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By keeping all your assets in the country where you
live, you commit, ahead of time, to ratify whatever policy your home government
might adopt, no matter how objectionable, unreasonable or pernicious that
policy happens to be. If the next new mandate is "Register today to get
a nail pounded into your head," you're already signed up.
Americans, by and large, run all their affairs within
the confines of the US. The US economy is so large and so varied that it's
easy to assume that everything you want to do with your wealth can be done
without crossing any borders. And people in the US, like people anywhere,
live with the habits and attitudes developed over generations. They're only
human. In the case of Americans, those habits grew out of long experience
with a government that was small and that generally practiced the rare virtue
of following its own laws. In a happy exception to mankind's experience with
rulers, there was little to fear from it.
Stay at home is still the norm for Americans, but it's
a norm that is slowly fading. Every billion-dollar tick of the government
debt clock, every expansion of the government's regulatory apparatus, every
overreaching judicial decision made in the name of a compelling public need,
every inversion of protection for citizens into license for the state and
every intellectually tortured discovery of a new meaning in the
Constitution's 4,400 old words leaves a few thousand more people wondering
how prudent it is to consign all their eggs to a single national basket.
Encounters with high-handed IRS agents and eager TSA gropers do nothing to
ease that concern. And for those who listen thoughtfully, the messages from
our designated leaders and their would-be replacements only hurry the dawning
sense of unease.
Specific worries include exposure to predatory
lawsuits, especially claims that could draw extra go-power by association
with politically favored causes or legally favored groups; fear of where
income tax rates might climb; the prospect of losing a family business in a
regulatory battle or simply through estate tax; the fragility of financial
institutions that have operated for forty years with the assurance that the
Federal Reserve would rescue them from any folly; the possibility that a
government desperate to protect the dollar from collapse might impose foreign
exchange controls or capital controls; the memory and precedent of the forced
gold sales of 1933; and the thought that a government floundering in deficits
might start pilfering from IRAs and other pension plans.
But beyond those particular worries and perhaps more
important than any of them is the sense that from here on, anything goes. The
politicians will do whatever they find convenient, because there is no longer
anything to stop them – not an electorate that is jealous of its
freedoms and certainly not the Constitution, which is now just a playhouse
for judicial imagineering. No one can know what's
coming next from the government and the financial system it has fostered, but
for many of us there is an awful suspicion that we are not going to like it.
Most Americans still have yet to stick a single
financial toe across the border, but more and more are considering it. Many,
perhaps millions of toes are now twitching at the thought. Their owners want
to end their absolute dependence on what happens in the US. They want to
prepare for whatever is coming down the road, even though they don't know
what it will be. They want to be as ready as possible, even though their
worries can only guess at what's ahead.
Because internationalizing your financial life means
dealing with the unfamiliar, the project can seem more complex than it really
is, so it's best to start with the simplest measures, even if by themselves
they don't give you all the safety you're looking for. Even from a simple
beginning, what you learn with each step will make the next step easier to
plan. Start with the first rung on the ladder of internationalization.
Then climb, at your own speed, to reach the right level of protection.
Rung 1: Coins in Your Pocket
Gold coins that you've stored personally give you
something whose value doesn't depend on the health of the US economy, doesn't
depend on any financial institution in the US and doesn't depend on any US
government policy. Gold coins are portable and hold their value no matter
where in the world you might take them. They're internationalization in a
wafer. Safety cookies.
It's best to buy the coins for cash, for maximum
privacy. And there is a good reason to favor one-tenth-ounce gold Eagles.
Gold coins mean readiness for troubled times; if you ever need to dispose of
the gold in an informal market, it will be easier to do so with
small-denomination coins that are widely recognizable and whose value matches
the scale on which large numbers of people normally trade.
The premium on one-tenth-ounce coins (the price
compared with the value of the gold content) is higher than on the larger
coins – usually about 15% for the small coins vs. 5% for one-ounce
Eagles. But the premium isn't a dead cost, like a commission or bid-ask
spread. The premium is a second investment; it's what you pay for the
packaging, and you can expect to recover it when you sell or trade. And in
the circumstances when you would have the strongest reasons for thanking
yourself for having bought some gold, the premium you paid will look like a
bargain.
Rung 2: A Foreign Bank Account
On its own initiative, the IRS can freeze any bank
account in the US without warning. The action might arise from mistaken
identity, from an erroneous filing by some other taxpayer, from your failure
to respond to an IRS notice in time or even from a postal error. And that's
what can happen without malice. Other government agencies have similar powers
to act on their own, without giving you an opportunity to object in court.
And any one of them might act against you for any of their specialized
reasons – perhaps because someone resents your inattention to the needs
of the migratory birds that visit your property or perhaps because someone
thinks it would be fun to point to you as a terrorist, drug smuggler, arms
dealer or child-porn merchant.
In principle, there are legal avenues for undoing a
freeze or a seizure. But you'd need a lawyer, and being suddenly penniless
could get in the way of hiring one.
A foreign bank account protects you from being trapped
in such a nightmare. The US government can get to your foreign bank account
eventually, because it can get to you. But a lightning seizure is very
unlikely, because it would require a foreign government to override its own
legal processes, which it generally wouldn't be willing to do except in a
grave emergency. So if your liquid assets at home were frozen, you would have
cash outside the US to fund the legal cost of untangling the problem.
A foreign bank account is also a way to step back from
the uncertainties of the US dollar, since the account could be denominated in
another currency.
The US government has seen to it that Americans are no
longer welcome customers at foreign banks. So forget about opening a Swiss
bank account in your own name. However, if you apply in person (not by mail),
you still can open a bank account in Canada. Be prepared to show your
passport and to give the bank an original utility bill that confirms your
place of residence.
Rung 3: Gold Abroad
The forced gold sales of 1933 were the work of an
executive order signed by President Roosevelt. The purported legal basis for
the order was the Trading With The Enemy Act, a legislative artifact of World
War I. I have yet to find an explanation of how the authority for an order
requiring Americans to sell their gold to the government at the government's
official price of $20 per ounce could be found in the Trading With The Enemy
Act, but the fact that the enemy in question had gone out of business 15
years earlier didn't seem to interfere with the legal logic.
The forced sale was a prelude to an increase in the
official gold price to $35. The government's reason for wanting that price
rise was to gain leeway for a substantial, though limited, inflation of the
dollar while keeping the dollar on the international gold standard. The
forced sale was a way for the government, which operated in a political
environment that still disfavored deficit spending, to capture the profit
from the price rise. That profit would be a kitty for more spending without
more borrowing.
Today there is no gold standard for the government to
stay on. And deficit spending isn't something politicians especially want to
avoid; they've promoted it as a civic duty, to stimulate the economy. So the
depression-era motives for a gold grab don't seem to apply. Yet you can't
listen to a conversation between two gold investors without hearing the
seizure topic coming up.
Are they just scaring each other? I don't believe so.
There are two potential motives for the government to again treat gold
differently from everything else.
If the dollar's slide in foreign exchange markets
threatens to turn into a panic, the government might want to use gold sales
to foreigners to mop up foreign-held dollars – in which case it might
see a need to mop up the gold owned by its own citizens. That's bad enough,
but a second motive is a good bit nastier. At a visceral level, people who
have centered their lives on government just don't like gold. It's an affront
to the government's authority to command and control and an insult to
government's supposed aptitude for solving economic problems. So
disrespectful. From their point of view, every ounce purchased by an American
is another tomato hurled at the political class. And the purchasers still
constitute a tiny minority of the voting population. What could be more
satisfying and convenient for the politicians than to kick sand in the face
of gold investors for being such lousy citizens?
A new attack on gold ownership probably wouldn't be a
point-for-point reenactment of 1933. There are many weapons for mugging gold
investors. It could be a prohibition on gold ownership coupled with a
prohibition on sales of gold to foreigners. The only one left to buy would be
the government, and being the only bidder, it would be a very low bidder. It
could be a commandeering of privately owned gold, with token compensation
like the $15 per day paid for jury duty. It could be a super tax, say 90%, on
gold profits, which would get the job done slowly... or quickly if it were
accompanied by a mark-to-market rule. Or it could be something none of us has
thought of yet.
Not only can't we know the shape of a future gold grab,
we can't know whether or how the rules would touch foreign-held gold. Owners
of gold stored outside the US would be a minority of a minority. Their gold
wouldn't be the low-hanging fruit – it would be higher up in the tree
and more trouble to get to. That's why, in a casino sense, gold overseas is a
different bet and a better bet than gold at home.
Maybe it will turn out that storing gold overseas won't
matter at all, in which case a little effort will have been wasted. And maybe
it will turn out to matter a great deal.
Rung 4: A Swiss Annuity
A conventional annuity contract is a device for
accumulating investment returns and eventually converting the value into a
lifetime income. The investment return on an annuity from a US insurance
company is tax deferred until it is paid out to you. If you buy an annuity
from a foreign company, tax deferral is available only if the annuity's value
is tied to the performance of a pool of investments (a variable annuity).
Swiss annuities have long held a special place in
personal financial planning. Such an annuity is denominated in Swiss francs,
i.e., it's francs, not dollars, that are owed to
you. The Swiss insurance industry has a perfect record; policyholders have
never been hurt by a default. And a Swiss annuity comes with an element of
protection from would-be lawsuit creditors.
The Swiss franc is, like every other modern-day
currency, just a piece of paper. It's not redeemable for anything, not even a
piece of chocolate. But the Swiss National Bank has a remarkable record of
restraint in issuing new francs, which means that the franc's prospects for
holding its value have long been rated better than for any other currency.
I believe that is still the case, despite the Swiss
National Bank's current policy of suppressing any further increase in the
price of the franc. In September, in order to save export industries from
being crushed by the franc's rapid appreciation against other currencies, the
Swiss National Bank announced that it would purchase euros
without limit to enforce a minimum exchange rate of 1.2 francs per euro
– which implies printing enough francs to pay for those euros. By itself, it is an inflationary move, but it's
not a suicide pact with the European Central Bank (the issuing authority for euros). If the ECB turns to a policy of rapid inflation,
I would expect the Swiss National Bank at some point to decouple the franc
from the euro and let the franc's price rise. So owning some Swiss francs,
whether directly or through an annuity, is still a good step toward
internationalizing your financial life.
Under Swiss law, an annuity is protected from the
owner's creditors if the beneficiaries consist of family members or if the
owner has made a beneficiary designation that is irrevocable. For an owner in
the US, that protection is not an impenetrable barrier to the winner of a
lawsuit, but it is a barrier, and it makes the annuity a less-than-ideal
prize for an attacker.
Earnings that are accumulating in a Swiss annuity are
not eligible for tax deferral for a US taxpayer. The advantages are currency
protection, the reliability of Swiss insurance companies and a measure of
asset protection.
Rung 5: Foreign Real Estate
Owning real estate in another country gives you a suite
of protections that distinguishes it from other steps toward
internationalization.
First, the property's value will depend on economic
conditions in the country you've chosen, not on what happens in the US. If
the economy of the foreign country grows and prospers, there is likely to be
a spillover effect on the market value of your house, apartment, farm or
patch of land – regardless of what is going on in the US.
Second, a foreign real estate investment would be hard
to digest for any future capital controls imposed by the US. New rules could
compel you to repatriate the cash you have in a foreign bank; rules forcing
you to liquidate your foreign real estate and bring the money home would be
another matter. Selling real estate isn't quick or easy. How does the
government compel an unwilling citizen to do what an eager seller often finds
difficult to accomplish?
Third, as a potential prize for a lawsuit attacker, foreign
real estate is a stinker. Even if he wins a judgment against you, foreclosing
on your foreign property would be difficult to impossible, since it would
require the cooperation of the courts in the foreign country, about whose
rules and procedures the attacker's attorney probably knows nothing. But he
does know that even if he persuades a court in the US to order you to sell
the property, the inherent illiquidity of real estate would give you plenty
of opportunities for foot-dragging.
Where to buy? The whole world is open to you... which
can be a problem. So many possibilities and no obvious place to start. One
approach is to think about where you've been that you'd like to visit again
or about some place you've long wanted to see. Plan to spend a few weeks
there. Minimize your hotel hours, to maximize your exposure to the rest of
the locale. Try to meet Americans, perhaps expatriates, who know their way
around the place and who can point you toward a real estate broker who won't
try to treat you as an out-of-town sucker.
Buying foreign real estate isn't for everyone. It
requires a big investment in time and effort, but it could repay you with an
asset that is low on the list of things anyone might try to take from you.
Rung 6: A Foreign LLC for Investments
A limited liability company organized under the laws of
a foreign country is easy to set up and not too expensive. To bring the
company into existence, you (or a service you hire) would file a simple form
with a government office in the country you've chosen and pay a small fee.
Then you as the LLC's Manager and you as the LLC's owner would enter into an
agreement (the "operating agreement") that would be the company's
governing instrument.
As the LLC's Manager, you would open a non-US bank
account or brokerage account in the name of the LLC and transfer your
personal cash and investments to that account. Again as Manager, you would
make all the investment decisions.
For a US person, a foreign LLC can be a powerful
door-opener. It is welcome at many banks and brokerage firms where you
personally would be turned away. This enables you to keep a wider range of
assets outside the US, which puts more wealth beyond the reach of any
arbitrary bureaucratic action. It also gives you investment choices that aren't
available at home.
Access to foreign investments and overseas financial
services is reason enough to consider using a foreign limited liability
company. But it can do much more for you, although at the cost of some
complexity.
Notice the fundamental difference between a foreign LLC
and what is going on at the first four rungs of the ladder of
internationalization. With the LLC, you no longer personally own the assets
you are trying to protect; the company owns them. This makes the LLC a
powerful device for reducing your family's expose to gift and estate taxes.
And with the right provisions in the operating agreement, it can provide
strong protection against loss to any malicious lawsuit.
If you are the sole owner of a foreign LLC intended for
holding investments, you can and almost certainly should file an election for
the LLC to be treated as a disregarded entity (indistinguishable from you for
income tax purposes). If your spouse or anyone else is going to share in
ownership of the LLC, the company can and should elect to be treated as a
partnership for income tax purposes.
Rung 7: A Foreign LLC for Business
A business that operates outside the US does even more
than a portfolio of foreign investments to give you the benefits of
internationalization.
By its nature, a foreign business lives in a different
environment than a business in the US. Economic troubles at home might not
touch it. If it's a business that depends on your personal efforts, it's even
less attractive as a lawsuit prize than foreign real estate. Being foreign,
it would be outside the range of capital controls in the US. And many of the
financial institutions that might turn away an investment-owning LLC because
it is owned by an American will welcome an LLC that makes or sells goods or services.
If you already have a business in the US that has
foreign customers or foreign suppliers, you may be able to relocate the
business's non-US activities to a foreign LLC. Internet-based businesses are
especially amenable to internationalization.
Locating your business in a low-tax or no-tax
jurisdiction, if it is practical to do so, can reduce your overall tax
burden. In many cases, a foreign LLC that operates a business should elect to
be treated as a foreign corporation for US income tax purposes. That can
allow the business to reinvest its earnings while it pays little in current
taxes and you personally pay nothing.
Rung 8: An International Trust That You Establish
Establishing a trust outside the US is the strongest
internationalization step you can take for yourself and your family. Doing so
costs more than any other measure, but the costs needn't be prohibitive if
your goal is to move $500,000 or more into the safest structure possible.
What you achieve is a very high level of protection from aggressive lawsuits,
from potential capital controls and from the possibility of a gold seizure.
The trust also puts your wealth in a far better environment for income tax
planning and for estate planning.
To serve the purposes of protection and tax savings, an
international trust is irrevocable (you can't simply call the institution
you've chosen as trustee and say you've changed your mind) and discretionary
(meaning that the trustee has a responsibility to decide when to send a check
to you or to any of the other beneficiaries you've included). Putting assets
under the control of a trust company under such an arrangement is a big step.
You're not going to do it unless you've done the homework needed to
understand how and why you can count on the trustee to handle the assets in
the way you intend.
Getting the protection and tax savings of an
international trust doesn't require you to give up management control of the
assets. The trust can be limited to owning just one thing – an LLC that
you manage. The LLC owns all the investments, under your supervision as LLC
Manager.
If you establish an international trust, it will be
tied to you for income tax purposes. But at the end of your lifetime, it will
completely disconnect from the US tax system. At that point, for the benefit
of your survivors, it becomes...
Rung 9: An International Trust Someone Else Established
Being a beneficiary of an international trust
established by someone other than a living US person is as good as it gets.
It's not linked to you by any transfers you've made to it, and you don't have
a determinable percentage interest in it (since it's a discretionary trust).
So until you actually receive a distribution, there is nothing for you to
report, nothing for you to pay tax on and nothing a potential lawsuit
creditor can hope to take from you. And, having no living connection to the
US, the trust is as far beyond the orbit of any conceivable US gold seizure
or currency controls as the former planet Pluto.
One Toe over the Line
It's a long way from walking into the local coin shop
and buying a few one-tenth-ounce gold Eagles to setting up a trust in a
foreign country. But the distance isn't nearly as great as you might imagine,
and it will get shorter both in fact and in apprehension with each step you
take.
As you move up the ladder, you'll learn about the
reporting requirements for US taxpayers. Rung 1 (gold coins in your pocket)
entails no reporting, nor does Rung 8 until you
actually receive a distribution. Rung 5 (foreign real estate) also is free of
reporting requirements, at least for now. But under rules in effect now or
soon to come, everything else covered in this article entails filing a form
with the US government. The most reliable way to make sure that you stay
within the rules, so that internationalization adds to your safety and not to
your problems, is to let your accountant know what you are doing. Keep him
informed, so that he can see to it that all the reporting requirements are
satisfied.
[Every day you
delay beginning your internationalization strategy is another day your bank
accounts are hemorrhaging. Learn
how to protect yourself.]
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