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Trends in International Tax and Wealth Management - Have the ‘Panama Papers’ Changed the Landscape?

For many decades, foreign nationals have turned to South Florida professionals for financial, tax and estate planning, as well as investment and wealth management services. To examine current trends and practices in this important sector – including the impact of the “Panama Papers” this spring – South Florida Legal Guide editor Richard Westlund interviewed several attorneys and bankers who practice in these fields:

  • Dwight Hill, president, Sabadell Bank United
  • Kevin Packman, partner at Holland & Knight
  • Orlando Roche, regional president, Sabadell Bank & Trust, Miami-Dade County
  • Francis E. “Frank” Rodríguez, managing partner at Shutts & Bowen’s Miami office
  • Michael Rosenberg , of counsel at Packman, Neuwahl & Rosenberg

Here are their insights and observations on serving affluent international clients.

Q. Are the sources of international investors changing this year?

Francis RodriguezRodríguez: The sources of international investment in South Florida change over time due to political, economic and currency trends. We have seen a downturn from Brazil and Venezuela and greater inflows from Colombia and Mexico, where some individuals are seeking to diversify their investments in the U.S. On the other hand, some foreign clients willing to take a risk are looking for investment opportunities in Venezuela because of the strong dollar.

Rosenberg: Our experience has been to see foreign investment in the U.S. from all countries throughout the world. But whenever a particular country runs into economic or political problems, we generally see an increase in U.S. investment and U.S. immigration.
Roche: Miami has always been an international city, attracting wealth from Latin America, Europe and other global locations. As for Asian investment, to date that has been concentrated in real estate and commercial projects, rather than personal wealth management.

Q. What other trends are you seeing in the market?

Rodríguez: Many of our clients come to the U.S. on a temporary or permanent basis. They may have existing businesses in home countries, and try to replicate that in South Florida. For example, a client with a car dealership, a restaurant chain or a hotel in Latin America might want to buy a similar business in the U.S. Others want to establish a business that complements one in their home country, such as self-storage facilities, textile manufacturing, heavy equipment distribution, electronics, and household goods. In any case, they should consider whether they want to establish a beachhead in the U.S., relocate here, or simply diversify their investments by putting funds into a safe haven.

Michael Rosenberg

Rosenberg: Some foreign clients have had to deal with certain Bureau of Economic Affairs (BEA) forms and the extensive reporting as to foreign assets within certain U.S. structures, That may, in time, adversely impact foreign investment although only time will tell. Another major current trend is foreign clients who are modifying their existing investment structures to make them transparent for home country compliance purposes.

Packman: Most foreign nationals who come to South Florida don’t know their long-term goals. For example, they might work here for a few years, and bring along their family members. Then, the kids start school and Miami starts to feel like home. So even though they may have thought the initial visit would be short term, the U.S. eventually becomes their home. Consequently, the planning for a foreign national who lives in the U.S. a few years is different than the planning for a foreign national who will make the U.S. his/her home.

Roche: We are seeing sophisticated entrepreneurs and executives investing in Miami real estate, technology companies and other ventures. However, Miami needs to invest in transportation and education, as well as creating more jobs to support these investments. Today, a lot of smart money is coming here and making a bet on Miami, and I think that trend will only intensify.

Q. Where are they investing their funds?

Orlando Roche and Dwight HillRoche: Many of our clients are actively involved in risk-taking business ventures. When it comes to wealth management, their goal is to protect their wealth. While they want to achieve the highest possible returns without volatility, capital preservation is usually the top priority. We believe in building a portfolio of assets that complement each other. We also take a disciplined approach to rebalancing those portfolios. As a result, we have been able to deliver returns of 7 to 8 percent a year with little volatility, achieving the goal of wealth preservation.

Hill: Along the same lines, we don’t believe in trying to time the market. Some investors rush into funds that are “hot” in an effort to generate higher returns. However, multigenerational families, like institutions and foundations have longer time horizons, and their portfolios can accommodate assets with a greater hold period such as real estate, timber and mineral rights.

We continue to see most foreign investors place funds into U.S. real estate, primarily as vacation homes or possibly eventual permanent homes if and when they ultimately settle in Florida, In addition, many foreigners place parts of their investments in U.S. securities accounts such as stocks and bonds. Many foreigners who utilize appropriate immigration visas as an entrance to the U.S. eventually grow their businesses and seek out commercial property as well, oftentimes via leasing but with plenty purchasing commercial property from which their new Florida business can be operated. Depending on the strength of a foreign investor’s home country currency and the inflation factor, foreign investors may vary their investment strategies but my experience is that more often than not, conservative “safe” assets are more desirable.

Rodríguez: We have a saying in our tax practice that all the inbound investment eventually becomes outbound. A typical pattern is that someone from Brazil or Mexico moves here and then establishes U.S. residency. Then that individual is considered a U.S. taxpayer and the international assets are now outbound investments from a U.S. tax perspective.

Q. How are U.S. disclosure and compliance requirements affecting international investors?

Rodríguez: It is becoming more difficult for foreign individuals to open bank accounts in the U.S. We have clients who want to invest in U.S. assets with other partners, and some of those structures require opening a domestic bank account. On the other hand, disclosure issues in their home countries are not a bar for investment and may actually encourage more foreign nationals to move here and enjoy a different lifestyle.

Kevin PackmanPackman: U.S. voluntary disclosure programs are a concern for many wealthy Latin Americans with a U.S. connection. The issue is not taxes – it’s the safety of the family, particularly in countries where the government or police force can’t necessarily be trusted. I have clients who have been kidnapped with their family members and held for ransom, so I know the importance of personal safety. Many foreigners hold assets outside of their home for pure safety.

Rosenberg: As the entire world continues to focus on compliance and disclosure, thus making compliance with one’s own tax laws a reality, many such foreign persons no longer see the U.S. substantive and procedural tax rules to be as burdensome as they once did. The stability, democracy, freedom, beauty and opportunity for “anyone to succeed,” now leads such persons to conclude that the U.S. is in fact the right place to now establish permanent residence and domicile status.

Q. Any impact from the Panama Papers?

Rosenberg: As is the case with most law firms and CPA firms that handle tax matters, we are continuing to see a constant and increased flow of U.S. persons participating in the Offshore Voluntary Compliance Initiatives (OVDIs). One can only assume that with FATCA, CRS, the Panama Papers and likely similar developments in other countries, this “flood” of compliance work will continue some time into the future.

Packman: The Panama Papers is a media-driven story. There is a huge difference between tax evasion, which is totally illegal, and tax minimization strategies that are fully compliant with U.S. laws and regulations. In some cases, offshore entities can serve a distinct purpose; they are not automatically wrong. Of course, I am not naïve enough to believe that all of the entities are compliant in their respective owners jurisdictions.

Rodríguez: After publication of the Panama Papers, some clients are looking for other international jurisdictions with a stable economy for their foreign entities. The flip side is the practical issue of cyber security, as it was a hacker who broke into the Panama law firm’s files and put the information online. Law firms, accounting firms, banks and financial managers deal with confidential information every day, both locally and externally. It’s important to remember that once you turn over information, your client’s confidentiality is only as good as your partner’s security.

Q. What are the biggest mistakes you see your clients make?

Hill: Many foreign nationals don’t recognize that business is done differently in the U.S. than their home country. That’s why it’s so important to work with an advisor who can explain how things work here.

Roche: Affluent foreign nationals should also realize that returns on U.S. assets many differ from those at home. Moving funds here can change the overall return profile of a portfolio. Currency fluctuations also need to be taken into account.

Packman: The biggest mistake is purchasing real estate or investing in other assets without getting professional advice first. For example, if a foreign national becomes a U.S. resident, that person is subject to tax on the gains of assets purchased prior to becoming a resident. Therefore, it might be advisable for a foreign national to liquidate those assets first, and then buy them back at the current price either before or after establishing residency. If someone has ownership of multiple entities, a professional can advise on restructuring them in a U.S.-friendly tax manner.

Rodríguez: The U.S. is considered a very safe destination for investment with a strong legal structure and a low rate of inflation . However, that reduced risk comes with higher costs and lower returns. One of the higher costs is that the professional fees for service providers may be different than in other jurisdictions where laws are not as well developed. So, someone might initiate a business here without realizing the complexities. It then can be difficult to undo those actions, and there may be tax consequences.

Rosenberg: Too often, the foreign client just wants a fast way to find access to the U.S. and does not sufficiently analyze the business aspects of the investment. Some are very sorry at the end of the day while others accept that risk as their driving force in the first place was having an investment to help get appropriate immigration status in the U.S. Also, we too often see situations where a foreigner who did not get the appropriate U.S. tax advice in advance, eventually learns that the favorable long-term capital gain treatment he or she expected might not be available, or the family of a now deceased foreign investor finds how costly the U.S. estate tax can be. Poor advice when structuring planning strategies or failing to follow through with the requirements of well-planned structures can prove costly.

Q. How do you work with other professionals, such as attorneys, accountants and family office managers, to serve your clients?

Rodríguez: South Florida professionals need to do everything they can to prepare their foreign clients for the cultural, regulatory and economic differences in the U.S. To take just one example, foreign nationals should look at the issues associated with acquiring an operating business versus a passive investment. An active business might deliver higher potential returns and also provide individual immigration benefits such as an L-1 or E-2 visa. A passive investment, such as a real estate fund, won’t necessarily provide the same benefits, but it might be more tax efficient.

Hill: International wealth management typically involves a team. That might include an international banker, insurance specialists, attorneys who can advise with tax planning, immigration and legal structures, as well as a CPA who knows the U.S. tax system.

Roche: We are usually one of many wealth advisors for our clients. We do the banking, investments and trusts, bringing in the experience in insurance, tax and accounting professionals. A real estate or estate planning attorney may also be involved in structuring a residential or commercial investment. We try to lead a team or professionals who provide coordinated services for the client.

Packman: I don’t think you can do proper international tax planning without using a professional in the client’s home jurisdiction. Of course, the opposite is also true, as foreign nationals need to work with a U.S. professional who understands the nuances of our tax code. It really does take a team approach to meeting the needs of wealthy international clients.

Rosenberg: We have always cautioned our foreign investor clients as to the importance of our being able to coordinate with such investor’s foreign advisors. In addition, if a foreign client comes to our office without already having certain other U.S. professional needs in place, we will suggest that the client consider an appropriate CPA, attorney (should advice be needed in legal areas outside our firm’s expertise), bankers, investment advisors, realtors and in some instances, a family office manager.

Q. Do you see continuing demand for “high-touch” concierge services, or has that diminished in the age of technology?

Roche: You need to deliver both high-tech and high touch. Some clients need a personal relationship for guidance, but technology is a big part in communicating today.

Hill: We want clients to access our bank in the way they prefer. Some want that personal touch with face-to-face meetings, while other like to self-serve the information they need. They key for wealth managers today is to provide both in a seamless way.

Packman: I have many clients I’ve never met face to face. Our office is set up to hold videoconferences with clients in Latin America and other locations, and our firm has offices in Colombia and Mexico. However, many Latin American clients prefer to fly here and meet in Miami to discuss U.S. tax and compliance issues.

Rodríguez: Technology affects how we do business. In the past, things moved more slowly and there were more face-to-face meetings. Now, we deal with a lot of foreign clients using videoconferencing. While I travel often to Latin America, most clients prefer to see me here in Miami.

Rosenberg: Although I have seen some concierge-service arrangements over the years, I have not found this to be a major need in the lives of my foreign clients.

Q. Are there any best practices or other advice you can offer for working with high-net-worth individuals and families?

Packman: It’s amazing how many foreigners in South Florida (and other major U.S. cities) don’t realize they are U.S. taxpayers. They all seem to be aware of the 183-day rule, but not the three-year rolling average test. Accountants who prepare tax returns for their clients should look carefully at the individual’s status and be prepared to address everything.

Hill: Many foreign nationals don’t think they can get loans on their acquisitions here. That’s simply not the case. While there are underwriting challenges, they can get loans at 4 to 5 percent, for example, compared with 8 to 10 percent at home. That means it may make sense to finance a U.S. real estate acquisition with a U.S. loan.

Rosenberg: When I was about 12, my family was driving from Brooklyn for a vacation in upstate New York passing one motel after another. Then my grandfather who came from Poland and barely spoke a word of English said something from the back of the car and my father could not stop laughing. He told me, “Grandpa just asked if Mr. Motel was the richest man in the world! So, make certain that your high-net-worth individual and family clients fully understand all you discuss with them. Too often, they will “yes you to death,” but not completely understand what you had explained to them. If English is not their primary language, ask them to have someone present at your meetings who can translate. Obviously, make sure that the attorney-client privilege is maintained. Another alternative is to get the client to consent to have your advice translated into English.

Any additional thoughts?

Rosenberg: Every U.S. professional advisor should do all he or she can to make certain that his or her foreign clients are complying with the laws of their foreign countries. Try to make certain that the client is not doing something back home that can come back to haunt the U.S. advisor.

Packman: Being a generalist in your profession does not apply to the international wealth management. You need to focus your practice in this field.

Rodríguez: The secrets to success in serving this market are hard work, building a good reputation, being accessible, and delivering consistent value to clients.

Dwight Hill is president of Sabadell United Bank, N.A. a locally managed, nationally chartered banking institution that serves over 40,000 clients through its branch network in Florida. Previously, Hill was executive vice president of professionals and business banking at Sabadell, overseeing all business development staff, strategic planning, and implementation of new services.

Kevin E. Packman is a partner with Holland & Knight and a member of its International Estate Planning Group, an integral part of the firm's Private Wealth Services Department. He also chairs the firm's Offshore Compliance Team. His practice includes tax controversies, estate planning (domestic and international) and creditor protection planning. He is also recognized as a national leader in the area of Foreign Bank and Financial Accounts Reporting.

Orlando Roche is the regional president of Sabadell Bank & Trust Miami-Dade County. He is responsible for overseeing private banking, wealth management and fiduciary services within the region. Roche has more than 26 years of experience in private wealth management.

Francis E. "Frank" Rodríguez is the managing partner in the Miami office of Shutts & Bowen LLP, where he is a member of the Tax and International Law Practice Group. He is also chair of the firm's Latin America Practice Group. He represents non-resident individuals and foreign corporations with inbound tax planning, and U.S. individuals and domestic corporations with outbound tax planning. He counsels international families in succession planning, trust issues, and federal tax reporting, including voluntary self-disclosures.

Michael Rosenberg is of counsel at Packman, Neuwahl & Rosenberg in Miami who has developed a substantial international taxation practice concentrating on foreign persons investing in, doing business in, and immigrating to the U.S., and U.S. persons investing in, doing business in, or expatriating to foreign countries. He was formerly was formerly the International Tax Manager of the Touche Ross & Co. office in Miami (prior to its merger into Deloitte & Touche) and was a member of its U.S. International Tax Group.

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