Liquidity: an oft-forgotten trap
Liquidity: an oft-forgotten trap
You need to plan for cashing in some or all of your investments, either for a predictable expense such as financing a child’s university education, or an unpredictable one such as bringing money back into your country to finance a business.
Accessing the proceeds of foreign assets inevitably involves additional delay because of currency conversion, banking processes, and sometimes legal formalities.
Liquidity should not be a problem if you arrange to keep a reasonable amount readily accessible in bank accounts or a money market fund, in the currencies you’re likely to need, for planned and unplanned cash expenses.
Expenses. You can’t avoid paying for the facilities you get from banks, brokers and investment funds, but it’s important to know what they charge, and to know that their fees are reasonable.
Insurance companies are notorious for their high charges, often hidden, which is why policies nearly always give mediocre returns.
However, they are not alone in this. Mutual fund managers, for example, usually have hidden expenses in addition to those they disclose.
A study by Fitzrovia International showed that although 300-odd actively-managed equity funds investing in the Far East disclosed annual management fees averaging 1.29 per cent, their total expense ratios – taking into account extra charges not normally disclosed – actually averaged 2.63 per cent.
Managers with high charges argue that you should expect to pay more for better performance, but the evidence is that this is rarely true. In fact on average high-expense funds underperform low-cost ones. Even where they have a margin of outperformance, it isn’t enough to offset their higher costs.
Privacy. If you want to keep your affairs confidential, for whatever reason, that requires some careful planning.
Banking secrecy is under attack by governments. The usual reason given for this is the need to counter “laundering” of money – conversion of the proceeds of crime, in particular the drug traffic, into assets apparently of innocent origin.
But the principal reason governments are putting offshore financial centres under pressure to “improve” their regulation and transparency is that they want to make tax evasion, which is costing them billions in lost income every year, much more difficult.
When managing your affairs, it’s important to know whether your bank, trust company, fund manager or attorney will report on your transactions to tax authorities, and how they deal with any requests for such information.
If they are based in a tax haven, they may have no choice but to reveal your affairs to your government if you are a citizen of the European Union member-nations or the United States. However, unless you’re a money launderer, in all other cases the confidentiality of your affairs is likely to be preserved. Often there are tough laws to protect your privacy as a client.
As an additional safeguard, follow sensible practices such as not having sensitive paperwork sent through the mails to your residential or business addresses, and being careful about what you say on the telephone or in digitally-transferred messages.
Regularly clear sensitive material from your personal computer such as copies of e-mails – although the most sensitive should not even be processed by computer. Shred or burn sensitive paper records once you no longer need them.
As credit card statements give a complete picture of your whereabouts and activities, avoid using credit cards where they could leave an interesting trail. Better to use a debit card from a bank based in a tax haven, with the statements sent to an offshore address. Always try to avoid paper trails that lead straight back to you.
Say as little as possible about your finances to your spouse, partner, close relatives, friends or acquaintances. Even without having any bad intention, they can let loose sensitive information about you to strangers.
It’s better that people think you are poor rather than wealthy. Nobody sues, robs or kidnaps a pauper. Smart people are also discreet people.
Escaping tax on income, wealth, capital gains
Although governments have become increasingly aggressive in attacking the use of international structures to reduce, avoid or evade tax, there are still ways of using global planning to this end.
If you are not tied to a particular country by personal or business commitments, you may consider becoming a tax exile.
Many countries only tax you on income you earn in it or bring in from abroad, so you can escape tax on income earned elsewhere that you don’t need, as well as capital gains, wealth and inheritance taxes on assets held outside.
You don’t necessarily have to go live in some Third World backwater to take advantage of such opportunities. Britain, for example, offers such privileges to foreigners living in the country but not domiciled in it.
Another possibility is to become a “perpetual traveller.” If you have access to accommodation in several countries, you may plan to spend only a few months of the year in each, thus avoiding being classed as being subject to taxes, except on income or gains arising within the country.
However, some governments such as the US seek to tax their citizens on their worldwide income – wherever it arises, irrespective of where they live. And every country has its own rules on tax status, according to residency, physical presence, domicile, citizenship, income source and marital status.
So you need expert advice on your particular circumstances before becoming a tax exile, to make sure that your planning is effective.
South African writer Jackie Cameron warns that you should include your spouse in all your planning as “your partner’s residency, physical presence and domicile can play a role in your affairs. If you don’t take your partner’s situation into account, you could find that your tax planning has been in vain.”
Putting space between yourself and your wealth
If your assets are sufficiently large, another route to tax efficiency is to set up a structure distancing you from ownership, for example by holding your assets in a trust, company or a nominee (or a combination of these) registered or based in a tax haven.
This is no longer a simple way of hiding income, gains and accumulated wealth from tax authorities than it used to be, because of registration and international reporting procedures forced on tax havens by the European Union and the US.
But there are still structures that remain effective using tax havens that have resisted forced co-operation with major-nation tax authorities, such as Singapore, Dubai and Hong Kong, and vehicles such as bearer-stock companies (no public record of who owns them), unregistered trusts and professional nominees.
Estate planning. Remember that when you pass on, any assets you own will be subject to the inheritance laws of the jurisdictions in which they are registered.
There are simple ways of dealing with potential problems such as joint accounts, local wills and testamentary trusts. It is best to get professional advice, which is often available cost-free from investment companies and intermediaries.
You should always have a will in a country where you have assets registered in your own name, such as a property.
Security. There are lots of crooks out there trying to steal your money, and lots of others trying to enrich themselves at your expense without doing anything criminal. So it’s important to be careful about whom you deal with.
Never buy an investment that someone tries to sell you over the telephone.
Always deal either with a large and reputable financial institution, with a person or business that you are comfortable with from personal experience over a reasonable period, or with one that comes highly recommended by someone whose judgement you trust.
Remember that integrity, a clear concern for your interests, regular detailed reporting, honest disclosure of mistakes and a good personal relationship are more important than the prospect of wonderful returns. In fact, if the latter is what you’re promised, that’s a danger signal.
this article follows on from: Do you think in dollars
previous articles in the series:
Basics of Financial Planning
Do you think in dollars
CopyRight – OnTarget 2012 by Martin Spring
