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Second Citizenships and Golden Passports

Help your clients flee the country—or at least gain citizenship in another—legally, and in compliance with the IRS.

An increasing number of wealthy Americans are seeking second citizenships for themselves and their families. They’re motivated by a mix of rational risk management, shadowy survivalism and a desire to escape what they fear will be confiscatory taxes on the wealthy. Whether they call it an “exit plan” or “backup plan,” wealthy Americans are dropping impressive amounts of money to secure a guaranteed path out of the U.S. for themselves and their families should the need arise.

The global COVID-19 pandemic catalyzed a surge of interest in second citizenships. Americans who thought they could flee from the virus by traveling to their refuge properties in, say, New Zealand, got a rude wake-up call when the pandemic hit. New Zealand, like many other countries, promptly closed their borders to nonresidents.

Hence the increasing interest in the benefits of a “golden passport,” a non-U.S. passport acquired either through a citizenship by descent or citizenship by investment (CBI) program. When the time comes, a golden passport ensures passport holders can enter freely and without visas into the country issuing the passport.

Citizenship by Descent

By far the most affordable and quickest way to a second passport is if an applicant can document heritage. Over 25 countries allow Americans to claim citizenship if their parents or grandparents (sometimes even great-grandparents) hail from a given country. Any country that defines nationality by the law of the right of blood (jus sanguinis) makes it easy to approve citizenship if they can prove their bloodline. For Americans, the most popular such programs include those of Ireland, Italy, Poland and The Philippines. The major obstacle for many second-generation Americans is documenting a bloodline that can be traced to a particular country.

I myself benefited from citizenship by descent. I was born in Hungary (I emigrated when I was 6 years old), but even if I had been born in the United States, I’d still be qualified for Hungarian citizenship by virtue of the fact that at least one of my parents or grandparents was a Hungarian citizen. Indeed, my two children, both of them born in the U.S., received Hungarian passports under the doctrine of citizenship by bloodline. My Hungarian heritage brings many blessings, but the most powerful is that a passport from Hungary—a member of the European Union—gives my entire family the right to live and work in any of the other EU countries. My daughter is allowed to live and work in Denmark because of my Hungarian heritage.

Acquiring a Hungarian passport required extensive documentation (originals of birth certificates, marriage certificates, etc.) and a personal interview at the Hungarian Embassy in Washington, D.C. (Interviews can also be arranged at consulates in New York, Chicago and Los Angeles.) I paid a fee of $150 and waited for a year before my passport and citizenship card arrived.

With 36 million Americans claiming Irish heritage, the Irish citizenship by descent program is the most popular. That a nation of 4 million people has issued more than 14 million Irish passports is a marker of that popularity. The process to obtain Irish citizenship is straightforward. Eligibility requires an Irish citizen grandparent (great-grandparent in some cases). The hard part usually is to be able to produce originals of birth certificates, marriage certificates and emigration records. The Irish citizenship application costs €287 (about $315). A passport from Ireland is gold: It offers visa-free access to 186 countries. The real problem is that COVID-19 backlogs mean that most applicants for Irish citizenship will have a two-year or longer wait for their applications to be processed.

Citizenship by Investment

For Americans who don’t want to wait two years, passports acquired by investment offer faster service. Passports offered by Caribbean CBI schemes are usually the fastest. Nations such as St. Lucia, St. Kitts and Nevis, Grenada, and Antigua and Barbuda can usually process applications in the 60–90 day time frame.

CBI programs are not a new phenomenon. Two dozen or so countries, including the U.S. through its EB-5 visa investment program, have adopted well-regarded “golden passport” programs over the years.

Predictably, golden passports can be costly. For an individual, the cost of a second citizenship varies from $150,000 to $3 million. The most desirable countries for second citizenship include St. Lucia, Dominica, Grenada, St. Kitts and Nevis, Vanuatu, Antigua and Barbuda, Bulgaria, Malta, Turkey, Montenegro, Samoa, Egypt and Jordan, according to Best Citizenships, a leading citizenship planning platform for the CBI industry. 

Meet Malta Man

Many wealthy Americans consider themselves under attack. President Biden proposed raising the top capital gains tax to 43.4%. The president’s 2023 budget includes a minimum 20% tax rate on all American households worth more than $100 million. That tax rate would be on their full income or the combination of traditional forms of wage income along with unrealized gains. While it’s unclear if the budget will be adopted, many high-net-worth Americans feel targeted by Uncle Sam.

On the local level, amid the disruption of the COVID-19 pandemic, the city of San Francisco quietly introduced a pay gap tax targeting companies with CEO pay rates more than 100 times that of the median worker’s salary. Voters approved the measure in November 2020.

This local ordinance was the last straw for a San Francisco investor we’ll call Malta Man. (No one I approached for this story was willing to be identified. Besides the expected concerns about privacy, all the sources pointed to the stigma attached to leaving the U.S.)

One has to look no further than the scorn that greeted Elon Musk’s decision simply to change domiciles from California to Texas, says David Lesperance, founder and principal of Lesperance & Associates, experts in immigration and taxation advice, in Warsaw, Poland. “When Musk left his native South Africa to move to Canada, no one said a word. When he moved from Canada to the U.S. for college, no one cared. But when he moved from one state to another, everyone lost their mind,” Lesperance notes.

Malta Man felt that merely changing states was insufficient. Besides his desire to minimize taxes, Malta Man’s anxiety about what he perceived to be the growing political, economic and environmental instability in the U.S. could not be addressed by simply crossing state lines.

Malta Man is a single U.S. citizen with a net worth of over $500 million. Within the next four years he expects a liquidity event with the potential of quadrupling his net worth. While he intends to live permanently outside the U.S., he wants to be able to visit substantial portions of the world, including the U.S., without needing a visa. He also wants to retain several existing real estate investments and banking relationships in the U.S. Finally, Malta Man, the eldest of many siblings, wants to gift, with optimum tax efficiency, most of his fortune to his siblings, nieces and nephews.

It’s no secret that the U.S. has one of the most draconian tax regimes in the world. Along with only Eritrea, the U.S. predicates its tax collection scheme on citizenship, rather than residency. That means the U.S. claims taxes on worldwide income and extracts taxes from its nonresident citizens no matter where they live or work. Malta Man was determined to get citizenship in another country with a strong passport, renounce his U.S. citizenship, and be rid of most tax and reporting responsibilities to the IRS.

One of Malta Man’s first steps was talking to his longtime financial advisor. If Malta Man were your client, what would your response be? Before we go further, take a pause here to consider how prepared you are to advise a client with similar concerns.

It Takes a Village

If your first reaction is, “I’m in way over my head,” you’re like all financial advisors. No one advisor can be expected to keep up with the dizzying complexity and shifting laws, regulations and costs of every CBI option.

If your second reaction is, “I definitely need to partner with experts in immigration law, exit tax complexities, offshore taxation, and citizenship and residence lifestyle issues,” you’re on the right track, according to Mel Warshaw, a former wealth advisor for JP Morgan Private Bank, and more recently an international tax and estate planning lawyer in private practice in Wellesley, Mass. Warshaw was part of the multidisciplinary team that guided Malta Man to a new life based in the island nation of Malta.

Malta, says Warshaw, offers one of the most attractive CBI programs in the world because it, as a member of the European Union, rocks one of the most powerful passports in the world. “It’s the only passport that grants access to both the EU and the borderless Schengen Area,” he says. “Moreover, it offers visa-free access to 186 counties, including the U.S.”

The new Malta Citizen-ship by Naturalization for Exceptional Services program has gotten a lot more rigorous and expensive since 2016. The program requires applicants to jump through a number of hoops. First, a minimum donation of €690,000 (about $784,000) gets one on track for citizenship in three years. A donation of €840,000 ($955,000) fast-tracks citizenship in one year. Spouses and dependents require fees of €50,000 ($57,000) per person. In addition, Malta requires a charitable contribution of at least €10,000 ($11,500) to an approved nonprofit. An additional requirement is purchasing or renting a residence. If purchased, the price must be at least €700,000 ($796,000). If rented, the lease must be for a term of at least five years with an annual lease payment of €16,000 ($18,000). The property may not be rented or leased to a third party during the five years.

Other than costs, one major consideration of CBI programs is how much time applicants must live in the country. Malta Man had to spend considerable time living in Malta to show proof of connection to the country. Other CBI programs don’t care if you live in the country or, indeed, ever set foot within its borders.

In Congress, the CBI landscape currently is being challenged. As Wealth Management reported, several lawmakers have introduced legislation in the House that, if enacted, would revoke a country’s right to remain on the U.S. Visa Waiver Program list if that country sponsors a CBI program in which passports are sold in exchange for an investment.

The Most Extreme Step

Alicea Castellanos, CEO of Global Taxes LLC in New York, also has witnessed growing interest in clients seeking a second citizenship as part of a coordinated backup plan. “Some of the motivations expressed by clients include concern about political instability and a desire to access alternatives to the U.S. health care system,” she says.

While most of her clients seek assistance securing golden passports for themselves and their families, a minority actually want to be permanently free of the U.S. tax system. That requires the extreme step of renouncing one’s U.S. citizenship. This process is even more rigorous than the most-demanding CBI program, says Castellanos. “It really takes a village of experts to avoid the cross-border tax pitfalls that often trip up clients,” she notes.

Castellanos has learned to ask pointed questions to avoid the myriad issues that complicate expatriation. First is the question of assets. “Whatever net worth the client tells me, I always recommend calling in a tax advisor who has experience in drilling into the details, because nothing will disrupt an exit plan faster than undeclared assets. It’s not a fast nor inexpensive process,” Castellanos says. “Because it takes time to assess a client’s particular situation, it makes sense to plan for expatriation three to five years in advance.”

In order for U.S. citizens to cut the umbilical cord with the U.S. tax system, they must certify to the IRS, under penalty of perjury, that they have been fully tax compliant for the preceding five years. Maybe they had an overseas income generating account that they missed, or they had an inheritance from a non-U.S. person that they forgot about. “Both of these issues would render an applicant noncompliant,” Castellanos says.

A byproduct of becoming U.S. tax compliant is that the individual may avoid the exit tax and the far more draconian inheritance tax. “One of the first things we do is review tax returns for the previous five years, as well as interview clients to make sure they have reported everything,” Castellanos says. “If my firm’s audit reveals tax discrepancies, we help the client become tax compliant.” Global Taxes helps the client become tax compliant by helping them take advantage of one of the IRS streamlined filing compliance procedures for taxpayers who mistakenly fail to report foreign financial assets or pay taxes on those assets. The bargain is that in exchange for coming forward to clean up the five-year tax compliance, the IRS agrees not to assess any other penalties (except for the 5% miscellaneous offshore penalty under the Streamlined Domestic Offshore Procedures).

Livable for Family

Americans embarking on crafting an exit plan must navigate myriad issues having to do with where in the world the applicant wants to land: the power of the passport, timelines, budgets, assets to protect, etc. But the bigger issue is not where you want your family to land but from where the family starts. “It’s more critical that the exit plan be decided first at the breakfast table and then in the boardroom,” says Lesperance, the Poland-based consultant. “The exit plan must make both financial and family sense,” he notes.

In order for an exit plan to be livable, it must be a family decision guided by a frank family discussion about individual preferences and needs around schooling, language, accessibility, infrastructure, health care, rule of law and other details that consider the individual needs of all family members. “Such a broad and deep discussion then allows the design of a sustainable backup plan with elements that make financial, individual and family sense,” Lesperance says.

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