Jurisdictional Diversification
Jurisdictional Diversification
Jurisdictional Diversification is a reality for most people whether they know it or not. If you have family members or property or business interests in more than one place, you are dealing with more than one jurisdiction. Most of the time, such jurisdictional diversification happens by accident. We just go where we go and there we are. You get far more benefit, and avoid more of the pitfalls, when your jurisdictional diversification is deliberate. As a good Buddhist will counsel: “be where you are.”
There is a simple and powerful reason why jurisdictional diversification must be a deliberate consideration in any kind of estate or business planning. The reality is, we don’t stay in one place. We move around. Our children and grandchild and grandchildren don’t live in the same communities and jurisdictions that we do. We own properties and businesses and investments all around the globe. In the past, people may have lived and died within a few miles of where they were born. In the modern world, particularly for developed nations with prosperous populations, that rarely happens anymore.
This is one of the reasons why our basic emergency documents and our trusts should be designed to be effective and functional as much as possible wherever we might be, anywhere in the world. A Dynasty Trust may need to change jurisdictions to retain its multi-generational function and avoid termination under the Rule Against Perpetuities. Jurisdictional diversity can effect our rights in litigation. Our jurisdictional ties most certainly determine our tax exposure and compliance obligations.
Going Offshore
Sometimes, we end up with jurisdiction diversification when we create structures or assets “offshore” through multi-national business or estate planning. This can be as simple as setting up an offshore bank account or as complex has having an offshore trust in one jurisdiction, owning a business entity in another jurisdiction, which in turn, owns a domestic LLC, which in turn owns a domestic rental property.
One of the often overlooked aspects of offshore planning is how, if at all, offshore structures and assets should be connected with domestic structures and assets. Domestic assets can in certain circumstances be protected with offshore structures. This creates an obvious and unavoidable connection. Financial assets can be separated from domestic risks by moving them offshore. But this of course creates the obvious challenge of how to benefit domestically from assets held outside of one’s domicile without exposing such assets to unintended or unwelcome risk.
Domestic Jurisdictional Diversification
Jurisdictional diversification can also happen on a purely “domestic” basis. For example, a person domiciled in Texas may set up a Wyoming LLC, which forms an Alaska Land Trust, which then holds title to a rental property situated in Tennessee.
There are pros and cons to such structures. Goals may be in conflict, and you may have to choose between risk management or simplicity. The reality is that owning things in more than one place, and protecting the risk of one thing from the equity of another, all add complexity. Complexity is a price we pay to be in more than one place and to protect ourselves and our assets.
Tax Consequences
There are serious accounting and tax reporting consequences to any level of jurisdictional diversification. Often, setting up and funding the structures is relatively easy compared to keeping track of it all and dealing with all the various tax reporting and governing authorities. This level of planning requires counsel from multiple disciplines including legal, accounting, tax reporting, financial, and insurance.
Cross jurisdictional planning is a necessary component of integrated planning. Integrated planning happens when all the various pieces are accounted for, and the connections between them are both deliberate and compliant with applicable governing authorities.
Is Jurisdictional Diversification for You?
If you are tightly located in one place with no leakage to any outside connections, you may not need jurisdictional diversification planning. Such an isolated condition is increasingly difficult to sustain. If you or your assets or your family are in more than one place, you are engaged in jurisdictional diversification whether you know it or not. The question is, are you going to plan for this state of affairs and be deliberate about it? Or, are you just going to let it happen ad hoc with no design or thought as to how the various pieces impact each other.