Series on Business Succession 4 A Family Wealth Management Story



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Many wealthy individuals are reluctant to make a lifetime transfer of wealth because they feel that they will lose the ability to control their assets and they are also concerned that a lifetime transfer will result in spoiled and unproductive heirs. With effective planning these issues can be addressed.

For wealthy individu- als, assets are often placed in some form of asset structure, for example, in a trust. The dispositive terms of those trusts can be thoughtfully drafted to address particular family goals and objectives, and the asset structure must be able to accommodate the senior generation to maintain decision-making authority in the family assets despite the assets being settled into a trust, if he wishes so.

Asset structuring for family wealth preservation
Family wealth need to be protected and preserved against all sorts of potential threats, such as rash litigation, marital dispute, family discord, incapable or profligate heirs, international tax issues, economic upheaval and even expropriation due to political or other unforeseen events.

By judicious use of some of the estate planning tools in a structured order we can ensure that efficient administration, transparent information and equitable distribution of family wealth can be achieved successfully across multi- generations. While not all risks and disasters can be anticipated and managed, a sound approach to asset structuring can provide a better protection from risks that could bring down family wealth over time.

Trust

The most popular tool for wealth and asset protection is a common law trust. The use of trust is a common way for individuals to transfer assets to their children and grandchildren during their lifetime. An individual may establish a trust to avoid probate, to reduce potential estate tax liability (if owned foreign assets), to provide for the special needs of a disabled child or grandchild, to fund a child or grandchild’s education or to protect their assets out of the reach of their creditors.

A trust is a tripartite contract which regulates the relationships between the settlor (one who establishes a trust), the trustee and the beneficiary. Trust is a legal vehicle which can be used to transfer ownership of assets effectively, by defining future distribu- tion policy of funds, delay the distribution of funds if certain criteria are not met as well as to achieve other objectives. A traditional trust structure is shown in figure 4.1

A trust is a highly controlled legal entity which in general, has a set life and duration. A trustee can only exercise his duties based on a set of general principles and specific documents including a trust deed and a letter of wishes.

When you set up a trust, you will need to appoint a trustee that can and will exercise an independent judgement to administer the trust. However if the settlor has considerable influence on the trustee and exercised extensive control over the trust property, this will render any court’s decision that he was an equitable owner of the trust and thus the trust as a separate entity as invalid. This is why many high net worth individuals may equate trust to loss of control.

Nevertheless, due to the increasing demand there is the need for Trusts Act to be remodeled to accommodate the settlor’s desires for retention of control. For this reason offshore jurisdictions like Labuan, British Virgin Island and Jersey has the flexibility to offer reserved powers trusts that are governed by their Trusts Act to settlors, which will not invalidate a trust. In addition there is also flexibility in the duration of a trust, which could be perpetual, fixed or convertible between fixed and perpetual to cater for different needs of the settlors.

For very wealthy families seeking to avoid excessive scrutiny and preserve family privacy, an asset structuring approach that are multi-jurisdictional will be appropriate and have many advantages. This will preserve income and assets from litigation and taxes, protection against prying corporate rivals and journalists trying to unravel the extent and nature of a family’s wealth and business operations.

In setting up an international asset structure or a complex domestic structure, it is advisable for any wealthy family to consider a diversified approach to asset structuring and trustee roles as shown in figure 4.2.

The above figure shows a diversify approach that is multi-jurisdictional nature and uses two trustees. As it is extremely important to select the best possible trustee for the family’s wealth, professional corporate trustees and private trust companies are common options available for consideration.

A Private Trust Company (PTC) is usually a corporate entity, controlled by the family of the settlor or the beneficiary, which operate as the trustee of a family trust. This combi- nation of trust and PTC can be a convenient approach to private asset structuring and is useful for any wealthy family seeking an integrated approach to offshore structuring and protection for family assets.

For the settlor, the key advantage of establishing a PTC is the additional element of control which the PTC can provide. However if the settlor or his family intended to be shareholders of the PTC, the potential tax consequences of that ownership need to be assessed. Therefore ownership would usually be recommended to be through a purpose trust or a foundation.

On a practical level, a PTC ensures more privacy in relation to the trusts, and allows for rapid commercial decisions to be made. The annual costs are often significantly lower than it would be should a public trust company run the trusts. However the establishment cost of a PTC structure would be substantial and therefore a feasibility study is required to determine the viability of PTC structure. Due to the cost, PTCs are feasible for large corporations or for very large family structures. For the latter, when the cost is outweighed by the advantages of having a dedicated trustee to look after a complex structure and the control provided to the family, then the family can proceed to set up a PTC.

In the next issue we will look at other means of asset structuring that will also allow the business owners to keep control of their assets.

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