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| Index
of Sovereign Society Articles |
Never Pay U.S. Taxes Again—Legally
By Robert E. Bauman, JD |
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| Expatriation: It’s been called “the
ultimate estate plan” and it’s a legal, step-by-step process that can lead
to the legal right for you to stop paying U.S. or other national income
taxes—forever. |
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| In sum, it requires professional
consultations, careful planning, movement of assets offshore and acquisition
of a second nationality. When all that’s done (and done exactly right),
you must leave behind your home country and become a “tax exile” with an
established domicile in a low or no-tax jurisdiction. And, for U.S. citizens,
this unusual plan requires, as a final step toward tax freedom, the formal
relinquishment of citizenship. |
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| A drastic plan? You bet. And in
truth, there are many other perfectly suitable offshore strategies that
The Sovereign Society recommends that can result in significant tax savings.
These include international life insurance policies (TSI 1/02)5 and
offshore investments made through retirement plans (TSI 7/03).6 But for
U.S. citizens and long-term residents who seek a permanent and completely
legal way to stop paying all U.S. taxes, expatriation is the only option. |
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| The Blueprint to Ultimate Tax
Avoidance |
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| To begin with, you should understand
that each "offshore" haven is unique. A country that provides the best
banking regulations won’t necessarily be the best place for incorporating
a business, just as the best jurisdiction for privacy won’t necessarily
be the best for an offshore trust. Yet, there are general guidelines for
choosing an asset haven that apply across the board. The following are
the more important considerations. |
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| Is the haven a completely independent |
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| Individuals have been leaving their
own land to seek opportunities elsewhere since the dawn of mankind. But
it has only been since the development of the modern nation-state, and
its taxation of the worldwide income of its citizen-residents, that expatriation
has taken on significant tax consequences. |
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| One of the first tax advisors to
appreciate the potential tax savings of expatriation was my friend and
colleague, Marshall Langer J.D., a valued member of The Sovereign Society
Council of Experts. |
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| Langer is an international tax attorney
and the respected author of several major international tax treatises.
He is also the daring creator of a now out-of-print book, The Tax Exile
Report. This title gained international notoriety when the late U.S. Senator
Daniel Patrick Moynihan (D-N.Y.), red-faced and angry, waived a copy of
the book at a televised Senate hearing, denouncing it as “a legal income
tax avoidance plan.” |
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| In explaining why “expatriation”
is so attractive to wealthy Americans (and others), a few years ago a Forbes
magazine article gave the compelling arithmetic: “A very rich Bahamian
citizen pays zero estate taxes; rich Americans—anyone with an estate worth
US$3 million or more—pay 55%. A fairly stiff 37% marginal rate kicks in
for Americans leaving as little as $600,000 to their children.”7 Even though
U.S. estate taxes have been reduced since then, an even more impressive
part of the Langer plan is the ability to escape American income, capital
gains and other taxes. |
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Earning
money requires effort. Protecting
it after
you've earned it requires finding those
who have
the right knowledge & experience
in the
field of asset protection. If you're not
an expert at
it you need someone who is. |
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| When it comes to expatriation, however,
Americans face a nearly unique burden. Unlike almost every other nation,
with one or two minor exceptions, U.S citizens and long-term residents
cannot escape home country taxes by moving their residence to another nation.
The only way to leave U.S. taxes behind is to give up their citizenship. |
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| Toothless Penalties |
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| Becoming a tax exile is not without
problems, but, so far, they are more political than legal. |
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| The source of the current controversy
over expatriation was a sensational article in the Nov. 24, 1994 issue
of Forbes magazine, entitled “The New Refugees.” Filled with juicy details
(famous names, luxury addresses, big dollar tax savings), the story described
how clever ex-Americans who became citizens of certain foreign nations,
paid little or no U.S. federal and state income, estate and capital gains
taxes. |
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| Ever since, expatriation has been
a favorite “hot button” issue kicked around by the American news media
and “soak-the-rich” politicians.8 While current anti-expat provisions in
the U.S. Tax Code are relatively toothless, this status may soon change.
On July 25, 2003 legislation (HR 2896) was introduced in the U.S. House
of Representatives by Rep. William M. Thomas (R-Cal.), powerful chairman
of the tax-writing Committee on Ways and Means. This bill includes an ominous
Sec. 2005, entitled “Revision of Tax Rules on Expatriation of Individuals.” |
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| This section, in effect, would impose
an immediate tax on unrealized capital gains on anyone who ends their U.S.
citizenship. It uses an arbitrary test of net worth and/or income tax paid
over a period of years to assume an ex-citizen is trying to escape income
taxes. Similar net worth / income tax provisions have been the law since
1996, which I’ll explain in a moment. |
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| It’s understandable why politicians
keep this political football in play. To the average uninformed U.S. taxpayer,
expatriation seems like just another rich man’s tax loophole. Before Forbes
raised the issue, few people had even heard of the concept of formal surrender
or loss of U.S. citizenship. |
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| Taken together with the recent controversy
over U.S. companies re-incorporating offshore to avoid U.S. corporate taxes
(which is completely legal), candidates for federal office have in expatriation
a convenient straw man that they can beat unmercifully. Former U.S. Treasury
Secretary Lawrence Summers (now president of Harvard University) went so
far as to call tax expatriates “traitors” to America. He later was forced
to apologize. |
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| Your Right to Give Up U.S. Citizenship |
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| As a national political issue, expatriation
is hardly new. |
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| In the bitter aftermath of the War
Between the States (1860-65), Congress hotly debated the status of people
in the southern states that formed the Confederacy. Ultimately, Congress
decided “rebels” who swore allegiance could again become U.S. citizens.
The “Expatriation Act of 1868” formally recognized that all Americans do
have a right to give up their citizenship, if they so choose. |
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| A century later, in the Foreign
Investors Tax Act of 1966, Congress again decided to make an issue of expatriation.
In that Act, lawmakers tried to impose onerous taxes on exiting wealthy
Americans who relinquished their U.S. citizenship “with the principal purpose
of avoiding” U.S. taxes, a highly subjective intention that was virtually
impossible to prove. The IRS couldn’t prove such “intent” and very rarely
even tried. |
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| A 1996 anti-expatriation law inspired
by the Forbes article asserts limited U.S. tax jurisdiction for a period
of 10 years over persons who renounce their U.S. citizenship “with the
principal purpose of avoiding U.S. taxes.” Also covered by this law are
permanent resident aliens (“green card” holders) or anyone else who has
resided in the United States for any eight of the preceding 15 years. |
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For the purposes of this law, tax avoidance
is presumed to be the true purpose if, at the time of expatriation, an
expatriate’s net worth exceeds US$552,000 or he or she pays an annual tax
bill exceeding US$110,000, figures that are indexed for inflation annually.
However, with proper planning, it is relatively easy to avoid U.S. taxes
during this 10-year period. |
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| The lengths to which politicians
will go to penalize expatriates is demonstrated by a never-enforced provision
of U.S. law, also enacted in 1996, that permits the Attorney General to
bar from returning to the United States anyone who renounces their U.S.
citizenship to avoid U.S. taxes. In this manner, Congress lumped
individuals exercising their legal right to avoid taxes with narcotics
traffickers and terrorists. |
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| Amidst the furor, thoughtful experts
criticize what they see as a much broader and dangerous U.S. anti-expatriation
precedent. They point out these laws involve not only retaliatory government
acts against resistance to high taxes, but pose possible violations of
human rights guaranteed by other laws and even the Human Rights Charter
of the United Nations. It is worth noting that the U.S. Supreme Court has
repeatedly affirmed the right of U.S. citizens to end their citizenship
as well as the right to enjoy dual citizenship. |
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| In reality, this political frenzy
probably reflects collective envy more than any sense of patriotism by
Americans or their congressional representatives. Expatriation is not as
serious a problem as some pretend: fewer than 800 Americans, rich or poor,
have formally given up their citizenship in recent years. Most expatriates
give up their U.S. citizenship because they are returning to their native
lands or marrying non-U.S. citizens. |
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| Save Millions of Dollars, Legally |
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| Despite the controversy, there remain
very substantial tax savings for wealthy U.S. citizens who are prepared
to give up their citizenship. While only a handful of very rich Americans
have legally expatriated, these individuals include some prominent names: |
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| In 1962, John Templeton, respected
international investor, businessman and philanthropist, surrendered his
U.S. citizenship to become a citizen of the Bahamas. This move saved him
more than US$100 million when he sold the well-known international investment
fund that still bears his name. |
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| Other wealthy ex-Americans who have
taken their formal leave include billionaire Campbell Soup heir John (“Ippy”)
Dorrance III (Ireland); Michael Dingman (The Bahamas), chairman of Abex
and a Ford Motor director; J. Mark Mobious (Germany), one of the leading
emerging market investment fund managers; Kenneth Dart (Belize), heir to
the billion dollar Dart container fortune; Ted Arison (Israel), head of
Carnival Cruise Lines; and millionaire head of Locktite Corp., Fred Kreible
(Turks and Caicos Islands). |
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| How It Should Be Done |
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| Long before you formally give up
your U.S. citizenship, you should reorder your financial affairs in such
a way as to remove from possible government control and taxation most,
if not all, of your assets. |
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| Here are the steps you must take: |
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• Move abroad and make your new
home in a no-tax foreign nation so you are no longer a “resident” for U.S.
income taxes;
• Obtain alternative citizenship
and passport;
• Give up U.S. citizenship and change
your legal “domicile” to avoid U.S. estate taxes;
• Arrange your affairs so that most
or all of your income is derived from non-U.S. sources; and
• Title your property ownership
so that any assets that remain in the United States are exempt from U.S.
estate and gift taxes. |
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| The following chart provides
a planning timetable: |
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Year
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Action Plan |
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0
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Decide to expatriate |
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1-2
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Strategize with expert advisors |
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3-4
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Liquidate U.S. assets |
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5-6
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Choose new jurisdiction |
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7-8
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Move to your chosen residency haven |
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9-10
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Give up U.S. citizenship |
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| One of the most important decisions
is the choice of a second nationality. Millions of Americans already hold
a second nationality; millions more qualify almost instantly for one by
reason of birth, ancestry or marriage. For instance, in many countries
(Ireland is one), having a parent or grandparent born in that country will
qualify children or grandchildren for immediate citizenship and passports
after presenting the appropriate documentation. |
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| Otherwise, you will need to qualify
for alternative citizenship through prolonged residency (2-10 years) in
a country in which you are eligible for residency based on your economic
status or investments you make there. For instance, both Panama and Belize
have formal tax-advantaged residency plans for foreign nationals who wish
to make their home there. After five years, sometimes less, you can apply
for citizenship. |
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| Alternatively, you may choose to
purchase economic citizenship, which can be obtained in a matter of months,
but only at significant cost (minimum outlay of approximately US$100,000).
The only two legitimate economic citizenship programs still in existence
are from the Commonwealth
of Dominica and St. Kitts & Nevis. |
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| Index
of Sovereign Society Articles |
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