Bespoke structuring on the rise

According to a 2016 report on ultra-high-net-worth individuals, 212,615 individuals in the world hold a total of over $30 trillion in wealth. Put differently, 12% of the world's wealth is controlled by just 0.0004% of the planet's adult population. By 2020 the number of ultra-high-net-worth individuals is anticipated to reach 318,000 with compound annual growth of 9%. In short, the rich are getting richer and more numerous. Consistent with this theme, there has been an increase in instructions from ultra-high-net-worth individuals and their advisers and a drive towards more bespoke and complex structuring.

Filling the vacuum left by a founding patriarch or matriarch is often a pivotal moment for a family. Having a coordinated succession strategy and tackling succession issues and concerns early, before the pivotal event can usually reap rewards later. Issues associated with succession, notably after the death of the founding patriarch or matriarch, have long been identified as one of the major impediments to the creation of further wealth and the erosion of existing wealth. Substantive trust and probate litigation can materially erode family wealth. Providing for an orderly transfer of wealth from one generation to the next is one of the key drivers to successful private wealth structuring. Founding patriarchs and matriarchs are increasingly motivated by legacy and a desire for dynastic structures to stand the test of time, thereby ensuring the benefit of future generations of the family.

Where ultra-high-net-worth clients come from and why they are structuring

In Jersey, there has recently been a marked increase in instructions from ultra-high-net-worth individuals from the Middle East and those advising them. The motivation to structure and restructure family assets is being driven by a number of factors, particularly with concerns surrounding political instability and nation-state sovereignty following the Arab Spring and the continuing turmoil in Syria, Iraq and Libya. These factors have prompted ultra-high-net-worth families from the region to scrutinise where and how they structure their assets.

The continued growth of London both as a home for Middle Eastern families or simply as a safe refuge or location for investment is another factor as to why clients are choosing Jersey structures. There has also been an increase in instructions from ultra-high-net-worth individuals from the Far East. Many of the factors which are driving structuring for Middle East clients apply equally for Far East clients. These factors include the following:

  • to retain a measure of control and participation in the family – particularly noting the high number of Asian businesses held privately by families;
  • to ensure the orderly transfer of wealth from one generation to the next;
  • to protect against seizure by political means;
  • to avoid estate duties and probate formalities;
  • to provide flexibility to meet changing circumstances;
  • to protect against profligacy; and
  • to ensure confidentiality.

Ultra-high-net-worth families are becoming increasingly international both in terms of location of individual family members (eg, members attending universities in the United Kingdom or the United States) and the location of family assets, many of which have long been held outside the Middle East or the Far East. Patriarchs and matriarchs increasingly want second and third-generation beneficiaries to take an active role in family businesses, which has led to a call for more sophisticated structures that allow for more control and participation to be vested in the family and future generations.

Jersey

Jersey is a major financial centre and has been at the forefront of global finance for over half a century. It has a long tradition of political stability and close links with the United Kingdom and Europe. High quality services are available, both to act as trustee and to enable a trustee to seek legal, financial and investment advice. The island has strong legal foundations and its trusts legislation is frequently used as the model for similar laws in other jurisdictions together with an increasing body of judicial authority interpreting trusts law. In Jersey, the legislation applicable to trusts, companies and foundations places a strong emphasis on the importance of flexibility allowing for structuring to be tailored to individual client requirements.

In addition, Jersey is readily accessible from the United Kingdom so for Middle East and Far East clients with business interests or family connections in the United Kingdom, choosing a Jersey structure also makes practical and logistical sense. The legal profession in Jersey is also experienced in advising on trusts and other structures.

Sharia compliant bespoke structures

For Middle East clients a Jersey trust or foundation can be Sharia law compliant. The legislation governing trusts and foundations is sufficiently flexible to enable the creation of trusts and foundations that are fully or partially compliant with Sharia law, notably with regard to the Islamic rules of inheritance and restrictions on investment. Inheritance and the investment of assets are usually two key areas which require careful consideration in the structuring of assets for Middle East families. Private wealth structuring that is compliant with Sharia law is a growing area – research forecasts that Islamic finance products are set to grow not just in private wealth management, but also at a corporate level where access to Islamic capital markets is being sought.

Structuring trends

There is an increasing demand from Middle East and Far East clients for trust instruments drafted with reserved powers (eg, a reserved investment power). Settlors from these jurisdictions want control – in varying degrees – over key aspects of the trust, and the absence of sophisticated anti-avoidance legislation in many of the jurisdictions in the Middle East and the Far East means that from a fiscal perspective the settlor may not need to be wholly disconnected from key aspects of the trust. Drafted properly, reserved investment powers can assist to mitigate trustee risk. However, there can also be pitfalls with their use. Trustees should consider the application of reserved powers carefully and on a case-by-case basis rather than adopting a 'one size fits all' approach to their use.

There has also been an increase in the use of private trust companies – rather than transferring assets to a service provider's trustee, some clients may prefer to establish their own private trust company (PTC) and for the PTC to act as trustee of one or more of the family trusts. Founders increasingly want more control and family participation. To this end, experienced family members and trusted advisers with experience and knowledge of the family and the family business or other assets being transferred into a trust can become board members of the PTC usually to sit alongside directors provided by the professional service provider. A PTC board comprised on this basis with in-house knowledge and skills will often be able to take key decisions quickly when circumstances require. A PTC can allow for the next generation of the family to become educated and experienced with the PTC's activities, assets and values before important decisions need to be made (eg, through the membership of an investment committee).

Another noticeable trend is that the scope of legal instruction is becoming wider and more involved – families are increasingly seeking advice on long-term strategies to preserve and enhance family wealth and to ensure an orderly transfer of wealth from one generation to the next. This might include setting up a PTC established to fulfil the specific needs and requirements of a family or drafting a family charter to provide a road map for the family and future generations on matters including:

  • inheritance;
  • distribution policy;
  • the operation of the family business;
  • investment;
  • family participation;
  • real estate; and
  • marriage or co-habitation (including the importance of pre-nuptial agreements).

Demand for other legal services

Consistent with the report about the growth in ultra-high-net-worth families and individuals, there is also a shift in the size and geographical reach of such families. Ultra-high-net-worth families are creating increasing wealth. As the family grows, its members may be located far and wide thereby requiring legal advice in multiple jurisdictions. Many of these families and the businesses they own are operated like international corporates. This can be seen in the increasing demand from ultra-high-net-worth families for other legal services, including corporate, banking, funds and private equity.

Comment

It seems clear that clients will continue to want structuring options in stable and established jurisdictions which provide for both the preservation of wealth from one generation to the next and for a high degree of participation by the family. This means that Jersey remains an attractive proposition for Middle East and Far East ultra-high-net-worth individuals looking to structure assets and demand for more bespoke structuring and for private trust companies is expected to continue. The nature of this work means that clients are looking for long-term relationships with their professional trustees and legal advisers.

For further information on this topic please contact James Campbell at Ogier by telephone (+44 1534 514 000) or email (james.campbell@ogier.com). The Ogier website can be accessed at www.ogier.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.