The management of the wealth and affairs of ultra-high net worth individuals (UHNWIs) has evolved into a highly specialised industry, demanding tailored solutions for the preservation, growth, and intergenerational transfer of wealth. More complex planning strategies are required as the assets of wealthy individuals and families become increasingly global in nature, spanning multiple legal systems and tax regimes.
Family offices, established as private entities to manage the affairs of UHNW and high net worth (HNW) individuals and families, are central to this approach. These entities offer a broad range of services, from complex international investment management to succession planning and philanthropic advisory services. This article provides an overview of the key concepts relevant to family offices as asset-holding vehicles.
Asset-holding structures
A key decision in the establishment of a family office is the selection of an appropriate legal entity to hold the family's assets. Three of the most prominent entities on which we often advise are the trust, family investment company (FIC), and family limited partnership (FLP).
Trusts: trusts are typically established by a settlor (during their lifetime) or testator (through their will upon their death) by transferring the legal ownership of the trust assets to a trustee, who holds the assets for the benefit of a pre-determined class of beneficiaries. Trusts are often used as holding structures for asset protection and succession planning purposes because the underlying trust property is extracted from the estates of individual family members. Once the trust is established, the settlor passes control of the trust assets to the trustee, who is bound by the trust instrument to administer the assets in the interests of the beneficiaries. The settlor can provide specific guidance to the trustee on how the trust should operate, however there may be tax reasons why they should not be involved in the ongoing governance of the trust.
FICs: FICs are generally private companies established by families to hold investments and act as and estate planning vehicles. The company's governing documents can be tailored to meet the specific needs of the family, and different share classes can be allocated to each family member to determine their respective voting rights and economic benefits. In this way, the principals can retain overall control of the structure while passing the economic value down to their descendants. As the FIC is typically an opaque entity, the underlying assets will generally be taxable at company level, rather than in the hands of the shareholders, until a dividend/distribution is made to them (although the specific tax treatment depends on the tax residence status of each shareholder and the FIC).
FLPs: As an alternative to a FIC, wealthy families can use legal partnerships as a tax efficient means of holding wealth and transferring assets to next generations. In general, the family principals act as the general partners (or the shareholder/director of a corporate general partner) who retain management and control of the partnership. Beneath them, more junior family members are given an interest in the capital and income of the FLP as limited partners, each having limited control over the family assets. By separating the legal control of the structure from the economic entitlement of each partner, senior family members can retain control over the investment of the family's wealth and the distribution of income and capital, while the value of the assets is transferred to the younger generation. FLPs are generally regarded as 'tax transparent', therefore each partner is taxed on their portion of the FLP's assets equivalent to their interest under the partnership agreement, so the structure can be used to spread the tax burden across multiple family members.
Suitable Jurisdictions
The specific tax implications of each structure depend on the jurisdiction in which it is established and operated, as well as the tax residence status of the family members involved. Naturally, the most suitable jurisdiction and entity for a family's asset-holding vehicle should be assessed on a case-by-case basis, however, we have highlighted some of the key parameters to consider below:
- Tax efficiency: when setting up an asset-holding vehicle, it is important to take advice on domestic tax rules in the jurisdiction where the entity will be established to achieve tax efficiency. It is also necessary to consider the anti-avoidance rules of jurisdictions in which individual family members are tax resident to ensure the income and gains of the structure are not taxed in multiple jurisdictions.
- Political and economic stability: a stable environment is crucial for operating a long-term asset-holding vehicle, as sudden legislative changes can have major consequences on the structure and safety of the underlying assets.
- Asset protection: the legal framework of certain jurisdictions can shield local structures from foreign judgements. Common in 'offshore' jurisdictions, this firewall legislation can provide a layer of protection against creditors and divorce courts seeking to undermine the structure.
- Privacy and confidentiality: some jurisdictions offer greater privacy for the beneficial owners of local structures than others, however, local confidentiality rules are counteracted by international transparency regulations (such as the Common Reporting Standards or 'CRS').
Each jurisdiction has a unique set of advantages and disadvantages for establishing an asset-holding vehicle. We have summarised below some of the distinguishing features of the prominent jurisdictions on which we regularly advise:
Cayman Islands: Renowned for its favourable tax regime, which imposes no income tax, capital gains tax, withholding tax or inheritance tax, the Cayman Islands is highly regarded as a choice for offshore tax planning. The legal system of the Cayman Islands is based on English law, and provides robust protection mechanisms to shield domestic structures from foreign creditors and divorce courts, as well as protect the identities of the beneficial owners.
Jersey: Jersey is a politically stable, self-governing jurisdiction with a modern and sophisticated legal framework based on English law. Jersey levies no income tax on foreign income (ie income generated outside Jersey), while also providing strong asset protection from foreign court rulings. Developments in Jersey law have made the jurisdiction more attractive to individuals looking for a base for their international structures. The judiciary in Jersey is independent and very familiar with the asset-holding vehicles outlined above, and the island attracts a high standard of professional service providers to call on for local advice.
Singapore: An extremely popular location for family offices within Asia, Singapore hosts roughly 59 per cent of family offices in the continent. With a strong rule of law, robust regulatory environment, and high standard of living, Singapore offers a very favourable environment for family offices. Indeed, the jurisdiction has been attracting wealthy families and their advisors with tax incentives, and by removing regulatory barriers to family office establishment.
Hong Kong: Hong Kong features a robust legal framework rooted in English common law within an internationally recognised financial hub. Hong Kong operates a territorial tax system, only taxing local income, with no capital gains tax, estate duty or withholding tax on dividends. The local government has announced its intention to facilitate the establishment of family offices in Hong Kong with tax concessions for family-owned holding vehicles and development programs to retain talent. The political stability of Hong Kong has been challenged in recent years, but it remains a leading jurisdiction for family offices and wealth management.
Switzerland: Switzerland provides the ideal environment for wealth preservation, enticing family offices with long-standing traditions of discretion and stability. Switzerland features a decentralised legal framework, where individual regions (or 'cantons') have a high degree of autonomy to determine local tax rules. This system has enabled certain cantons in Switzerland to develop favourable tax regimes to attract foreign investment and talented professionals for family offices to draw on. Foreign nationals moving to certain cantons can opt to be taxed under the 'forfait' regime, which allows them to obtain a favourable tax ruling before migrating to Switzerland, giving certainty as to their tax position under local rules.
Luxembourg: Luxembourg offers political and economic stability alongside a range of unique and flexible investment structures for family offices, including the Specialised Investment Fund (SIF). Luxembourg law provides a high degree of privacy for beneficial owners, but local courts will recognise and enforce foreign judgments provided that the judgement is enforceable in its country of origin.
When establishing a family office, there is no 'one size fits all'; they are inherently bespoke structures and should be tailored to suit the family's unique circumstances, risk tolerance, and long-term intentions. Effective family office structuring requires a holistic approach that integrates legal, tax, and governance considerations with a strong emphasis on long-term stability and intergenerational planning.
This article was originally published by IFC, click here to read.
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.
