Cyprus and Estate Planning Beyond the Legal Documents

The Cyprus Ordeal

As you are likely aware, the Republic of Cyprus is the latest economic crisis to have bubbled up into the media. We hope our thoughts on this debt crisis provide helpful perspective on the media blitz covering the economics/politics of the island at the center of the news stories. The Republic of Cyprus maintains a population of just over 1 million people – about the size of city of Dallas (proper) according to the 2010 Texas Census. For those who did not ace their geography quizzes in grade school, the island is in the Mediterranean Sea, west of Lebanon and Syria, and south of Turkey. I have spent a fair amount of time in this part of the world during my military career, and I find it fascinating that the Eurozone, with its deeply entrenched cultural traditions, has embraced nations on its fringes, and continues to debate including nations such as Turkey. The Republic of Cyprus is already in the Eurozone.

Cyprus is divided by a U.N.-monitored buffer zone somewhat less hostile than the one in Korea. Now, suddenly, news outlets are declaring that a failed bailout of this tiny nation could shatter the European Union's finances, sending financial shock waves around the world. Shares on European stock exchanges plunged in panic selling, and it remains to be seen whether U.S.-based investors will join this fearful exodus. Meanwhile, the biggest potential losers in this crisis could be Russian mobsters and oligarchs - explanation to follow.

This “crisis” represents a spectacular display of poor timing. The southern part of the small nation gave up its currency (the Cyprus pound) for the euro in January 2008, just before the global economic crisis hit. The meltdown was followed by a severe financial crisis in Greece--and, since most of the people living south of the U.N. buffer zone are ethnic Greek, it is not surprising that the country's banks would have had substantial holdings of Greek public and private debt.

The restructuring fell like a hammer on the Cyprus banking system. The Washington Post recently estimated that the nation's two largest lending institutions--Cyprus Popular Bank and the Bank of Cyprus--ended up losing $4.4 billion and $3.1 billion respectively on their Greek debt investments--roughly 76 percent of their value.

An estimated $12 billion would restore solvency. In negotiations with the European Central Bank and the International Monetary Fund, the Cypriot government agreed to a solution that is (so far) unique in the Eurozone: the government would assess a one-time tax on its country's bank depositors--taking 6.75% of all deposits of 100,000 euros or less, and 9.9% on deposits greater than that amount. This would have raised $7 billion, more than half the needed total, and the IMF and ECB agreed to provide the rest of the cash in the form of loans.

The Washington Post reports that Russian companies have been setting up subsidiaries in Cyprus as a way to evade Russia's heavy taxes on money they earn abroad. Most of those Russian deposits, of course, exceed the 100,000 euro threshold by a few orders of magnitude, and therefore would have been taxed at the highest rate (hence Cyprus solution of taxing the different size deposits at different rates). This explains what might otherwise be a puzzling part of the Cyprus default story: the fact that Cyprus's finance minister Michael Sarris flew to Russia instead of Belgium when the crisis became public, or that Russian President Vladimir Putin took time out of his workday to publicly pronounce the tax levy, in a very small country far from Russian shores, as "unprofessional and dangerous."

You've probably seen in bold headlines, reports that the Cyprus parliament ultimately rejected this plan to confiscate billions from the country's savers and foreign oligarchs, causing the rescue package to collapse and triggering yet another global hand-wringing over the fate of the euro. But there are also reports that Russia has offered Cyprus a loan of $3 billion at favorable 4.5% interest rates, and indicated a willingness to sweeten the deal if necessary.

Should you be worried about all this? It depends on whether a big part of your investment portfolio is allocated to the Cyprus stock exchange, which suspended trading on Tuesday and Wednesday while the mess gets sorted out. If not, consider that Cyprus can always go back to its original currency as a last resort, without endangering the Euro banking system the way, say, a Greek or Spanish exit might. And also remember that Cyprus is in the habit of running a government surplus, which means that the country will eventually get back on its financial feet again--probably after the Russian oligarchs and their government quietly refinance their private tax haven.

Plan for More Than Financial Well-Being 

By Brian Cox Guest columnist | Posted: Saturday, March 2, 2013 4:15 pm:  Herald-Zeitung, New Braunfels, TX

I recently had coffee with a general officer who just retired here. He said he couldn’t find
volunteers in his church in California, whereas he has yet to get a call back from his church here
because his local parish has a waitlist of people stepping up.

My satisfaction with and appreciation for helping others has grown from my time serving in the
military to a career in providing financial planning and investment management expertise. In the
spirit of helping others and based on my firm’s years of listening and helping clients, my
colleagues and I have decided to offer a couple of planning suggestions we believe will materially
help your loved ones manage more than their financial future.

While deciding on matters such as whether to harvest your taxable gains before year-end in the
face of fiscal cliff negotiations (and tax rates rising) is important, we believe those decisions and
planning for financial resources to sustain your family should not supersede other planning. This
planning will help your family manage their affairs without you, no matter when that occurs.
I was called back to active duty to serve as an Army Reservist in Baghdad in 2004. That turn of
events led me to consider more deliberately than the average 33-year-old the possibility of my
passing as a young parent. Ten days after receiving my deployment orders, moving my family
back to New Braunfels from New York City (where we were living at the time), I boarded the
plane for the Middle East to stage and complete a few days of refresher training before boarding
another plane for Baghdad.

I was as nervous as one would expect to be, leaving my wife and our first child behind. As I was
waiting to fly, I decided to draft what is known in the field of estate and financial planning as an
ethical will for both my wife and my son. In it, I articulated my hopes and dreams for my son and
explained to him my values, and what I enjoy in life, including of course details about my
relationship with him.

Even though he was only a year and a half when I left, I wrote about what made him unique and
some of the things that brought me the most happiness during our time together. For my wife, I let
her know how much she means to me, and recounted some of our milestones and the values I
hoped she would continue to raise our son with. We now have three sons, and I have a letter for
each of them.

My colleagues and I believe that gently nudging those we cross paths with, including of course
our clients, toward taking care of such legacy documents can be just as impactful as ensuring your
financial resources are adequate without the benefit of your ongoing income.

Similarly, we pass on a sample letter of instructions to anyone who is in need of some guidance on
how their family will specifically deal with the difficult process of their passing (i.e. who will read
what scripture, where you wish to be laid to rest, and what should be taken care of when you are
gone, including bills and other obligations).

Doug Pauley, my firm’s managing principal, has experienced the loss of both of his parents, first
his father, and then years later, his mother. Fortunately, both had taken his advice and drafted an
ethical will and a letter of instruction. We all need to be gently nudged in various parts of our life, so I hope you don’t mind our effort to encourage other members of this extraordinary community to focus on something we see in our duties as often overlooked. We have encountered a vast majority of people who have not
considered or perhaps just not taken the time to think beyond the financial ramifications of their
untimely or even expected passing.

We look forward to hearing your feedback on these suggestions, and to serving this community
for many years to come.  If you would like example copies of our either of the above-mentioned documents for your family to get started, please email me at or call (830) 832-3081.

The information herein represents the opinions of the author. Much of the material is based on data gathered from what are believed to be reliable sources. It is not guaranteed as to accuracy. It should not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.