In Memory of Sir John Templeton

My esteemed colleague, Eric Roseman, Investment Director for the Sovereign Society, said today: "As a value investor, I mourn the passing of Sir John Templeton yesterday. The pioneering global value investor passed way in The Bahamas at the age of 95. More than any other individual during his lifetime, Sir John catapulted global value investing in the mid-1950s by uncovering cheap stocks across the world. His passing deserves a tribute because he influenced so many investors."

Eric is certainly correct about the worldwide influence of the man who popularized value investing and made mutual funds available to the mass of smaller investors. Templeton didn't invent the mutual fund, but he made it popular and reputable. But he was also a man of great personal conviction and deep religious faith.

Born in Winchester, Tenn., Mr. Templeton developed a strong Christian faith that defined his career and guided his philanthropic efforts. He founded the Templeton Prize in 1972 to encourage "progress in religion." The dollar amount has gradually increased over the years to ensure it remains a greater monetary reward than even the Nobel Prize offers. In 1987, the year he was knighted by Queen Elizabeth, Sir John Templeton founded the John Templeton Foundation, which funded projects that brought science and religion together. It has distributed more than $1.5 billion to date, with $70 million in annual grants distributed.

Profitable Prophet

A $10,000 investment in the storied Templeton Growth Fund in 1954 would have grown to $2 million by 1992, when Sir John sold his company to Franklin Resources, the San Mateo, Calif. based fund giant, for $913 million. That translates to an annualized 14.5% return.

But Templeton knew that when it comes to income taxation Americans face a nearly unique burden. Unlike most other nations, U.S. citizens and long-term residents cannot escape U.S. taxes by moving their residence to another nation. The only way to leave U.S. taxes behind is to give up citizenship or resident alien status.

In 1962, Sir John surrendered his U.S. citizenship to become a citizen of The Bahamas.

This move saved him more than $100 million when Templeton sold the well known international investment fund that bore his name. Many years after surrendering his U.S. citizenship, Templeton told The Wall Street Journal that the political frenzy over expatriation could happen "only in America." Sir John said his investment record improved after he distanced himself from Wall Street and was freed from worry about the U.S. tax consequences of his decisions.

Expatriation: the Ultimate Estate Plan

In explaining why "expatriation" was so attractive to wealthy Americans such as Templeton, several years ago a Forbes magazine article gave the compelling arithmetic that applied at the time: "A very rich Bahamian citizen pays zero estate taxes; rich Americans – anyone with an estate worth US$3 million or more – could pay 55%. A fairly stiff 37% marginal rate kicks in for Americans leaving as little as US$600,000 to their children." Even though U.S. estate taxes have been reduced since then (and may go up again soon), expatriation offered the ability to escape federal and state income, capital gains and other taxes.

Once Templeton became a Bahamian (and British) citizen, he lived tax-free in The Bahamas. Interestingly, his investment record improved markedly after he stopped worrying about the tax consequences. As a result of tax-free compounding, Templeton was worth several billion dollars at his passing and was one of the world’s wealthiest men.

However, Templeton did not necessarily recommend that other investors follow his lead and switch allegiance to a tax haven such as The Bahamas. (It's almost impossible for an American to become a Bahamian citizen today). But, Templeton did strongly recommended that smart investors take full advantage of offshore tax-deferral vehicles such as a life insurance, annuities, self-directed pension plans and incorporation of a business.

Politics as Usual

For more than a decade now expatriation to avoid taxes has been a favorite "hot button" issue kicked around by the American news media and "soak-the-rich" politicians. Templeton was often cited as an example of "tax traitors" who left the country. No doubt many of the hundreds of millions of dollars he saved in taxes went to the philanthropy and charities he supported, instead of to the IRS.

Ironically a few weeks ago a long pending proposal for an "exit tax" on U.S. persons who end their proposal by U.S. Rep. Rangle (D-NY) was adopted by the Democrat Congress and signed into law by President Bush.

This outrageous law imposes an immediate confiscatory tax on unrealized capital gains on all the assets and property of anyone who dares to end their U.S. citizenship or resident alien status (a right the U.S. Supreme Court has upheld). The new law, unparalleled since the days of Nazi Germany and apartheid South Africa, also imposes Draconian restrictions on trust beneficiaries and pension income.

Rest in Peace

Sir John Templeton lived and prospered in a time and in a freer America that allowed him to use his talents, not only for profits for the many, but for global philanthropy that benefitted untold thousands.

Truly sad that petty American politicians now punish such talented men and women instead of rewarding them.