The US media recently published news about new proposals coming out of the White House looking to hike taxes targeting high net worth individuals (HNWIs), and if there has ever been a time to act on protecting your assets, it’s now.
What do the proposals aim to do?
US HNWIs always dread the phrase wealth tax, and for good reason – the government will always look to close the gap in its coffers by taxing the wealthy obscene amounts. Under Biden’s new proposed taxation framework, that looks like a real possibility. Especially that Biden’s Build Back Better proposal for combating climate change and social issues with a staggering 1.75 trillion USD warchest will be mostly funded by taxes.
Here are the main points of concern in Biden’s proposed framework that HNWIs should carefully consider if, or when, it does come into effect.
Capital gains taxes will nearly double for investors who earn more than 1 million USD per year. Long-term capital gains tax rates would soar from 20% of capital gains on an asset (or 23% if the asset is a stock) to 39.6% (or 43.4% if it’s a stock).
Gift and estate taxes would also be affected, with the current minimum of 11.7 million USD required for gift or estate tax to apply being slashed to 6 million USD. The tax rate is also rumored to undergo a raise from the current 40% to a whopping 65%.
The top 2% of US citizens would also face a “Millionaire and Billionaire Surtax” on adjusted gross income that exceeds 10 million USD. The surtax is set at 5%, while any income higher than 25 million USD would incur an additional 3% in surtax. This means anyone with an income higher than 25 million USD would be paying a 45% federal marginal income tax alongside the 3.8% net investment tax.
Are there any legal solutions?
The good news is that this proposal remains just that for now, a proposal. Albeit one with a high probability of going through due to the popularity it garners from low-income earners throughout the US.
Another piece of good news is that there is something you can do to protect your wealth; you need to set up a robust asset protection tool, and none can be as effective in this situation as an offshore trust.
Trusts are powerful legal offshore asset protection tools that take ownership of assets from you and dispense it as per your instructions. Once you put your assets into a trust, you don’t own them; hence, no one can take them from you. But you maintain complete control over them through a trust deed, a comprehensive list of instructions on how to dole out the assets to you or any other beneficiaries as you see fit.
So, if you do open a trust and shift ownership of your assets to it before the bill is enacted, then those assets will not be considered as part of your taxable estate. Opening a trust after the enactment of the bill will fall under the new laws and see your estate counted towards your taxable assets, so time is of the essence.
on offshore structures and jurisdictions
that would best meet your
asset protection goals.
on offshore structures and jurisdictions that would best meet your asset protection goals.
Setting up an offshore trust
Before we go into how an offshore trust can safeguard your wealth, it is imperative to highlight the differences between a foreign (offshore) and a local (domestic) trust.
The tool remains the same in terms of how it operates; a trust takes over your assets and uses them as per the title deed. The main difference is the level of protection.
Domestic trusts in the US fall under the jurisdiction of US courts, meaning an American court order could force your trust to pay out money or dissolve itself. It is a difficult and complex process, but it is still doable.
Offshore trusts have an extra layer of protection. For example, if you open a trust in St. Kitts & Nevis, which we will cover more details about shortly, your trust would not heed US court orders, and any creditors looking to make money off your trust would have to do so by filing legal claims in St. Kitts & Nevis itself.
Now, trust law differs from one country to another, and in the case of the US from one state to another, but the important thing to note is that trust law in St. Kitts & Nevis – especially Nevis – heavily favors you (the trustor) over creditors.
If a creditor did go through with filing a claim against your trust in St. Kitts & Nevis, they would have to find a capable attorney in a foreign land, put up a bond with the Ministry of Finance for 25,000 USD to file the claim (a Nevis court could raise that amount as they see fit), and must finalize their legal action within just one year.
These precautions make filing a claim against a Nevis incorporated trust a costly -and improbable – task. What also makes Nevis a great destination for your trust is that you can open one as an economic citizen.
What is economic citizenship?
St. Kitts & Nevis allows HNWIs to become economic citizens, which is another term for becoming citizens by investment. If a person has a clean criminal background and makes a qualified investment to the St. Kitts & Nevis government, they can become full-fledged citizens within a few months.
Now, gaining a second citizenship has various benefits such as global mobility, a solid Plan B, greater investment opportunities, and much more. But what we are focusing on right now is the tax benefits. St. Kitts & Nevis is one of the most tax-friendly nations in the world, and having your trust (maybe even an LLC) within the Caribbean nation offers you outstanding asset protection and legal tax relief, but the latter requires quick action before Biden’s proposal becomes official business.
And if you are a citizen, then anyone suing your trust will be suing a citizen’s trust, and it is always more difficult to sue a citizen as a foreigner. One more great piece of news, the burden of proof required from a creditor in a civil case in St. Kitts & Nevis is proof beyond a reasonable doubt, which is something US courts stash for criminal cases, making it that much harder for someone to file a successful claim against your Nevisian trust.
Since the cost of obtaining a St. Kitts & Nevis citizenship starts at 150,000 USD, and setting up a trust just costs a few thousand, you can have an entire framework that will save you millions up and ready in a month for less than 200,000 USD.
This is, of course, if one choosing the donation option of the St. Kitts & Nevis citizenship by investment program. Another option is purchasing real estate for 200,000, which is also a great asset protection tool, allowing you to diversify your wealth in a tangible asset while getting citizenship at the same time.
To know more about getting a St. Kitts & Nevis citizenship or how you can set up a trust in Nevis before Biden’s new tax framework kicks in, contact us today to book a free, comprehensive consultation with one of our citizenship consultants and financial experts.