James d’Aquino and Rachel Morris, associates at law firm, Charles Russell, outline the myriad factors to be weighed by advisors when choosing vehicles and jurisdictions for their high net worth clients.

As international jurisdictions seek to become more competitive and appeal to a clientele whose circumstances and demands are becoming increasingly mobile and complex, the array of options available for wealth structuring advisors has grown ever wider, with any number of variations for residence, governing law, place of incorporation and location of administration.

Frequently clients’ requirements demand a complex patchwork of these cross-jurisdictional structures all working together for a common purpose.  Asset protection, a legitimate concern for confidentiality and succession planning are commonly driving forces, and each jurisdiction should be considered on its merits.  A number of common law jurisdictions now recognise and offer civil law entities.  In the last four years alone Guernsey, Jersey and the Isle of Man have all enacted a legislative framework for the establishment of foundations. Similarly, a number of civil law jurisdictions have ratified the Hague Convention on the recognition of trusts and a number, having frequently been used as places of administration in the past, now also have their own tailored trust laws and sizeable trust industries. 

There will be a number of factors to evaluate when considering the ideal structure for clients, but they will always include the following.

Understanding a client’s rationale

Advisors’ initial efforts should focus on understanding the client’s rationale for establishing the structure. There are many possible motivations or issues and, while tax efficiency is relevant, it will not always be the driving factor.

Is it intended that the structure will form part of a long-term succession plan for established family wealth, or is the structure intended to be a short-term vehicle in the event of a planned liquidity event, for example on the sale of a business? The requirements of these two possibilities are quite different. The former usually involves a strong degree of separation of the legal and beneficial ownership of the wealth; the latter usually requires that a greater degree of control remains with the settlor.

Is it intended that the structure will be for particular purposes or to provide for beneficiaries only?  Time should be invested in considering the family who will benefit and what their requirements, residence status and respective tax positions are.  Advisors will also need to consider the existing structures in place and the extent to which these will be left intact, work with or within the proposed new structures.

Assets

Advisors should consider the assets which will be held by the structure.  Are the assets liquid and transferable, or are they immovable?  Is the structure going to hold real estate or sensitive commercial assets?  If so, there may be relevant domestic restrictions on foreign ownership, such as the Lex Koller law in Switzerland restricting foreign ownership of property.  For commercial assets, entities with a separate legal personality may be required to limit liability.  Consider also whether there are restrictions or tax considerations on ownership of specific assets by particular entities, for example, ownership of French assets in trusts.

Furthermore, bearing in mind the home jurisdiction of the client and assets, are there private international law issues to consider?  It is important to evaluate whether factors such as forced heirship or Shariah law will apply to the client or the relevant assets, as well as what the applicable matrimonial property regime is. Is it intended that the proposed structure will work in concert with these rules (for example, a Shariah-compliant trust), or work to defeat these rules?

The recent UK case of Slutsker v. Haron Investments, whereby a husband unsuccessfully (on the facts) attempted to establish that the Russian Family Code prevented UK property having been validly transferred into an offshore structure, highlights the potential pitfalls for those ignoring these questions.

Challenges, protection and risk

Depending on a client’s circumstances, potential challenges to a structure could come from a variety of sources.  They could be directed at the settlor, a beneficiary or the trustees themselves.  Claims may include matrimonial proceedings, insolvency or undue influence, claims made by legitimate or illegitimate heirs, or creditors.  In certain parts of the world, political threats such as regime change have long been considered a risk factor.

It is important to ensure that the chosen structure and the jurisdiction’s legal system and local courts are as robust as possible to fend off any attacks.  The integrity and quality of local professionals, their familiarity with trust and succession issues and a solid legal and financial infrastructure will all be relevant. 

Trust structures may confer enforceable proprietary rights in trust property and rights to information upon beneficiaries which may be undesirable where there is a risk of challenge from a family member.  Where the risk of challenge is likely to be from third parties, advisors should consider the period of time during which a structure could be set aside by creditors.  The local court’s recognition of foreign judgments and matrimonial orders, and the process for enforcing these may be relevant.  Clients are increasing distrustful of jurisdictions with reciprocal enforcement of judgments or fast-track enforcement procedures (as is now the case within the EU) and jurisdictions which have enacted specific legislation to provide protection in these circumstances have found favour.

Confidentiality and disclosure

Clients will be interested in what information is required to be a matter of public record and what form of local presence is required by the entities they are establishing.  The local presence requirements of many foundations and certain trusts may mean that an outsider will be involved in decisions on distributions and investments which may be undesirable. 

In the event of a change of law or circumstance, the ability to re-domicile an entity or to alter its place of administration will also be vital.  As a general rule, registered entities are usually more difficult to migrate.  Certain entities, such as the Bahamian executive entity cannot at present be re-domiciled because an executive entity is not recognised as a legal entity in other jurisdictions.

Control and accountability

It should not be forgotten that having painstakingly reviewed jurisdictions and entities, the success of a structure will depend on the clients’ individual circumstances and their willingness to buy into the recommended structure.  It is vital to ensure that all parties are aware of what the implications are for the envisaged structure and how it will work in practice. 

Certain structures and jurisdictions allow families to retain an element of control through reserved settlor powers, which might include powers to direct investment or appoint trustees.  For higher value structures, the use of a private trust company or a managed trust company is an attractive option to assist clients to maintain an appropriate level of control and, subject to other constraints (for example, tax), clients may be able to sit on the board of such a PTC.

For structures which require clients to release significant control of their assets, accountability will be an important consideration.  Trustees’ fiduciary obligations and the appointment of a protector or enforcer may in some scenarios provide sufficient comfort.  However, for families unwilling to give up control, trusts may not be appropriate, particularly given the likely adverse tax consequences and possible accusations of a sham trust if they fail to do so.

Other practicalities

In creating the ideal structure for particular clients, advisors should not forget the softer practicalities of maintaining a structure and ensuring that it is user-friendly for the family it was set up to serve.  Consideration should be given as to whether time zones or language may pose a problem.  The quality, skill set and cost of appropriate trustees and administrators must also be primary considerations.  

The best choice of trusts, foundations, limited partnerships, PTCs or other entities and selection of jurisdictions will be determined by balancing all of the above factors.  There is no magic formula or single structure or combination of structures which works for all (or even a majority) of clients.  Each client’s individual circumstances must be assessed and the structure tailored accordingly.

The certainty and protection afforded by choosing reputable jurisdictions and widely-recognised entities which are well tested in law should not be underestimated.  Advisers should consider carefully whether traditional entities are a safer bet than newer entities, where the outcome if things go wrong may be less certain.  Given the current climate of legislative change and increasing regulation worldwide, and the inevitably changing needs of clients, the chosen structure should be kept under review; a structure put in place today cannot be expected to last forever in its original form and should be flexible enough to allow for multiple changes. 

Spoilt for choice both in terms of combination and range of entities and jurisdictions, it should be possible for advisors to find a suitable structure for any client regardless of the complexity of their affairs. Paradoxically, the most successful solutions are frequently those which adhere to the guiding principle of simplicity.