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  • Your Escape Plan

Why Flag Theory is Your Best Backup Plan

  • BY
  • June 1, 2019
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Whether you are a complete beginner when it comes to international banking or you’re an experienced investor on a global scale, you know that one rule reigns supreme: Diversify, diversify, diversify! The best way to reduce your vulnerability and see stable, steady growth and asset protection is to diversify how and where you store your assets. 

Although diversification is a buzzword in the world of finance, some lack concrete strategies to follow in order to achieve diversification. This is why it’s important to have a Plan B as well as a Plan A. One of the most promising, however, is known as Flag Theory. Just like the first man on the moon, Flag Theory is all about planting flags that spread out your financial risk and have the greatest number of global opportunities.

Depending on who you talk to, there are between 5-7 key elements, or flags, in the Flag Theory. For this discussion, we’ll focus on six of those; residency, citizenship, banking, assets, businesses, and digital security. Each of these plans can form a part of your backup plan in 2019 and beyond. 


Flag #1: Residency 

The first flag of Flag Theory is exploring the opportunity for residency in another country. Many people live their entire lives in a single country. Even if you are completely happy in your current country of residence, however, it may be worth exploring your options. 

Considering another country for backup residency can provide many benefits, including a reduction in tax liability. Legally minimizing tax burdens is a driving force in establishing secondary residencies. However, other factors can include financial gain, economic relief through a lower cost of living, and political matters.

Research your options and visit top countries as soon as you can. While vacationing, investigate real estate options or set up an offshore company. It often takes a bit of time to establish residency in another country, so it’s important to not wait until the last minute to do so.


Flag #2: Citizenship 

Going one step further than residency is the second flag of citizenship. Residency rules can change quickly, and there is no guarantee that the rules allowing you to reside in a country today will be in place tomorrow. For that reason, it may be worthwhile to diversify your potential residences by obtaining a second citizenship. 

This is a huge benefit to travelers, and it also opens new doors for residency, retirement opportunities, healthcare, and even employment options. The road to citizenship can often take years, so it is smart to begin the process well in advance. Obtaining a secondary citizenship when you’re 50 years old might mean a much easier retirement when you hit 65. 

 

Flag #3: Banking 

Banking constitutes the third flag. Keeping all of your assets within a single bank account is already widely regarded as a financial misstep. However, distributing your assets within the same country and the same banking system may be just as problematic. 

This problem has been magnified in the last few years since the United States government passed FATCA (Foreign Account Tax Compliance Act). FATCA requires that additional steps be taken by American account holders and their offshore banks. In fact, some international banks have chosen to not provide services to American investors due to these new IRS reporting requirements.  

As a result, it is more important than ever for Americans to have their wealth diversified and have more than one bank account open. You can read more about FATCA here.

Keep in mind that not all offshore banks are the same, and some jurisdictions are more advantageous than others and are clearly versed in, and capable of, adhering to reporting requirements of other countries. Right now, Belize remains a top offshore banking pick for individuals as well as corporations. 

 

Flag #4: Assets 

The fourth flag is all about asset protection. We all work hard to obtain financial assets and sometimes it is just as challenging to protect and secure these assets for the future. Asset protection comes in many forms, but once again, it often includes an element of diversification. 

Rather than protecting your assets in a singular way, it is worth using several varying methods of asset protection. For example, you might invest in real estate but also set up an international trust. While protecting assets is the primary goal of these methods, it can also be a way to reduce tax erosion.

Placing assets in an offshore trust, for example, preserves assets, secures them, and limits how they can be taxed, if at all. 

 

Flag #5: Businesses 

Establishing an international business is the fifth flag. If you live overseas and you’re generating more money than is allowed through the FEIE (Foreign Earned Income Exclusion), then you may be leaving money on the table. Through an offshore or international business, however, you could reduce your tax burden. 

It isn’t necessary to create a large corporation with a lot of employees and millions in profits to make this strategy work. The goal is to establish a business in a country that doesn’t tax the type of income your business generates or provides some sort of tax haven for your business type. Examples of tax-free jurisdictions include Belize, Nevis, and Panama.

If you own an overseas rental property that you also use for periodic personal vacations, consider making the property a business asset. You can still draw a salary, but you’ll have greater diversification, stronger ties to the region, and the potential for lowered taxes. 

 

Flag #6: Digital Security 

Digital security is our final flag and it tends to be the most controversial. In fact, some argue that it doesn’t belong in the Flag Theory at all. However, it is becoming increasingly clear that individuals from around the world are relying on the internet to conduct every aspect of their lives ranging from shopping to online banking. Many even trade and invest in digital currency, which has no tangible offline value.

If your assets are stored digitally or even if you just have an online banking account, you need to take care to increase your digital security. If someone steals your password and transfers assets out of your offshore account with the click of a button, then it doesn’t matter how diverse your investment strategy is. Phrases like identity protection, encryption, and second-factor authentication should all become part of your vocabulary. 

 

Get a Head Start on Your Contingency Plan

Flag Theory is all about creating a contingency plan. Even if everything is going well now, implementing one or more of these six flags can help secure your future and create greater financial, economic, and political security.

Begin your research now into the various locations and strategies that work best for you. If enlisting the help of offshore financial advisors, ensure they are reputable and experienced in your areas of interest.

Are you ready for Plan B and Going Offshore?  Here is The Ultimate Guide To Going Offshore.  Make sure to download a copy for your personal library.

 

If you’re considering traveling or moving abroad, be sure to explore your healthcare options. Visit International Citizens Insurance to learn more and get a free quote.

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