The Channel Islands are key jurisdictions for wealthy entrepreneurs who are keen to preserve their family wealth for future generations.
Many individuals think of the traditional trust as being the best way to manage their estate planning needs. However, in the Channel Islands, there is a growing client base from civil law jurisdictions unfamiliar with the trust concept launching alternative structures.
Recent examples include foundations, private family funds and, increasingly, the Family Limited Partnership (FLP). The name implies that it would be ideally suited to the wealthy family but what is an FLP really and, in times of austerity, why is it that we are seeing an increase in demand for this more expensive “designer label” estate planning tool?
THE BIRTH OF THE FLP
FLPs were developed in response to the significant tax disadvantages when creating trusts that were introduced in England and Wales by the Finance Act 2006. While initially developed onshore, the concept of FLPs was also harnessed and developed offshore in the Channel Islands as a flexible investment structure and a viable alternative to the traditional trust due to its ability to transmit wealth to younger generations while allowing patriarchs to retain a sensible level of control. This is particularly important for clients using the FLP to transmit the family business or “golden egg”, where a loss of control is so unpalatable.
HOW DOES IT WORK?
An FLP is a contractual relationship, which is structured as a limited partnership, and holds investments and assets often on behalf of a wealthy family. There are two types of partners in FLP structures - General Partners (GPs) and Limited Partners (LPs). GPs are solely responsible for the management of the FLP and have unlimited liability, whereas LPs invest in the FLP and enjoy the benefits of limited liability. Conceptually, the GP role is akin to a trustee and the LP is akin to an enfranchised beneficiary.
The patriarch establishes an FLP by transferring his assets into the FLP and, in return, he receives FLP interests. These interests can then be gifted to younger generations of the family, who will be LPs, to provide income and capital entitlements for them in accordance with their particular interest. This has the key advantage of passing value down while still retaining management conduct and control.
In order to ensure a satisfactory level of control, the patriarch will often establish an FLP with one of his companies as the GP. As the GP is the means of controlling the FLP and, consequently, the devolution of the family wealth, the board of the GP will usually consist of the patriarch and/or his key advisers and family members (in a similar manner to Private Trust Companies). Consideration should be given to establishing a purpose trust or foundation, both of which are valid in Guernsey and Jersey, to hold the shares in the GP to ensure the smooth devolution of those shares in the GP following the death of the older generation.
The assets of the FLP are then held in accordance with the Partnership Agreement and control can be built in to protect the interests of young/spendthrift family members. As the younger generation come on board, they will enter into an Adherence Agreement promising to comply with the terms of the Partnership Agreement.
FLPS COMPARED TO OTHER STRUCTURES
FLPs are more robust than the traditional trust and can (but do not have to) have separate legal personality, providing a strong asset protection structure whilst allowing patriarchs to retain a significant element of control.
FLPs can also be used to hold assets that a professional trustee, with investment duties owed to beneficiaries, may be reluctant to hold in a traditional trust, for example, private company shares or ‘toys’.
However, FLPs are not always as flexible as other estate planning tools and rebalancing partnership interests to adapt to changes in family circumstances is not always straightforward. Costs can also be prohibitive for some clients. A figure of £10 million is often cited as the asset level needed to make the set up and ongoing administration costs viable - hence the “designer label” status.
In the Channel Islands we are seeing a greater level of interest in FLPs, perhaps due to tax advisers’ recommendations or due to the relatively recent availability of the orphan foundation structure to hold the GP’s shares.
The law in both islands is flexible enough to allow a very bespoke agreement to be put in place to cater for the often very detailed and prescriptive demands of clients who can afford and are used to having something tailor made.