With an ever-increasing array of vehicles available to wealthy individuals and families to provide for their succession and estate planning needs in an ever increasing number of jurisdictions, it can be difficult for them to determine which structure will be the best option for both them and future generations.
Any solution will be determined by the principal’s objectives - what are they trying to achieve? Will there be a liquidity event in the near future? Do they want to implement a succession strategy? Are they concerned about asset protection? The principal’s and wider family’s residence and tax status will need to be borne in mind as well as the location and nature of the assets they wish to be held. Some jurisdictions do not recognise certain structures and, although tax planning may not be central to the individual’s objectives, there will need to be certainty in terms of the tax treatment of whatever is implemented as well as affording a tax-efficient solution (while the assets are held in the structure as well as on extraction/distribution of funds) .
How will the planning put in place operate in conjunction with any existing structures? Does the individual wish to achieve segregation between various assets (for example, personal, business and ‘risky’ assets)? If the vehicle is intended to be part of a long term strategy, it will be important to ensure that it is as portable and flexible as possible? Can it be migrated to another jurisdiction and assets appointed to an alternative structure?
Depending on the principal's and family’s needs and objectives, as well as the nature of underlying assets, it may be that a combination of the vehicles outlined below is used to attain the ‘right’ result.
The trust continues to be the most flexible type of vehicle available, taking a number of different forms and continuing to evolve in response to clients’ needs, including purpose trusts (usually seen in the context of charitable vehicles and as shareholders of PTCs), reserved or directed powers trusts (with directed powers trusts typically used to hold investment portfolios) and STAR and VISTA trusts (bespoke to Cayman and the BVI respectively). Depending on the governing law and type of trust, the perpetuity period can be of unlimited duration, thereby providing a true succession vehicle.
The trust is a well-established concept in many jurisdictions (including the UK) and there is a body of case law in these jurisdictions, offering certainty to individuals in terms of both tax treatment as well as how issues should be dealt with by the courts if any arise. Certainty is key to many individuals. They do not want to be a test case and, for this reason, a trust may well be the preferable option over other vehicles.
The idea of having a bespoke vehicle created with the sole purpose of acting as a trustee of one or a small group of family trusts is still very attractive and will continue to be. For this reason, private trust company (PTC) structures continue to be very popular. PTCs can also allow the principal to continue to be involved in the management of assets held in trust (subject to tax considerations) within a well thought out control structure. It is common to use a PTC in the context of more complex or risky trust assets (such as trading companies) where specialist expertise may be required in managing those assets and an institutional trustee may be uncomfortable with holding them. Typically, therefore, the board of directors of a PTC will comprise a mixture of personal/business advisors to the principal in question as well as third parties (such as representatives from an institutional trustee).
PTCs are permissible in a number of jurisdictions and, therefore, this structure affords portability. The selection of a particular jurisdiction will usually be determined by proximity to the principal, the nature of the underlying assets, confidentiality as well as the regulatory framework of the jurisdiction in question.
PTCs are, however, costly to run so this will need to be borne in mind (particularly in the context of the value of underlying trust assets). It is important to note that, if too high a degree of control of the structure rests with an individual/group of individuals who are resident in a single high tax jurisdiction, there is a risk that this could bring the whole structure within the scope of tax in that jurisdiction and so PTCs may not be appropriate where the principal and/or advisers are resident in the UK.
Limited Partnerships (LPs)
Over the years, LPs have also been used by families to deal with succession issues by getting younger generations involved in the family business gradually without fully divesting control to those generations and maintaining oversight via the General Partner (the GP) of the LP. This structure is the classic fund structure and therefore will be familiar to many in the context of running businesses and can also deal with the issue of management of underlying assets identified above in the context of PTC structures where the principal is UK resident.
If the principal wishes to be involved in the underlying business assets by having, say, board level control (rather than, for example, an advisory or consultancy agreement with the underlying companies), this control may be risky from a UK tax perspective if that individual is UK resident. This structure can allow that individual to continue to be involved in the business (via the GP) while ring-fencing any risks associated with this involvement to the GP.
Again, many jurisdictions recognise LPs and therefore this structure would be portable but the tax transparency of the structure will need to be reviewed in conjunction with the proposed partners in the LP and their tax/ residence status. This can also be a costly structure both to implement and operate going forward so is generally only worthwhile for assets of significant value, or, rarely, for difficult families.
Foundations are an important offering and, in response to this, an ever increasing number of jurisdictions offer this type of structure. The idea of legal personality usually appeals to individuals from civil law countries. They can, as a general rule, find the concept of transferring legal title to, and surrender formal control over, hard-earned assets to someone else difficult. Accordingly, they find it easier to ‘buy into’ the idea of a foundation as, in their minds, it enables them to park their assets in a ‘neutral’ territory within a separate legal personality which, again, can be of unlimited duration.
However, as there is still uncertainty regarding the UK tax treatment of foundations, this may not be the most appropriate structure for a family with UK connections. It is also important to note that the legislation in the newer foundations jurisdictions is still evolving and has yet to be tested. Again, from the perspective of certainty, this will need to be borne in mind.
Although the sheer variety of vehicles now available as wealth management and structuring tools can sometimes be perplexing, due to this variety it should also be possible to find a suitable solution no matter how complex the family circumstances and assets in question.