While the UK tabloid newspapers obsess over details of the just-announced wedding next May of Prince Harry and his American girlfriend, Meghan Markle, tax experts and others familiar with the tax challenges expat Americans face when they settle abroad have been indulging in their own form of pre-nuptial excitement.
The prospect of the fifth in line to the British throne marrying an American divorcee, it seems, is more irresistible to certain US tax boffins than a particularly challenging Sudoku puzzle, or the latest video game.
Others, such as expat American bloggers who have been hit by what they consider unjust tax bills and penalties by the IRS on income they made overseas – and on which they had already been taxed by the government in the country where they now live – have been sharing snarky comments about the pending nuptials on social media.
“Without Ms Markle renouncing [her] US citizenship, it would seem that [she] will give the IRS a port of entry into the finances of the royal family,” a blogger who calls himself “Mike” wrote in a posting on the Isaac Brock Society website. The website is a Canada-based forum for American expatriates unhappy about the way the US taxes and otherwise involves itself in its expats’ lives.
“Think of it: Tax colonisation through marriage!”
Poring over the tabloids in Wimbledon
Among the tax experts who have been poring over the tabloids for juicy details that might shed light on the future tax arrangements – and possible changes in the bride’s citizenship – has been David Treitel, managing director of American Tax Returns Ltd, which specialises in helping American expatriates with their tax affairs.
“I have been talking about Meghan for days,” Treitel, who is based in Wimbledon, London, less than 10 miles from Buckingham Palace, says.
Thus far, he admits, there’s not a lot of detail for a tax expert to work with. But that hasn’t stopped him from putting together some basic thoughts about how he might advise the bride-to-be and her husband, were he to be given the royal tax adviser’s job.
For example, “I strongly suspect that the engagement ring Meghan received on Monday could be worth more than US$100,000,” he says.
“If so, this would oblige her to file IRS Form 3520, formally known as the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
“In any event she will need to have the ring valued, as a gift, for IRS reporting purposes, and potentially could suffer a US$10,000 penalty if she fails to disclose it to the IRS.”
Possibility of renunciation
Much informal speculation among expats and their advisers focuses on the question of whether Markle might renounce – that is, formally go through the process of giving up her US citizenship once she obtains a British passport – as a number of other well-known Americans, and growing numbers of ordinary American expatriates, have done and continue to do.
Buckingham Palace announced yesterday that Markle will apply to become a British citizen next year. But as many American expatriates have discovered recently, even the combination of a foreign passport and a foreign address doesn’t free Americans from their need to file a US tax return every year, report to the IRS on their non-US bank accounts, and in some situations, pay US taxes.
(This is why, as reported, many American expat groups are lobbying Congress this week in an effort to replace the US’s current citizenship-based tax regime with one that’s based on residency, like almost every other country in the world has.)
Renouncing one’s American citizenship typically takes years, though, and also involves an “exit tax” that is based on the individual in question’s wealth, and therefore can often be significant.
Last year, British foreign secretary Boris Johnson formally renounced his citizenship, joining such other famous ex-pat Yanks who have also handed back their passports over the years as pop singer Tina Turner; actor Yul Brynner; authors Henry James and T S Eliot; film director John Huston; performer Josephine Baker; emerging market fund manager Mark Mobius; socialite Christina Onassis; investor Sir John Marks Templeton; and Eduardo Savarin, the Facebook co-founder.
Perhaps significantly, though, it’s not thought that Wallis Simpson, the American divorcee who married King Edward VIII in 1937, ever renounced her citizenship.
Among the reasons some American tax experts think a renunciation could be possible eventually would be the fact that if Markle doesn’t, she will be expected to file a tax return that would reveal many details of the nature and extent of the wealth she and her by-then-husband shared.
It’s not 1937, but…
Stanton Farmer, a Certified Financial Planner with US-based American specialists Thun Financial Advisors, noted that the fact that Markle is a divorcee “doesn’t seem terribly pertinent now”, as it “isn’t 1937, and Harry isn’t the king”, a reference to the Wallis Simpson/Edward VIII union.
“Miss Markle’s status as an American, however, makes her potential UK immigration/US expatriation interesting,” he added.
“It will be interesting to see if she retains her US citizenship. More important, it does raise the spectre that the children of this happy union, if they retain dual nationality, would likely be beneficiaries of foreign – from a US perspective ‘offshore’ – trusts.
“This would potentially subject the children to special reporting and tax rules that would create a lot of problems for everyday dual nationals, although one suspects in this case that there would be a small army of tax lawyers and accountants employed by these trusts to waddle through all of that. It is a ‘high(est) class problem’ at worst. That’s all a very premature concern.
“But if and when they have children, whether these children would keep their American citizenship as British royals will be interesting.
“Moreover, if Miss Markle were to expatriate – that is, to formally renounce her US citizenship – she will no doubt be subject to the special rules that apply to ‘covered expatriates’ under the US tax code, and this is problematic when gifting or bequeathing assets post-expatriation to Americans.
“This is pure speculation at this point, but it is not uncommon for wealthy Americans to establish and gift substantially to irrevocable trusts for their American loved ones before going through formal expatriation.
“Whether or not she will retain her US citizenship, have dual-national children, etc, we obviously cannot know now.
“That said, it is wise for any American who is planning to move abroad to revisit their financial planning arrangements well in advance – and Miss Markle would certainly be no exception to this rule.”
‘Advice, and more advice’
Charles Bruce, a Switzerland-based American tax lawyer with Bonnard Lawson-Lausanne who also represents the American Citizens Abroad as its legal counsel, says his advice to any American about to marry into a wealthy non-American family also would be to get the best advice possible as soon as possible – and then, to get an equally good second opinion.
“Having an American in the family tree is a very common phenomenon” these days, he notes.
“The trick is simply to think through the fallout, especially as to taxes and the IRS, in advance.”
Still, for a celebrity couple such as Prince Harry and Markle, he adds, there’s also the potential “embarrassment” factor, if any of the pre-wedding planning were to turn out to be flawed in some way.
“I would urge them to get an opinion; get a back-up second opinion; and then, perhaps in this case, tell the advisers they’ll end up in the Tower of London if they turn out to be wrong.”
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