If Meghan Markle’s managers are on the ball, they’re busy shifting her career earnings into vehicles that will survive her royal wedding and give her some independent security.
When the Queen of England announced that her grandson Prince Harry would be marrying American actress Meghan Markle next year, a British passport came with the deal.
After all, it’s bad PR for the wife of the person who’s fifth in line for the throne to technically owe her allegiance to another country, no matter how friendly.
But simply giving up her U.S. citizenship will cost her close to everything she’s saved so far. Her advisors need to do some heavy lifting now to earn their pay.
Gaming the exit tax
A lot of the reporting around the royal wedding focuses on what would happen if the soon-to-be-princess passively waits around to hand over her passport on her wedding day next May.
Real people with real assets just don’t do that. She may not be a huge star, but seven seasons of cable drama at $50,000 per working week have grossed her around $5 million.
Throw in endorsements and a few movies and you’re looking at executive money, the kind of career wealth that’s worth investing a little cash now on the professional expertise that can find the loopholes.
Otherwise, she’ll definitely pay a big exit tax on every penny she’s saved and invested. Thanks to the TV show, she counts as “highly compensated,” and even if she wasn’t, if she’s managed to rack up a few million dollars as a single lady, she’s on the IRS hook either way.
Under those conditions, when you renounce your citizenship, you immediately owe the assessed capital gains tax you’d pay if you sold everything. Assuming the Senate gets its way on tax reform, that might be 20% of all profit she’s ever earned on her investments, due immediately.
Her career really got rolling back in mid-2011, when stock prices were only half what they are now. Any money she set aside then takes a 10% hit off the top. Anything she’s earned in the last 12-month rally becomes a short-term gain taxed as ordinary income.
Put it simply, it’s a drag, especially when she’s effectively retiring in order to launch a new career as a royal goodwill ambassador. Her ability to earn an independent living is going to take a serious hit.
There are unattractive options. She could refuse to pay, creating an international stink that bars her from visiting her native USA much less working here.
And while she could retain her citizenship, that would expose the royal finances to IRS scrutiny. The queen’s already reeling from the Paradise Papers revelations. If she’s going to lower the boom, this is where it’ll come.
The sensible options
So her choices really revolve around where to move the assets to a place where they can grow free from the exit tax. That’s where her advisors can add value in the here and now.
Even an IRA is subject to instant taxation when someone renounces U.S. citizenship — the transaction counts as a penalty-free “pretend” distribution. In effect, it’s a forced Roth conversion.
However, the IRS is more lenient around certain types of trusts and investments structured to pay deferred compensation. If Markle’s people move her nest egg into one of these arrangements, she’s off the hook until she starts making withdrawals.
Granted, those withdrawals will suffer a 30% haircut, but in the meantime they can compound unmolested. Wait a few good years in the market, and the ultimate IRS drag becomes a wash.
On any holding period longer than that, the trusts pay for themselves. Markle was still early in her Hollywood earning cycle, so transferring her assets now shouldn’t trigger a lot of limits.
Of course timing is tricky around the tax bill, but odds are good any effective rate Markle pays on her exit next year will be as low as it gets for the foreseeable future. Locking that rate in — or even the 30% on trust distributions — feels like a pretty good long-term bet.
Why am I making such a big deal of this? Marrying into the royals is the equivalent of signing the ultimate prenuptial contract. She needs to bring as much of her own wealth as she can into this relationship.
After all, she’ll never inherit the titles, property or share in the family trusts. If she survives Harry, the family will take care of her as long as she behaves herself. That’s it. Tradition frowns on her even working.
And if things go sour, she’s got even less claim on the family fortune. Princess Diana had her own money. Fergie didn’t, and she’s been bouncing between short-term endorsements and near-bankruptcy for years.
Keeping a million or two in her own name may not be the key to lifelong luxury if the marriage falters, but at least it gives Markle a little personal security, an emotional cushion to stick up for herself inside the palace.
Every extra dollar in that cushion helps. After all, she isn’t leaving the United States to cheat our tax code or to make a political statement. She’s not a villain here.
Love is love, but she needs to protect her assets. There are ways to do it. If she never has to draw on that wealth, it's OK. Either way, the clock is ticking.