Not making a decision... is making a decision

OPINION by David Lesperance JD, Founder and Principal Lesperance & Associates

High-net-worth (HNW) individuals around the world live in very turbulent times and live their lives in the equivalent of a wildfire zone. This is why so many are looking for the “fire insurance” of a second passport. However, what few appreciate is the speed at which their worlds can change forever.

EVENTS, DEAR BOY, EVENTS

The late British prime minister, Harold Macmillan, when asked why most long-term plans went astray, famously replied, “Events, dear boy, events”. Now just imagine the impact of the following events on a HNW individual and their family in each of the following situations:

1) A wealthy American who is suddenly facing a significant tax burden as a result of an increase in capital gains rates to ordinary rates (i.e. 23.8 percent to 43.4 percent); and/or significant drops in the estate tax exemption (i.e. US$11.7 million to US$3 million) or a wealth tax.

2) A wealthy Gulf national whose current head of state passed away, triggering a confusing unstable succession and significant uncertainty as to whether the faction with which they are aligned will win out in the power struggle.

3) Wealthy nationals in dictatorships who have fallen out of favour with the powers that be and are worried that their passport could be cancelled or worse.

Any one of these different trigger events can occur very quickly. No prudent person waits for confirmation from the fire marshal that their house is engulfed before securing fire insurance. Likewise, HNW individuals should not wait for circumstances to overrun them before seeking a second passport to protect their family’s wealth and well-being.

Throughout history, those who migrated often did so because they began to feel unsettled about their eroding future in their current location. Sometimes the issues were obvious such as the outbreak of war, drought or famine. Other times, the signals of erosion were more subtle; societal breakdown, political tension, economic mismanagement.

Though the sensation was only a low-grade simmer, continued vigilance eventually revealed the eroding future was there, only it had arrived in a more gradual manner. This same concern over erosion of the future holds true today, except the speed of “triggering events” is unmistakably accelerated.

WHAT ARE “TRIGGERING EVENTS”?

Triggering events are often negative and can range from pandemics to domestic political unrest to international geo-political conflicts. If they occur, financial and personal consequences can be significant and even life-altering. Consequently, as the possibility of a triggering event increases, attentive and proactive individuals will seek out tools which will give them the “optionality” to deal with a wide range of possible future strategies to deal with the fallout. If that possibility turns to a probability or even a reality, there may even be enough impetus for the individual to overcome the ‘life inertia’ necessary to actually relocate.

In my experience, proactive HNWI clients deal with two different types of triggering events:

• Increased risk but no certainty as to timing; or

• Increased risk with absolute certainty of timing

The first type of triggering event is the result of an increasingly volatile political and societal situation. This volatility will severely impact clients and their families should certain events ever come to pass. Current examples include Hong Kong and Chinese businesspeople, Saudi and other GCC nationals, and Mexican, Brazilian and Israeli businesspeople.

The key mistake that I observe with clients facing this type of triggering event is complacency. This occurs when the event date is unknown and unpredictable. It is similar to people who never get around to doing their will. Planning for this triggering event is important but not urgent. Unfortunately, when the negative event does occur, those who have not planned ahead experience a catastrophe that could easily have been avoided.

The second type of triggering event has a specific deadline such as an election. The two most obvious current examples are the United Kingdom and the United States. Both have governing parties espousing populist ‘Tax the Rich’ policies. These administrations will almost certainly increase the family’s tax burden in the very near future.

FAILING TO PLAN IS PLANNING TO FAIL

The first common mistake that I see with these clients is that many do not accurately determine the cost of failure should certain triggering events become reality.

The first common mistake that I see with these clients is that many do not accurately determine the cost of failure should certain triggering events become reality.

For the triggering event of tax proposals becoming legislation, the “cost of damage” can be readily determined. Unfortunately, rather than get hard numbers from their accountants and other advisors, they mentally calculate the impact. This often means that they grossly underestimate it.

The second mistake that is often made in looking at tax proposals is to underestimate the probability that those proposals such as a wealth tax will ever become law. Indeed, their “it-will-never-pass” attitude may very well come back to haunt them. Just as with fire insurance, you need to have your clients recognise that a fire is a possibility and that without insurance the impact would be financially devastating.

A classic example that I constantly run across is when clients advise me that they are “entitled to a lineage citizenship” such as Ireland. They hold this naive belief that they can simply dial “1-800-I-AM-IRISH” and a Leprechaun will deliver the Shamrock passport to them.

The third mistake many wealthy individuals make is to underappreciate the time necessary to devise and construct a proper backup plan.

A classic example that I constantly run across is when clients advise me that they are “entitled to a lineage citizenship” such as Ireland. They hold this naive belief that they can simply dial “1-800-I-AM-IRISH” and a Leprechaun will deliver the Shamrock passport to them. While they may be correct in law, the processing of such applications often takes one to three years. While Ireland traditionally took from six to twelve months to process such applications, the Irish government has been flooded with applications from UK nationals who want to preserve their EU mobility rights in a post-Brexit world. A comprehensive plan B includes a new residence and possibly citizenship, lifestyle planning, and the necessary tax and estate planning in the old and new countries. Designing an effective and efficient backup plan that meets a family’s goals and protects them from a myriad of potential future threats takes time and the effort of experienced experts. Once designed, it then takes some time to build.

YOU SNOOZE, YOU LOSE (A BIG CHUNK OF YOUR ASSETS)

Clearly, it is paramount that those seeking a proper backup plan start early as there are several complex steps to the process. First, it is critical that they take a close look at their goals and fears. This will ensure that the path they select will lead them and their families to the right destination.

A COMPREHENSIVE PLAN B INCLUDES A NEW RESIDENCE AND POSSIBLY CITIZENSHIP, LIFESTYLE PLANNING, AND THE NECESSARY TAX AND ESTATE PLANNING IN THE OLD AND NEW COUNTRIES.

Second, attempting to do it themselves – is a recipe for disaster. Properly protecting family wealth and wellbeing means engaging professional and experienced advisors.

They should be qualified to look at related matters such as taxation, status, the privacy of second citizenships, etc. With the right assistance, the client understands their fully loaded cost of failure and can then put together a proper backup plan that can be standing by, ready to trigger at the first sign of a negative triggering event. While many look at the cost of doing this right, I tell clients to focus more on the “cost of failure”; to have a bullet-proof backup plan in place if one or more triggering events should happen to their family.

In closing, please remember these two things. A goal without a plan is just a wish and taking the time to do it right is always better – and a lot cheaper and less stressful – than doing it twice.