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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.  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.  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.  The Blueprint to Ultimate Tax Avoidance 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. 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. 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.” 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. 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.

The Sovereign Society, headquartered in Waterford, Ireland, was founded in 1998 to provide proven legal strategies for individuals to protect their wealth and privacy, lower their taxes and to help improve their personal freedom and liberty. The Society's highly qualified contacts recommend only carefully chosen banks and investment advisors as well as financial and legal professionals located in select tax and asset haven jurisdictions around the world. The Society provides advice concerning the establishement and operation of offshore bank accounts, asset protection trusts, international business corporations (IBCs), private foundations, second citizenships and foreign residency, as well as practical safeguards for financial, Internet and personal privacy.  The Sovereign Society stands alone in fulfilling this singular, international offshore service role for its members. To learn more about our organization and how you too can become a member, please click here.

Becoming a tax exile is not without problems, but, so far, they are more political than legal.

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.

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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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. 

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.

Your Right to Give Up U.S. Citizenship 

As a national political issue, expatriation is hardly new. 

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. 

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.

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.

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.

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.

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.

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.

Save Millions of Dollars, Legally

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:

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. 

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).

How It Should Be Done

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.

Here are the steps you must take:

• 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.
The following chart provides a planning timetable:

 Year Action Plan
 0 Decide to expatriate
 1-2 Strategize with expert advisors
 3-4 Liquidate U.S. assets
 5-6 Choose new jurisdiction
 7-8 Move to your chosen residency haven
 9-10 Give up U.S. citizenship

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. 

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. 

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. For more information on these programs, see the Henley & Partners Web site at www.henleyglobal.com/ec - Based on an exclusive arrangement with Henley & Partners, Sovereign Society members are eligible for a significant reduction of the applicable professional fees.

Before making any move, it’s absolutely essential to consult qualified professionals.13 We are pleased to provide the names of qualified professional advisors if you contact us at info@thesovereignsociety.com -

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