Outside-IN

If clients are fed up with the U.S., consider a second citizenship

Citizenship by investment is a growing method that allows high-net-worth clients to shield their assets from the U.S. government

Nov 2, 2015 @ 10:56 am

By Nuri Katz

In today's evolving financial landscape, investors are looking to their financial advisers for advice on investment opportunities to help preserve capital — and citizenship by investment is one avenue high-net-worth investors can pursue to achieve these goals.

Citizenship by investment provides investors with a means to leverage investment in real estate, government bonds or other financial instruments to attain a second citizenship in a country that provides financial, tax or other advantages over one's existing country of residence.

Why would a U.S. citizen seek second citizenship? One of the reasons many high-net-worth Americans invest in other countries is to diversify their assets. For some, the size of the federal government causes great worry. They become concerned that as the government's needs grow, lawmakers may go after their assets, making diversification by attaining a second citizenship an important solution. Living and placing assets outside of America makes it more difficult for the government or others to pursue one's assets through taxes.

(More: Investors facing the dark side of MLP investing)

Investors can gain peace of mind knowing they have the rights of a citizen in another country where their holdings and income exist.

Another area of concern surrounds succession. In the United States, there are significant succession and capital gains taxes when investors pass hard-earned assets to their children. While most Americans use trusts and other maneuvers to protect their assets, becoming a citizen of another country that does not tax inheritance can create considerable savings without having to use complicated and perhaps unreliable corporate structures to pass on wealth.

What kind of investment products facilitate second citizenship? Existing opportunities for citizenship by investment programs require that applicants for citizenship or residency invest in assets such as government bonds or real estate. For example, a U.S. citizen could invest €2.5 million($2.76 million) in Cyprus government bonds or a publicly traded company on the Cyprus stock exchange to attain citizenship. Another option would be to invest in government funding for infrastructure, a one-time payment that is often non-refundable but achieves the desired goal nonetheless.

Tax benefits to pursuing a second citizenship. The U.S. is unique in that U.S. citizens who move to another country — at any age — continue to pay taxes to the U.S. on their income for the rest of their life. In most countries, income tax is paid only to the country that you call home.

But there are tax advantages Americans can achieve by expatriating. If your client has been tax compliant while a U.S. citizen, he or she may pay a one-time capital gains tax, which may be close to 20% of their total net worth. For those whose annual income is over $1 million or those living off passive income investments, this one-time fee may be more than accounted for in savings created from the reduced income taxes associated with second citizenship for the years going forward. For example, someone making $2 million per year with a total net worth of $10 million may pay this one-time fee and live the rest of their life with a significantly reduced tax structure.

Obtaining a second citizenship is an important and difficult decision. If you have clients who are comfortable forgoing their American citizenship to examine moving elsewhere, there is a significant opportunity to preserve considerable capital. Ultimately, their tolerance for lifestyle change becomes paramount.

Nuri Katz is President at Apex Capital Partners, an advisory firm specializing in investment consulting and wealth management for multinational, high-net-worth clients.

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