Leaving U.S. taxes, and your citizenship, behind -- Page 2

"Expatriation for financial reasons has almost always been an estate tax-driven plan after people have done all the normal domestic tax planning, maximizing their Family Unified Credit, doing the QDOT (qualified domestic trust) with the spouse, looking at life insurance," he says.

"I find that the breakpoint before people even consider this option is $10 million plus, assuming they're married. It's only when you get above those numbers that you start to say the domestic solutions aren't taking me very far."

Even in the stratosphere of high wealth, very few are willing to give up their citizenship to avoid the so-called "death taxes."

"If you have $10 million in estate tax, you tend to have what I call 'life inertia,'" says Lesperance. "You've got homes, friends, you belong to a church or synagogue, you've gotten into the clubs you wanted to. You've established a lifestyle."

The expatriation Catch-22
The working wealthy who could conceivably save money by expatriating -- Lesperance puts that income threshold at roughly $350,000 to $400,000 -- choose not to do so because of an equally persuasive Catch-22 that's directly tied to their passports.

"The problem is, people who make in that income bracket are people who generally have to be somewhere," he says. "If you're a hands-on manager who puts in 12-hour days, six days a week, you need to either sell the business or find a manager to replace you or you can't leave."

But when you expatriate, you have to leave; there is a limit on the number of days you can be in the United States. For example, while members of a U.S. rock-and-roll band might earn enough to make the process appealing, that hefty income comes in part from live performances in their home country. And that, notes Lesperance, means the band will be in the United States too many days for expatriation to work.

There's also the social stigma of appearing to be a tax-dodging turncoat.

"Stanley Works doing an overseas re-incorporation in Bermuda made perfect sense from a business point of view," says Lesperance. "But the optics of it -- Stanley Works, Stanley hammers, not made in the U.S.A. anymore? -- it's an economic Benedict Arnold."

US citizenship, non-U.S. residence
On the upside, if you want to live outside the United States without forfeiting your citizenship, there are a few attractive tax breaks, though it takes some vigilance to become a nonresident "qualified individual" in order to take advantage of them.

The greatest of these is a tax exemption on your first $80,000 of foreign-earned income. Nice perk, but you must first establish a tax home by living in one or more foreign countries for at least 330 days to qualify. (American federal and military personal are excluded from this perk.)

Establishing a tax home, however, doesn't mean you're off the hook for taxes. You'll pay applicable taxes to the country in which you live. Still, with the right income mix, a couple can live very nicely overseas with a combined $160,000 U.S. income exemption.

In the wake of the Sept. 11 terrorist attacks, some Americans are considering nonresident status and dual citizenship as a way to diversify their travel documents. No one wants to be "the American in room 106," says Lesperance.

Still want to chuck it all? You can, but it's tricky.

You probably have three goals: 1) to retain major-country travel documents on a par with your U.S. passport, especially in these uncertain times; 2) to protect your estate from onerous estate taxes; and 3) to live where you want to live.

Unfortunately, no one country fits the bill completely. England and Ireland will welcome you, but their estate taxes are higher than in the United States. "It would be like jumping out of the U.S. pot into the U.K. fire," says Lesperance.

Similarly, the Caribbean tax havens want you, but will you be able to freely travel on documents from Nevis?

Lesperance suggests you establish a vacation home in an income tax-free Caribbean nation (Bermuda, the Bahamas, Cayman Islands, etc.), expatriate to Canada (where there is no estate tax), then become a Canadian nonresident in your island second home. That way, you have (most of) your cake and can give it to your kids, too.

That said, you're going to need to plan your moves months, or even years, in advance and have experienced tax advisers at all destinations to help you maneuver through the proper day-counts and sundry other requirements. It's a legal thread-the-needle proposition with both your money and your citizenship at stake.

Lesperance spends most of his time talking his clients out of expatriation.

"For a lot of people, I just refer them back inland and they just play the game better," he says. "Expatriation is leaving the game."

Jay MacDonald is a contributing editor based in Mississippi.