The right structure

The right structure

Key points

What is the issue?

In the next decade, USD15 trillion is expected to transfer to the next generation.

What does it mean for me?

With vast amounts of wealth moving from one generation to another, ultra‑high‑net‑worth individuals and families need to be acutely aware of their options.

What can I take away?

When advising clients on structuring trusts and foundations, it is important to plan strategically for the future. Choosing the right structure, in the right place and with the right trust partner is the key to maximising efforts.

 

The past 18 months has seen the world adjust to a ‘new normal’, with few industries escaping unchanged. Now, some sectors are returning to a pre‑pandemic way of life, while others have evolved  permanently.

For the wealth sector, the pandemic has engineered a shift for generational wealth transfer and shortened the timeline significantly.

Not only has the COVID‑19 pandemic accelerated the wealth of the ‘super rich’ by 27.5 per cent,[1] increasing the pressure on ultra‑high‑net‑worth (UHNW) individuals to get the wealth transition right, but it has forced older generations to re‑evaluate their plans to transfer their wealth to younger generations. For UHNW families, the protection and preservation of wealth, now and for subsequent generations, will be top of mind.

In the next ten years, USD15 trillion is expected to transfer hands to millennials, generation Z and generation Y, according to a recent IQ‑EQ and Wealth‑X report.[2] Additionally, for UHNW individuals with a net worth greater than USD100 million, 62 per cent are over the age of 75, highlighting the urgency of the transition. Pre‑pandemic, the wealth transfer for this generation was expected to begin in the next five years, but the impact of COVID‑19 on elderly generations has accelerated the wealth transfer planning timeline.

With vast amounts of wealth transferring hands, UHNW individuals and families need to understand their options and have the right infrastructure in place to facilitate a smooth transition of wealth. Trusts and foundations will play a key role in facilitating this transition and mitigating the risk of wealth depletion.

Especially in the current economic environment of low interest rates and rising inflation, conservation of wealth is essential for UHNW families and their family offices.

Protecting and distributing assets

Trusts and foundations are key asset‑protection tactics and can have a wide remit within succession planning. They offer families flexibility for how their assets are held, preserved and distributed in the long term.

Both trusts and foundations can be individually tailored to address the specific circumstances of an UHNW family and can be set up for an unlimited duration, allowing for maximum flexibility for the continuation of wealth across multiple generations. They also share the benefit of relative privacy, while being flexible enough to ensure compliance with regulation and tax laws. In terms of assets, trusts and foundations can hold any asset that a person may own: from cash, public securities and family businesses to alternative assets such as private equity, real estate and luxury assets such as yachts and art.

Trusts or foundations?

Choosing between the vehicles is usually based on a UHNW family’s specific needs and circumstances, such as a family living across multiple jurisdictions; however, there are some key structural and practical differences and/or perceptions between the two.

Trusts are the most common and most widely used wealth‑holding vehicle in the world. A trust is a legal arrangement formed when the owner (settlor/grantor) of assets transfers legal ownership of those assets to a trustee for the benefit of a beneficiary/ies. The trust then holds legal title to the assets while beneficial enjoyment goes to the beneficiary/ies.

Private purpose foundations are less widely adopted compared to trusts, but are nonetheless used frequently in certain regions. They are a hybrid between a trust and a company as they are set up as a corporate, with a separate legal personality owning the property transferred by the founder. A foundation can transact in its own name, meaning that there is no separation of ownership; however, it too can, and normally does, have beneficiaries.

Location matters

Globally, trusts have proved to be more popular than foundations, with trusts being the structure of choice in most parts of the world these days, and foundations still used in more select (often civil law) countries. However, this does not make the process any simpler given the numerous legal and tax considerations.

UK

For global UHNW families with UK connections, like non‑domiciled UK families and/or foreign families with family members or assets in the UK, the use of a trust for both non‑tax succession and tax planning remains very common (the Crown Dependencies remain the most popular jurisdictions for this group of UHNW families). For UK‑domiciled UHNW families, however, choosing to set up a trust in the UK removes a number of headaches attributed to non‑tax estate planning, succession and asset preservation, as UK residents setting up a foreign or a non‑UK trust can have negative tax implications on the family. If a UK‑based UHNW family wants to forgo a trust, there are additional vehicles they can leverage, including a family investment company (FIC) or family limited partnership (FLP). An FIC is an alternative succession vehicle for UK residents and allows the family to retain control of assets but transfer their value to heirs. An FLP is similar to an FIC but with added benefits, such as fewer fees compared to trusts, and non‑UK residents can use an FLP as a tax‑neutral vehicle. Both FLPs and FICs are popular private wealth structures in the UK.

US

Similarly, in the US, trusts are the main framework of asset preservation, albeit with a couple of US states having recently introduced foundations. However, each of the 50 states in the US is considered a separate trust jurisdiction with its own varying laws. Although the Uniform Trust Code has been enacted to unify trust law, only half the states have signed up so far. This adds significant choice and complexity for families when choosing to set up a trust in the US, as there are a number of tax considerations on a state and federal level to keep in mind. The US has also proved to be an attractive trust jurisdiction for non‑US families with US connections or simply a sort of ‘midshore’ jurisdiction (benefits of onshore and offshore attributes) of choice to locate their trusts.

Switzerland

Switzerland is another good example of the evolution of some trust jurisdictions into more of a midshore offering. Trusteeship with Swiss‑based trustees has been around for a long time (using the trust law of other countries) but has had a renaissance recently with increased demand for such midshore offerings by clients globally. This interest has, in part, been reinvigorated by new licensing of trustees in Switzerland, as well as an incoming trust law.

Asia

In Asia, Hong Kong and Singapore both have strong trust offerings, but do not offer foundations. Hong Kong has a well‑established trust industry that makes up a core part of its financial services sector. It has been further bolstered by a new licensing regime for trust and company service providers that sets out a number of statutory due‑diligence and record‑keeping requirements, making setting up a trust in Hong Kong more attractive for UHNW families. Singapore is one of the premier wealth management and trust hubs globally, and is an international financial centre for the wider Asia region. Singapore has recently modernised its trust law as part of a wider effort to promote wealth management in the country.

Conclusion

The past year‑and‑a‑half has shone a spotlight on just how unpredictable life can be and has kick‑started generational wealth transfer for UHNW families. The world is changing rapidly and any ability to plan strategically for the future has been severely compromised; however, organising set plans can help UHNW families take back control of their wealth. To maximise their efforts, it boils down to helping clients choose the right structure, in the right place and with the right trusted partner/provider to protect and preserve their wealth, which is where trusts and foundations play a key role.


[1] According to a report by Swiss bank UBS.