When implementing a succession strategy for clients it is important to ensure that the chosen structure will be able to stand the test of time.
When implementing a succession strategy for clients it is important to ensure that the chosen structure will be able to stand the test of time. In order to protect multi-generational wealth in the long-term, structures must be sufficiently robust to pre-empt likely challenges and flexible enough to deal with inevitable economic, tax and political changes or a client’s altered circumstances.
UNDERSTANDING THE CLIENT’S RATIONALE
Advisers’ initial efforts should focus on understanding the client’s rationale for establishing a structure, taking into account the client’s individual circumstances. Clients will frequently have a number of motivations and although tax efficiency will always be relevant, it is rarely the only important factor.
Wealth protection, a legitimate concern for confidentiality and generational succession planning are often driving forces. Consideration should also be given to the nature and situs of the assets intended to be held by the structure as well as to the client’s residence status, tax position and family situation. Once these needs and priorities have been established one can then consider how best to engineer an appropriate structure.
TAILORING THE STRUCTURE
International jurisdictions seeking to become increasingly competitive offer a much wider choice of wealth structuring vehicles than was previously the case.
A number of common law jurisdictions now recognise and offer entities previously the preserve of civil law jurisdictions – in the last four years alone, Guernsey, Jersey and the Isle of Man have all enacted legislative frameworks for the establishment of foundations.
Similarly, a number of civil law jurisdictions have ratified the Hague Convention on the Recognition of Trusts and some have also introduced their own tailored trust laws.
Certain structures and jurisdictions allow families to retain an element of control through reserved settlor powers. For higher value structures the use of a private trust company, managed trust company or some other orphan entity may be attractive to assist clients to maintain an appropriate level of control, subject to relevant constraints (such as tax), while traditional trust structures accompanied by letters of wishes enable succession plans to be amended as circumstances change.
Advisers must therefore consider the full range of available jurisdictions and entities to meet their clients’ needs as well as the numerous variations available for residence, governing law, place of incorporation and location of administration of a given structure.
Private international law issues such as Shari’ah law, matrimonial property regimes or forced heirship rules might restrict the choice of jurisdiction or vehicle. If such considerations are in issue, it is important to identify this at the outset to prevent the structure being frustrated or challenged at a future date.
PRE-EMPTING POTENTIAL CHALLENGES
Potential challenges to a structure will vary greatly depending on clients’ circumstances. Challenges may be directed at the settlor, a beneficiary or the trustees themselves. Claims may arise out of matrimonial or insolvency proceedings or on the basis of undue influence, or of the expectations or rights of legitimate or illegitimate heirs or creditors.
In certain parts of the world, kidnapping or political threats such as regime change have long been considered risk factors. Dissipation by spendthrift or non-commercially minded family members is always worthy of a mention too!
A structure with the means to combat these challenges will add to the potential for endurance and durability. For each jurisdiction, advisers should consider the period during which applications may be made by creditors to set aside the structure as well as the processes for and enforceability of foreign judgements.
Certain structures, such as trusts, may confer enforceable proprietary rights and rights to information which may be undesirable where a challenge from family members is a risk. The integrity and quality of local professionals, their familiarity with structuring and succession issues and a solid legal and financial infrastructure will all be relevant.
Advisers should remember the “softer” practicalities of structuring. Simple factors such as time zone and language can make a structure more (or less) user friendly for the family it was established to benefit and can often make or break a structure’s long term effectiveness.
Time is well spent making all parties aware of the implications of the proposed structuring particularly in terms of the level of control to be retained by the family and the accountability of third parties such as trustees, protectors or enforcers.
Only when a client’s objectives, circumstances and the likely challenges (both internal and external) to the structure have been considered is it possible to advise on the type and location of entity which best matches the client’s requirements. While some newer jurisdictions and vehicles are highly attractive on paper, for clients with long-term wealth structuring objectives, the certainty and protection offered by choosing a reputable jurisdiction and a widely recognised entity should not be underestimated.
The changing economic, legislative and tax climate worldwide means that any structure should be kept under review and it is unlikely that a succession strategy put in place today will last unchanged forever. Frequently the most effective solutions are the simplest, but in this day and age, flexibility is now likely to be a pre-requisite to the success of any structure.
James d’Aquino and Rachel Morris, Charles Russell LLP