This article notes that for intended and unintended reasons, the US has become one of the most effective places to park assets for wealthy people seeking secrecy.

A great detail of ink in the wealth management industry has been spilled about whether the international clampdowns on cross-border tax avoidance and evasion (the first isn’t typically a crime, the second is) has morphed into a more broad-based assault on financial globalization. An international set of information-sharing deals known as the Common Reporting Standard affect dozens of countries, killing Swiss bank secrecy, for example. The US, though its extra-territorial tax net, and through legislation such as the Foreign Account Taxation Act, is chasing alleged US tax dodgers around the globe. (The US isn’t, ironically enough, signed up to the CRS, at least not yet.) And of course the election of a new administration, seemingly pledged to roll back some financial regulation and change corporate tax rates, creates new situations for wealth advisors. (And as non-US commentators are sometimes wont to point out, the US has one of the most opaque tax havens on the planet - Delaware.)

With all this to contend with, now is a good time to take a breath and consider the broader picture for internationally-minded individuals and their families. This article is by John Pantekidis, CFA and partner, chief investment officer and general counsel for Twin Focus Capital, an international multifamily office for global ultra-high net worth families that advises clients on $4 billion of assets. The organization is headquartered in Boston. 

The editors of Family Wealth Report are pleased to share these views; readers who want to reply should email tom.burroughes@wealthbriefing.com. As is always the case, the editors don’t necessarily agree with views of guest writers.

Since the post crisis, where the confidence of the global financial system has all but vanished, the US has emerged as one of the most lucrative havens for the ultra-high net-worth foreign families to stash their wealth. A confluence of factors and trends, including a policy-friendly federal government, as well as the almighty stable dollar, could result in the U.S. overthrowing such popular destination sites as Switzerland, the UK and Hong Kong as the global leader in offshore foreign banking and investment. 

In 2010, the US famously led the charge in cracking down on the use of offshore banking and investments for dodging taxes and hiding assets by US tax residents and citizens, leading to the enactment of the Foreign Account Tax Compliance Act. Among other things, FATCA requires financial institutions to report foreign accounts held by US citizens and residents to the IRS or face heavy fines. 

This has had a dramatic impact in eliminating US-based investors from hiding assets in offshore investments to avoid US taxes. However, little did the architects of FACTA know these regulations would become a catalyst of a domino effect that would culminate into the further internationalization of the US economy, with larger capital account surpluses and current account deficits.    

These US-born regulations were emulated and made even more stringent by the Organization for Economic Co-operation and Development (OECD), which developed the Common Reporting Standard (CRS). 
 
The CRS “calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.” However, in a world where the free flow of information can lead to other complications and challenges for the global top 1.0 per cent, CRS has become the anathema not of paying taxes, but of avoiding kidnapping and extortion. Currently more than 97 countries have agreed on the new standards. The most notable exception to the CRS rules is the United States. As a result, the US has emerged as the nouveau tax haven for the global rich, although its favorable tax rules for foreigners have been in existence for decades. This trend is poised to grow in popularity, although xenophobic polices can easily quell these tectonic shifts.      

What are you hiding?
The concept of off-shoring assets to so-called tax havens as nothing more than clever devices for tax avoidance has become antiquated. While tax havens are still abused by some criminal elements to launder money and avoid taxes, it’s becoming increasingly more difficult to do. 

The simple fact is that in our inter-connected economy, it’s becoming harder and harder to hide assets for illegal reasons. The traditional barriers of secrecy prior to the digital age no longer exist as they once did. The confluence of technology-driven factors, like big data and machine learning, underpinned by stringent and punitive regulations (e.g., CRS and FATCA), make using havens as a tax-panacea hard to conceal and potentially monetarily devastating.  

The documentation and bureaucratic red-tape required to custody assets in different countries, fueled by global “know your client” mandates, have made it increasingly difficult to conceal ownership identity.  
So what’s driving the trend of the US as an asset haven for wealth foreign families?  We believe the major reasons include personal and family safety, as well as certainty – not to mention favorable tax rules.  
While wealthy families domiciled in the US take for granted the ability to walk in the street and not worry about getting kidnapped or suffering other harm because of their wealth, it has become the Number
One priority consideration for high net-worth families in emerging parts of the world, where the roster of newly vintage millionaires and billionaires is exploding.  

Fraud, abuse, extortion, and kidnapping are everyday concerns for high net worth individuals around the globe. For many families, moving wealth to offshore accounts is a mechanism for evading transparency and hiding their family from the kidnapping-economy, most often entirely unrelated with the desire to evade taxes in any jurisdiction.  

It’s not just physical security though – the crisis in Venezuela provides a good example. As the once oil-rich country grapples with social upheaval driven by diving oil prices and a loss of national wealth, HNWIs desperate to provide generational security to their family are moving assets to the U.S. to avoid expropriation, confiscation and nationalization back home - again, the key elements of certainty and stability fuel the desire for foreign investors to consume US assets.   
 

In this instance, a HNW family from Venezuela concerned about losing their wealth can invest in various assets in the US without providing disclosure to their government.  Because these investments and assets may not require filing US tax returns, there’s no information to exchange.  
 
No tax law is broken, but the HNW family has a secure investment vehicle to ensure the certainty of a store of value, denominated in a stable currency, and the generational transfer of their wealth.  
The major factors that we see driving the purchase of US assets by HNW foreign families include:  

-- Secrecy:  This includes the desire for many families to avoid the transparency associated with CRS-like regulations that expose wealthy families to the criminal element. Ironically, the US which gave birth to information-sharing FATCA-types of laws to go after foreign secrecy jurisdictions, is now an attractive haven for families needing to avoid such disclosure. Both the Federal government and many states provide very scant information in return to these jurisdictions;      
 -- Asset protection and stability: HNW families seek the stability of the US to escape the political, social and economic uncertainties back home.  This includes deleterious impact of a depreciating currency and inflation back home;       
-- Preservation of settlor intent and property protection: One key area that we see developing is the desire for many patriarchs/matriarchs to avoid the application of forced heirship rules. Here, many settlors wish to control the way assets are managed and transferred across multiple generations. US-situs trusts have become key vehicles that can guarantee such results.    
-- US Trust law developments: No discussion of foreign HNW families in the US is complete without discussion of the use of US-situs assets. For HNW families investing in the US, a US-situs trust can be the optimal structure for holding these investments. If a family maintains a non-US situs trust, a US-situs trust can complement the family’s existing vehicles for managing its wealth, or can domesticate or on-shore these non-US trusts to US trusts for beneficial tax reasons. A properly-structured US-situs trust is a tax-efficient way through which to hold US passive investments and real estate, which can help minimize the family’s exposure to US income, gift, and estate taxes;  

Moreover, we have seen many states develop their trust laws to accommodate the desire for families to achieve such objectives as: avoiding state income/estate taxes, enhanced asset protection benefits, and provide additional privacy protections. Additionally, the US maintains the most lenient and seamless regulations for opening and starting shell companies;    
-- Favorable Tax Treatment of U.S. Passive Investments: Foreign investors are not taxed on U.S. capital gains or portfolio interest. Dividends are quite often taxed at favorable Tax Treaty rates.  There are also clear and distinct was to structure vehicles in the US to own foreign assets to be estate and gift tax effective;    
-- US property ownership: This includes the ability to access US real estate, insurance products, business interests, and the widest selection of the most cost-effective passive investments.  Additionally, the wide availability of offshore vehicles for US-based alternative investments (i.e., hedge funds, private equity, and venture capital) have also facilitated the investment by foreigners of some of the more sophisticated US investments.     

Trump change
The US is one of the few places left globally where financial advisers actively promote accounts that will remain secret from overseas authorities. This is particularly true in some states, such as South Dakota and Alaska through the use of US-situs trust structures. Under the new US President and Republican-controlled Congress, we expect this trend to grow as regulations are changed, or even eliminated, in favor of freeing up investment. 
 
One of the first changes that President Trump has called for is the elimination of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Under this regulation, foreign investors in US real estate are subject to taxation on these holdings at ordinary rates and other complications. Under current proposals, a Trump presidency would eliminate FIRPTA and the IRS’s ability to tax foreign investment in US real estate. This will surely open the floodgates for the foreign purchase of US property, particularly for Asian investors.  

High-end real-estate is already one of the most popular vehicles for foreign investment in the U.S. elimination. Loosening FIRPTA regulations would result in a huge influx of international money flowing into the US to buy real-estate. We think that will act as a powerful “put option” on the prices of US real estate, particularly in major metropolitan areas, where the stability of US real estate, strong cash flows, and a favorable tax regime, coupled with an ironclad currency, will prove Herculean.  

However, for HNW individuals and families, this is a huge opportunity with a window that may close simply by the sheer volume of investment.

Trump’s proposals with respect to international taxation includes an incentive program to repatriate assets by US multi-nationals.  We believe this should provide a strong catalyst for further strength of the dollar, making US investments all the more attractive to foreign investors. However, this has to be balanced with some of Trump’s countervailing policies that appear to have a xenophobic and anti-globalist taint.     

Conclusion
For years, all we read about the establishment of the infamous Swiss bank accounts as a means for global investors to hide assets and evade taxes. After years of mounting pressure, the US was the first to adopt mandatory information sharing legislation, which created a global tidal wave of such laws across countries and regions. Ironically, the US has become among the worst violators. 

With the onset of the technological revolution and the improving flow of electronic information at digit speed, as well as with one of the worst global financial crisis since the Post-WWII period, the US suddenly became one of the most attractive places to park assets in secrecy for the foreign high net worth family.  

Riding on the tailwinds of its Exorbitant Privilege, the US offers political certainty, a stable currency, a well-established rule of law, and unmatchable access to the global markets and products foreign investors have come to envy and desperately desire. 

Whether this trend remains in place or whether the US eventually becomes a woe remains to be seen, although we see Uncle Sam extending his friendly hands for quite a bit longer.