The threat of higher US taxes, combined with other factors, could produce a sharp rise in the number of Americans seeking to give up their citizenship, an advisor working in the space says.

The number of US citizens seeking to renounce their nationality will increase “dramatically” because they want to break free as taxes rise, an advisor handling such individuals has told this publication. 

The US taxes its citizens on a worldwide basis - the only major country to do so - and expats must file annual returns to the Internal Revenue Service. With the Biden administration expected to push up income, capital and estate taxes in the coming year or so, high net worth Americans are in the firing line. And for expats, they can only escape the net if they give up their citizenship. 

David Lesperance, a Canadian-born advisor working with HNW individuals seeking to mitigate heavy taxes, said this is a busy time, and not just because of the situation HNW Americans find themselves in.

The pandemic has also interrupted renunciation processes. As countries open up there could be a rush of cases. 

“It must be remembered that since the start of the pandemic, many US missions (where one must renounce citizenship) have been closed or operating at a reduced capacity. For example, I recently received an email from the US Embassy in Berne, Switzerland, saying they had a waiting list of 400 people for renunciation appointments….and that is only one of 307 US foreign missions! So in summary, the rate of expatriation will continue to accelerate dramatically,” he said. 

Numbers of renunciations grew fast last year, in spite of the disruptions to business life from COVID-19, according to Americans Overseas, a Europe-based organization specializing in US tax preparation. A record 6,705 Americans gave up their citizenship in 2020, and that was up 260 per cent from 2019 when 2,577 US citizens did so. The rise is all the more striking considering how many US consulates were shut for much of 2020 as the pandemic raged. The previous record year for renunciations was 5,411 cases in 2016.

For so long, the US has been a beacon attracting immigrants, including HNW individuals seeking to escape high taxes, oppression and lack of opportunity. The shift towards renunciation by wealthy people takes getting used to. A list of thousands of such expatriating Americans is reported by the Federal Register.

So why are people getting out?

“Tax is almost always a major factor but rarely the only one. Control over strategic philanthropy; disenchantment with political partisan paralysis; concerns over civil unrest and increasing societal violence amplified by widespread gun ownership are also frequently mentioned. Add to this a realization that the majority of wealthy people have successfully lived their entire lives without a US passport or full-time residence in the US, and you have a decent understanding of why expatriation is exploding,” Lesperance said. 

“All of these drivers have come to light because the pandemic has forced many to overcome the inherent life inertia of their previously carefully curated lives. We all know the poster showing the island of Manhattan as the center of the world. Those people were driven out of NYC and discovered that they could survive and thrive elsewhere. This gave them the perspective to look at the tax future that the NYC Mayor; governor and federal politicians had planned for them. Since a body in motion tends to stay in motion, many decided to not only move to a low tax state but also equip themselves to legally and permanently leave the US tax system,” he said. 

There’s little doubt that tax hikes in some form are coming. Wealth managers have told Family Wealth Report that tax hikes, both at federal and, in some cases, state level are expected in the wake of the COVID-19 pandemic. US Senator Elizabeth Warren is also pushing for a US wealth tax.

US citizens cannot easily flee the system by moving abroad. Even before the tighter controls enacted under the US Foreign Accounts Tax Compliance Act (FATCA), any US citizen/Green Card holder was in the tax net, a situation affecting only one other country: Eritrea. Other major nations tax citizens by residence.

Lesperance has run his eponymous law firm - Lesperance & Associates - since April 2017; prior to this he was at David S Lesperance Professional Corp, from 1994 to March 2017. He has been a lawyer at different firms before that. He was educated in Canada.

Lesperance has strong views about tax, arguing that the idea that wealth taxes, as proposed in the UK recently, would be a “one-off” measure is a myth. “There’s no such thing as a one-time tax. My clients are under the operating assumption that a wealth tax would be permanent,” he said. 
 

Moving around
“I have personally moved my family four times, so my professional expertise is refined by personal experience. One of my favorite sayings is that `Backup Plans must not just be sold at the boardroom table but also at the dining room table.’ In practice, this means that all planning must not only make fiscal sense…it must also be acceptable and livable for all family members who are involved,” he said.  

“In practice, the vast majority of my client families don’t move to small island tax havens. Rather they move to large developed countries like Canada, the UK, the European continent, New Zealand, and Australia. Either with legal pre-immigration tax planning or taking advantage of existing tax-favorable regimes designed to attract HNW residents, my clients can enjoy the same lifestyle but at a tiny fraction of their prior US tax burden,” he said. 

This news service asked Lesperance about how some traditionally “offshore” places such as Switzerland and Singapore have compulsory military service, and for those of the Jewish faith thinking of Israel as a new home, their children could be called into the IDF. What does he tell clients?

“Too many people focus on the `visa-free travel’ of a given citizenship, rather than much more important issues such as citizenship-based taxation; dual citizenship; mandatory military service; and the right to live in multiple jurisdictions. This is top of mind in our planning, as the ramifications of these issues are often significantly more than the cost of acquiring the citizenship. Quite frankly, given the profile of my clients, they can pay a travel agent a few hundred dollars to get the rare country which is going to charge an advance airport tax by way a visa requirement,” he said. 

Back to the issue of Americans seeking to renounce their nationality, Lesperance said the process requires planning. 

“To execute an expatriation plan, a wealthy American needs both a second citizenship and a place to reside in the future. The first is required in order to avoid statelessness upon renouncing US citizenship. The second is required as the person must limit their future time in the US to either less than approximately four months or six months (if a tax treaty is involved). Sometimes the expatriate will reside in their place of citizenship but often it is a combination of two or more jurisdictions,” he said. “On citizenship, EU countries where the person is entitled to a lineage citizenship are popular. In the same vein Israel is popular for those who qualify under The Law of Return. If neither of these are available then various Citizenship by Investment programs fit the bill,” he said. (Such programs are sometimes dubbed “golden visas”. Lesperance mentioned the following candidates as “alternative residences”: Canada, New Zealand, Australia, Ireland, Portugal, Malta, Italy, Greece, Switzerland, Monaco Dubai and the UK.

“Most of my clients are referrals from Centers of Influence such as family offices, private bankers, financial advisors, lawyers and accountants. This group knows their client’s situation and exposure and has their trust. Often I will have worked on multiple clients for the COI previously. Occasionally I will be contacted by a potential client directly, but most are not able to understand the value I bring until one of their trusted advisors has spoken with me. The trusted advisors are quickly able to recognize the expertise and experience required. They are also able to quickly identify those who are simply “salespeople” flogging products which may or may not be an appropriate solution for this client,” he said. 

“Along with acquiring the `fire insurance’ of an alternative citizenship and residence, the other key element of backup planning is a `fire escape plan’. The fire escape plan is devised by the client’s advisors supplemented by specialist US tax lawyers I recommend and my team. The fire escape plan is a tax-efficient way of dealing with each and every one of the client’s assets. Almost universally, the client will be subject to the Expatriation Tax regime which means an immediate deemed capital gains event and planning for future bequests to US person heirs must be part of the backup plan,” he said. 

“The entire world is living under the Chinese curse of `May you live in interesting times’. From the rise of populist `Tax the Rich’ movements to the loss of easy, cheap, no-thought-needed travel, wealthy families are increasingly aware of both the opportunities and threats of this changing world. In some countries like China or Saudi Arabia, the wealthy are also concerned about the second Chinese curse `May you come to the attention of the Emperor’.” 

In early March, The Heritage Foundation, a conservative think tank, put Singapore at first place in its 2021 Index of Economic Freedom, followed respectively by New Zealand, Australia, Switzerland, Ireland, Taiwan, the UK, Estonia, Canada and Denmark. The US, at 20th, has plummeted to its worst-ever score, caused by “out-of-control spending and a loss by Americans in the even-handed rule of law,” the report said. The US recorded a score of 74.8, lower than its 2020 score, and dropped to 20th place globally from 17th in the year prior. The US remains “mostly free” and its regional ranking is unchanged at third out of 32 countries that were graded in the Americas region, behind Canada and Chile. According to the editors, out-of-control government spending has put US fiscal health at grave risk.