The best plan is worthless if not properly executed.
This article follows on from our earlier discussion on issues clients may need to consider before passing assets to their intended heirs. Here, we highlight some offshore tools that can assist clients in bringing their planning to fruition. Given that each family's circumstances will differ, the comments and thoughts set out below are general only, and specific tailored advice should be taken before any action is taken. Further, no such transfers need to be made, but the downsides of not doing so may include tax inefficiencies and the effective freezing of the business in the event of the owner's incapacity or death.
What's in the offshore toolbox?
There are a wide range of potential offshore planning tools for clients to utilise as they seek to give effect to their particular succession plans, including wills, joint tenancies, trusts, foundations, and family limited partnerships. The most appropriate tool will ultimately be determined by a combination of the client's particular circumstances and wishes, onshore considerations, and the particular assets in question. Advice should be obtained both in respect of the intended structure and on the impact of any relevant local legislation or systems of law, such as forced heirship regime rules (FHR Rules), that may impact the proposed planning. Similarly, relevant local advice should be obtained on the particular asset(s) as there may be restrictions under local law concerning the ownership of certain asset classes.
Wills
An offshore-specific will should generally speed up the process
of passing offshore situs assets to the intended heirs (or
structure) as it will allow the offshore application for a grant of
representation to be run in parallel with the onshore applications,
dealing with the offshore assets (typically shares) only. Although
offshore centres do not generally impose forced heirship regimes on
individuals who are not domiciled in that jurisdiction in respect
of their moveable estate, this does not conclude matters. Despite
the fact that offshore jurisdictions allow for testamentary
freedom, any FHR Rules attaching to or impacting the deceased's
estate by reason of their domicile or place of residence will, in
effect, be imported into the relevant offshore jurisdiction. To
plan around these rules, the client will need to either place the
assets in a trust or other offshore structure during their
lifetime, ensure that they are not the direct owner of the relevant
asset, or arrange for the assets to be held by way of joint tenancy
with rights of survivorship.
A will may be a helpful tool, but it is unlikely to provide a
complete solution given the potential delays in obtaining a grant
of representation. Pending receipt of which, the assets (in the
case of shares, the business of the company) may be
'frozen' and the risk of any planning based on the use of a
will being set aside.
Joint tenancy
If a valid joint tenancy is established over, say, shares in a
BVI company, under which each of the joint tenants enjoys the
rights of survivorship, then on the death of the first joint
tenant, the relevant property (the shares in the BVI company) will
vest automatically in the survivor without the need for any grant
of representation. The transfer of such property happens
automatically and should not, in principle, be affected by any FHR
Rules. On paper, a joint tenancy would appear to represent a
straightforward and attractive method to cause assets to end up in
the hands of the intended heir(s).
However, it is a blunt tool with several potential shortfalls. From
the point at which the joint tenancy is declared, the asset(s) in
question will be deemed to form part of the estates of each of the
joint tenants. Consequently, the assets would be at risk from
creditors of either joint tenant or on either of their divorces.
This form of planning is typically undertaken between spouses/civil
partners rather than between different generations. However, if the
potential risks are seen as being outweighed by the convenience and
ease that this option affords, it may be a useful tool for a client
looking for a quick and straightforward planning device.
Trusts
Trusts have long been seen as the 'default' tried and
tested tool by which a client can put assets in a structure that
will survive their death and over which they can have some degree
of influence through the terms of the instrument by which the trust
is established. A trust is an arrangement in which one person (the
trustee) holds title to property (the trust fund) given to the
trustee by another (the settlor) subject to an obligation for the
benefit of another (the beneficiary). A trust can be established
during the client's lifetime or on death (for example, through
a will).
The advantage of establishing a trust during the client's
lifetime is that it allows for the trust to be stress-tested, with
amendments being made as required or desired. Trusts are incredibly
flexible and long-established succession planning tools, allowing a
client to specify who can benefit and upon what terms, and what
restrictions and parameters relating to the investment and general
administration of the trust fund should apply. A trust can also
allow, through 'firewall' legislation, a client to leave
assets upon terms that would otherwise not be permitted under
relevant FHR Rules. However, the benefit of a trust in seeking to
vary or set aside FHR Rules will be limited to moveable assets not
situated in the jurisdiction in which the client died domiciled.
Immovable property is potentially at risk of an order being made by
a local court where there are FHR Rules in play.
A trust can also provide assistance from an asset protection
perspective by separating the client from the assets held upon the
terms of the trust. However, if the trust is established with the
intention of defrauding creditors or where there is the prospect of
such claims or insolvency arising, it risks being set aside by the
courts. Offshore trust legislation generally allows for a settlor
to reserve to themselves or grant to third parties a wide range of
powers relating to the day-to-day administration of the trust, the
investment of the trust fund, and the conferring of benefits on
beneficiaries. These powers allow a client to control or influence
the management and administration of the trust, but the greater the
level of control and influence retained, the less effective the
structure will be from an asset protection perspective.
Aside from the terms of the trust, the client will need to be
comfortable with the identity of the trustee and have full
confidence that it will administer the structure appropriately.
Establishing a trust during the client's lifetime allows them
to see how the trustee administers the trust in practice and
whether this accords with their hopes and expectations. A key
'plank' in allowing a client to establish a trust through
which individuals may benefit in a manner that would not otherwise
be permitted under FHR Rules are the 'firewall provisions'
that many offshore jurisdictions have introduced.
Although the precise terms of each jurisdiction's firewall
provisions differ, broadly they provide that where the law of that
jurisdiction is chosen as the governing law of the trust, that
choice is valid despite the fact that there may be no other
connecting factor to that jurisdiction. All matters concerning the
administration of the trust should be determined by the law of that
jurisdiction, and neither the trust nor any transfer of property to
the trust may be challenged by reason of the fact that either a
foreign law does not recognise trusts or that the particular trust
was established to defeat or otherwise vary FHR Rules or rights
third parties may have by reason of their relationship with the
settlor.
Trusts are therefore a tried and tested effective way for many
clients to establish a structure to hold their assets both during
their lifetime and thereafter. However, trusts are by no means the
perfect solution, and so we turn now to consider two alternative
tools that may provide a better and more complete solution for some
clients.
Foundations
In contrast to trusts, foundations are legal entities in their
own right and can hold assets and enter directly into transactions
with counterparties in their own name. The day-to-day
administration of the foundation is undertaken by a council or
board of directors, depending on which jurisdiction's offering
is chosen. Given this, a number of the uncertainties that
counterparties may have when transacting with trusts through the
trustees fall away, and so, in principle, foundations may make
interactions with counterparties more straightforward.
There is a divergence in the approach that offshore jurisdictions
have taken with regard to foundations. Some have yet to legislate
for them (BVI), some have decided to create a new kind of entity
(Jersey and Guernsey), while others (Cayman) have decided to adapt
an existing entity (a Cayman company) and from this create a new
one (a foundation company). A foundation will generally allow a
client to do all that they want to do with a trust and possibly
more, such as modifying the information and enforcement rights of
the 'beneficiaries' of the foundation, the ease of dealing
with counterparties, acting as an ownerless holder of assets, or
providing that the memorandum and articles of association are
unamendable and ensuring that the death of the client is a
'non-event' in respect of the ownership of the assets held
by the foundation.
Foundations, on paper, may appear to be a more attractive and
flexible tool compared to the traditional trust, and for some, this
will likely prove to be the case, particularly if the concept of a
trust is one that the client is uncomfortable or unfamiliar with.
However, foundations are still seen as the shiny new and often
untested tool in the toolbox, meaning there may be uncertainty as
to how onshore jurisdictions will treat them from a taxing
perspective and how the courts will deal with them. Notwithstanding
these points, foundations represent an incredibly flexible planning
tool and may very well provide a solution in situations where a
trust does not or cannot meet all of the client's planning
needs.
Family limited partnerships
Family limited partnerships are a further alternative to trusts.
The day-to-day administration is vested in and undertaken by the
general partner, with the limited partners performing a passive
role, broadly akin to the beneficiaries of a trust. Typically,
business is undertaken on behalf of the family limited partnership
by the general partner, who also holds title to the relevant
property on behalf of the family limited partnership. In a family
succession context, the wider class of family members could be the
limited partners, with the client either acting as general partner
or, if a corporate entity is being used, sitting on the board or
owning the shares of that entity. Consideration would need to be
given as to what should happen to the shares of the general partner
on the death of the client.
Family limited partnerships offer many of the same features as
foundations in terms of providing certainty when dealing with
counterparties and the ability to limit the information rights of
the limited partners. However, a limited partnership's
treatment from an onshore perspective is typically likely to be
more settled compared to foundations and so may provide a useful
alternative to trusts for implementing a client's succession
plans.
Finally, a word of warning: a succession plan that involves the
seemingly simple option of blank (signed) share transfer forms or
having shares placed in the hands of a nominee with a standing
instruction that the assets be transferred to the intended heir(s)
on death will not be effective. The instructions will cease to be
valid and binding on the instant of death, and anyone who acts on
them thereafter risks exposing themselves to personal liability in
the event of a successful challenge from the rightful
(disinherited) heirs.
Conclusion
In conclusion, the effective execution of intergenerational
wealth transfer is paramount to ensuring that a client's
succession plans are realised without unnecessary complications or
delays. The offshore tools available, such as wills, joint
tenancies, trusts, foundations, and family limited partnerships,
each offer unique advantages and potential drawbacks. The choice of
the most appropriate tool will depend on the client's specific
circumstances, the nature of the assets involved, and the relevant
local laws, including forced heirship regimes.
Wills can expedite the transfer of offshore assets but may not
provide a complete solution due to potential delays and the risk of
assets being 'frozen'. Joint tenancies offer a
straightforward method for asset transfer but come with risks
related to creditors and divorces. Trusts remain a tried and tested
method, providing flexibility and asset protection, though they
require careful consideration of the level of control retained by
the settlor. Foundations offer a modern alternative with
potentially greater flexibility and ease of dealing with
counterparties, though they are less tested in some jurisdictions.
Family limited partnerships provide another viable option,
combining features of both trusts and foundations, with a more
settled onshore treatment.
Ultimately, tailored advice is essential to navigate the
complexities of intergenerational wealth transfer and to select the
most suitable tools for each client's unique situation. Proper
planning and execution can mitigate tax inefficiencies, avoid the
freezing of business operations, and ensure a smooth transition of
wealth to the intended heirs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
