The enactment of the HIRE Act and the Foreign Account Tax Compliance Act (FATCA) has brought the challenges facing US resident Non-doms and Green Card holders firmly in to the spotlight, the US remaining one of only a handful of countries to impose citizen-based taxation, with significant restrictions on permissible investments.
So what are the challenges facing wealth managers and advisers working with US families?
The principal challenge lies in the formation of a coherent, consistent investment strategy, which is appropriate for the family as a whole. It is vital to ensure that family members in one jurisdiction are not disadvantaged by the onerous reporting requirements of family members in another.
The three challenges:
1. Taxation
Wealth managers with family members based around the globe must optimise their tax position, making full use of tax agreements between countries, working within different accounting regulations and adapting to different tax regimes. Tax and investment considerations must be viewed together to avoid unintended consequences.
2. Investment
As family members with a US reporting requirement can impose certain investment restrictions on the other members, it is also vital that any investment strategy is structured so that it does not prove detrimental to either side. It should fulfil the regulations regarding US permissible investments, whilst avoiding damaging the tax status. For US members, the biggest challenge is to ensure that Passive Foreign Investment Companies (PFICs) and Controlled Foreign Corporations (CFCs) are avoided.
3. Reporting
The US applies onerous reporting requirements on its citizens, wherever they are based around the world. The US requires all reporting to be made in dollars, which requires advisers to manage the foreign exchange component. These onerous reporting requirements and the prolificacy of US citizens in multiple jurisdictions is creating a significant problem for US families. The decision on how best to manage these issues is therefore of paramount importance.
How to structure the family’s investments
Tax planning needs to be compatible with the family’s investment strategy. Tax and investment specialists should work closely together to devise appropriate solutions that mitigate tax without disrupting the investment objectives.
A multi-manager approach, for example, can make it more difficult to avoid PFICs if not properly managed. For US investors, a multi-manager will need to build an investment strategy from permissible investments such as ETFs, direct equities and fixed interest. In most cases, assets have to be managed to produce capital gains, rather than income, as income tax rates will be higher than capital gains tax rates.
Any investment adviser must be familiar with the different mechanisms and comfortable putting together a portfolio of compliant investments – such as fixed income, listed equities, qualifying ETFs and derivatives – to achieve a variety of investment objectives.
Another solution is to make use of US-compliant insurance arrangements, which allows for more flexible structuring of a portfolio. This can also have trust and tax planning advantages.
The decision on how best to manage these issues for the greater good of the family is of course paramount. Necessary steps to be taken include reviewing the structure of the portfolio, identifying how best to hold non-compliant holdings, reviewing the legal agreements and determining how FATCA will affect the family overall.
By Daniel Freedman, managing director and head of US Family Office, London & Capital
