans on these issues for over three decades, the current level of interest is unprecedented.

This surge, and the questions that they and their advisors are asking, reminded me of how often their initial approach to this very important topic is unstructured and misguided. Therefore, I thought that this might be a good time and an ideal forum in which to set out a client-centric methodology for designing, building, and maintaining a proper Backup Plan.

To the great distress of many wealthy families throughout history, preparation for adverse events is too often either non-existent or incomplete. This fundamental failure in planning has been repeated over the centuries and, more recently, several times during the 20th century. Many families that could have avoided these existential threats with the help of a Backup Plan did not take this basic, prudent precaution. As a result, they were decimated by pogroms, world wars, various smaller wars, expulsions, genocides, civil unrest, and political instability. Sadly, many of the wealthy families lucky enough to escape alive often found themselves destitute in their adopted home countries. 

As with other types of insurance, an effective Backup Plan allows a wealthy individual and family to deal with potential future negative events, whatever their source. Furthermore, an effective Backup Plan is more than a ‘lifesaver’ in times of strife; it can also allow the family to immediately take full advantage of business, education, and lifestyle opportunities in a globalized world.

The choice by my own ancestor to emigrate from France to Canada in the 1600s had a profound impact on his life as well as the lives of the subsequent generations. Similarly, a properly designed, executed, and maintained Backup Plan will be the most important factor in your descendants’ health, wealth, and happiness. With so much at stake and the cost of failure being so high, it is essential to get it right. 

So, let us now look at the “Four Rules of Success” for an effective Backup Plan.

Rule 1: Your familys situation, concerns, and goals are unique. 
While there are certainly some commonalities between wealthy families from a particular country, ethnicity, or religion, each family will have just as many facets that are unique to their own particular circumstances.  These might include:

  • Type of threat(s) and level of urgency and concern about it/them;
  • Family history for both lineage citizenship claims and family ethos;
  • Number, age, ambitions, and marital status of family members;
  • Liquid assets to devote to a Backup Plan;
  • Annual after-tax income necessary to maintain lifestyle;
  • Capital gains (amount and location);
  • Business succession and estate planning;
  • Potential divorce issues for all adult family members (Remember what I always say: “Tax is a percentage of Income – Divorce is a percentage of Capital”).

Rule 2: Your Backup Plan must be agreed upon at both the boardroom and the breakfast table (i.e. it must make both financial and family sense). 
First, the cost of acquiring and maintaining your Backup Plan must be less than the “Cost of Failure”. The “Cost of Acquisition” can be measured in terms of both money (upfront and on-going) and physical presence. The “Cost of Failure” is the financial and personal cost to your family’s well-being and wealth arising from a single negative event or combination of simultaneous negative events.

Second, even if the benefits of your Backup Plan outweigh its costs, it must also be “livable” by the family members it is meant to protect and benefit. This requires a frank family discussion about personal and business needs, including preferences such as language, accessibility, infrastructure, schools, medical facilities, rule of law, adequate staffing, etc. Such a broad and deep discussion then allows the design of a sustainable Backup Plan with elements that make both financial, individual, and family sense.

Rule 3: The selection of a jurisdiction and/or property should be the LAST, not the FIRST decision.
Too often, the starting point for many is the idea to acquire a second passport followed by a pitch from a commissioned salesperson to buy a particular Citizenship by Investment or Residence by Investment real estate product. The potential client then tries to design a Backup Plan around this chosen product. This can be a costly mistake. 

Having ignored the factors outlined in Rule #1 above, they often discover that the jurisdiction of the purchased property is either not the best or even a useful choice. Unfortunately, too often this discovery occurs when they actually try to exercise the Backup Plan and discover that it is not fit for purpose. The results can be disastrous.

The proper sequence of decision-making should be as follows:

  1. Review all the issues identified in Rule #1 with your team of professional advisors, including one that understands both immigration and taxation; 
  1. Have your team of advisors work together to design your personalized Backup Plan which satisfies Rule #2; and
  1. Organize residence/citizenship status in the appropriate jurisdiction(s) as part of the execution of your Backup Plan.

To assist in evaluating alternative citizenship and residence by investment jurisdictions and how they might meet a family’s specific needs, I have created a handy worksheet. Once appropriate jurisdictions have been selected and the tax and other ramifications have been aligned to satisfy the family’s situation, the process of evaluating specific offerings within those jurisdictions can begin.

By first determining the family’s immediate and future needs and concerns and then selecting a program that satisfies them, one increases the likelihood that their Backup Plan will prove effective when needed. Stated another way, following the 3 Rules ensures the Backup Plan will perform as designed when faced with a crisis.

* For the purpose of this article, I define wealthy families as multi-generational and having assets (business, investments) in excess of US$20M…where the cost of a setting up and maintaining a professional back-up plan is more than covered by the financial and non-financial returns and benefits. 

More From Reasonable Doubt

History is replete with examples of wealthy families who lost everything for lack of a comprehensive backup plan, writes David Lesperance.

Vanuatu’s deputy PM concedes the country’s CIP investors are still just honorary citizens and that he plans to give them a yellow passport.

Media reports this month say the pandemic is driving record expatriation. The reality, writes David Lesperance, is exactly the opposite.

 

Our readers are the best-informed professionals in the investment migration industry.
Once a week, we’ll send you a curated newsletter with the week’s top stories.

Want updates every day?
Be the first in your company to know about breaking investment migration news; Get the most important stories delivered.

The post Effective Backup Plans Part 1: Back to Basics appeared first on Investment Migration Insider.