“Rule No.1: Never lose money.” – Warren Buffett
What are the secrets to generational wealth? Is it that someone in the family created so much wealth that it’s impossible to spend or lose? Is it having the best investments, whether that’s real estate, stocks, venture capital or crypto? Does having the proper trust structure keep the heirs from spending the wealth unwisely? Or is aggressive tax planning the secret ingredient to the recipe?
These questions have been frequently heard in North America and Europe for the past seven decades, but other parts of the world such as Cuba, North Korea, China, Venezuela and former members of the Soviet Union have felt the effects of totalitarian regimes that have stolen many families’ wealth.
Other families have maintained their wealth since the 1700s. For example, the Rothschilds family has lived through the French Revolution, First World War, Holocaust and Second World War. If all their assets had been located in one country at a critical point in history, the family could have been wiped out. It’s clear, therefore, that part of the solution for long-lasting wealth is having assets in (safe) jurisdictions outside your country of residence. This is a form of diversification. Some of a family’s financial wealth may be lost during periods of uncertainty, but there is still enough to continue or start new ventures.
Many in the financial industry speak of diversification across asset classes such as stocks (Canada vs. global), bonds and alternative investments like real estate, private equity and even crypto, but what many forget is jurisdiction risk.
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Canada since its inception in 1867 has been a beacon for hard-working individuals and families from around the world. Our rule of law and lack of corruption made Canada a sought-after place to raise a family, work or create a business. Could things change to such a degree that the risk of forfeiture of assets to the Crown becomes a significant risk? No.
However, the path is obfuscated because the risks are significant: a combination of progressive and high taxation along with a significant overstep in regulations and the loss of the individual’s rights and freedoms. This is akin to the story of the frog being slowly boiled. By the time he feels uncomfortable, it’s already too late to jump out.
That leads us to these current times. I’ve seen an exodus of family enterprises and entrepreneurs from Canada during the past few years and the flow is getting faster. These families have been moving human and financial capital to safer climes. These aren’t a bunch of trust-fund babies, but individuals who can see opportunity and devote their efforts to it. Sometimes they win, sometimes they lose, but what they have is a good understanding of the risks.
For families of meaningful wealth, we’re not suggesting the use of ultra-secretive, low-tax, offshore jurisdictions, which, due to the Common Reporting Standard (CRS) have become much less secretive. For the record, the United States is becoming the most significant offshore location in the world because it is not a member of CRS, even though it has meaningful income taxes.
What should be completed is a thoughtful analysis of various countries, the pros and cons of them, with the objective being to determine if there are better countries where the ownership of an investment should reside and where the wealth creator should hold a passport or live. The key to success is to never lose money. As Warren Buffett’s Rule No. 2 states: “Never forget rule No.1” FPM