Net worth under $500,000 / Earning less than $100,000 per year
- Open up banking and investment accounts outside of your country of residence. You do not need to have large sums invested, but you need to experience what it is like to operate on a global level.
- Consider strategically placing the legal title of your assets in another person's name (like your spouse, although this could cause nasty side effects later on...), or create a domestic family trust. Both of these options help in terms of asset protection, and the family trust may have some added tax splitting benefits.
- Make sure that you have adequate insurance coverage to protect your assets in the event of an untimely death or for unforeseen situations (such as disability or tortious acts). We see many people who do not carry umbrella liability insurance (additional insurance - usually up to $5M above existing property and vehicle limits). The cost of this is about $400 per year, so I strongly recommend taking a serious look at this.
- Try to create alternate streams of income to reduce your dependency on one area. Real estate is good for this. Also, if you are a professional, such as a lawyer or an accountant, you might try getting qualified in a second jurisdiction (so long as it is not cost prohibitive).
- Obtain a second citizenship. With it you would qualify to work outside of your current place of residence. This would also give you a second citizenship which is an extremely valuable personal security measure.
Net worth between $2M-$10M / Earning $250,000-$500,000 per year
- You need to step up into a more effective asset protection plan. We like trusts as they are familiar to Canadian and US courts. Foundations are favored by some individuals who want to have more overt control over their assets, but ultimately, that could undermine your plan. Asset protection trusts in jurisdictions such as Cayman, Bermuda or Jersey can be set up for $10,000 USD in the first year and $5,000 annually thereafter.
- You also need more sophisticated tax planning. Private placement insurance is a good way to combine asset protection planning with tax savings. Instead of setting up a trust or a foundation - which is tax neutral for Americans and Canadians - there are a number of private placement insurance plans that can provide tax-free growth in addition to asset protection. Insurance can also be used in conjunction with corporate tax planning. In America, 831(b) captives are popular, which provide for tax deductions of up to $1.2M per year from active income. The accumulated capital, plus investment gains, can later be turned into long-term capital gains (a tax savings of about 20%). In Canada, private placement insurance can be used to re-characterize retained earnings into tax-free capital distributions, saving about 30% in taxes.
- Another effective tax plan for clients needing (or wanting) to stay resident in a high tax jurisdiction is to make their active business global. This concept is no different than the large publicly-traded companies setting up their branches or head office in non-tax jurisdictions. For a number of individuals who operate businesses that trade internationally (internet businesses included), or have intellectual property that they can transfer to a non-tax jurisdiction, this type of planning is ideal. You have two basic paths to follow: Either (1) Own a subsidiary in a low or no tax jurisdiction and eventually repatriate the profits into your domestic company without paying corporate taxes... or (2) Set up a company that you do not have direct legal control of, but from which you will eventually receive the profits as an indirect beneficial interest. Prices for these plans can vary widely given the stated facts and jurisdiction from which you are planning.
- For someone in this category, it might also make sense to combine a new citizenship with business. You may be able to choose to live in a low tax jurisdiction, but work internationally. We have a handful of clients who have official residency in the Dominican Republic at the cost of $2,500 per year, but who run international businesses outside of the country.
Net worth in excess of $50M / Earning $1M+ per year
- For individuals in this category, we find that it becomes a battle between lifestyle and principle. Most non-tax jurisdictions are non-tax because they do not have complex infrastructures to support. Heavily populated communities that have a lot of variety and lifestyle choices tend to also have expensive infrastructures. Some people prefer to pay high taxes to have access to those communities. Others feel that they prefer to give up a myriad of lifestyle choices in return for paying no taxes. Once you are non-resident from a high tax jurisdiction, you are no longer subject to taxes levied by them except in the case of US citizens (unfortunately, Americans are taxed based on citizenship and not residency). Time to get that Dominican passport!
As you noticed, there are gaps in the net worth and annual incomes between the three categories. That is because some individuals think aggressively and would fit into a higher category, while others are more conservative and would best fit in a lower category. However, the benchmarks noted above seem to be very consistent for the great majority of clients we have encountered. Whatever you do, just make sure that you feel comfortable with the strategy your tax planner suggests. Ultimately, it's your money on the line.
