Successful wealth structuring - managing wealth in turbulent times

Tuesday, 01 February 2011
The global economic climate has changed dramatically over the last few years and around the world stock markets have fallen drastically, large financial institutions have collapsed and governments have had to come up with rescue packages to intervene and support their financial systems.

The downfall in the global economy has, consequently, also affected the investment portfolios of high-net-worth individuals (HNWIs) and wealthy families. The economic down-turn has highlighted some critical issues for HNWIs and advisors. Every HNWI is unique and has different goals, but generally structures are in place to limit the risk and exposure from events such as divorce, insolvency or incapacity and the desire to create an effective wealth transfer mechanism for future generations.

Both clients and financial institutions are now faced with a world of growing financial transparency and compliance, driven by international organisations such as the Organisation for Economic Co-operation and Development and the Financial Action Task Force. It is important that in planning for the future, HNWIs seek coordinated, correct and balanced advice from industry experts whose key objectives are to meet the client’s wealth structuring needs. To this end, HNWIs will often demand a certain level of control and input in the management of their financial affairs.

Factors for successful wealth management

Is it possible to define the specific factors for successful wealth structuring?

There is no single structure available for HNWIs and their families. New wealth planning and trust solutions will depend on each specific situation and the client’s objectives. It is, however, apparent that in the changed international environment, there is a need for collaboration with a team of both onshore and offshore wealth planning professionals, as opposed to merely the trusted family advisor, private banker or trust professional advising the client on their wealth planning options and strategies.

The international wealth structuring team should, therefore, be a partnership of both onshore and offshore legal and tax professionals, the client’s private banker and investment manager, as well as a professional trustee – all able to deal with the complexities of multi-jurisdictional planning.

The onshore legal and tax professional should offer guidance to the family with regards to their domestic tax situation, in order to evaluate possible tax efficiencies and advise on filing requirements. The offshore legal professional, on the other hand, would be able to give advice on the proper establishment, and ongoing management and maintenance, of the offshore fiduciary structure.

The professional trustee is responsible for the overall management of risks of the investment activities. It is essential that they fully understand, and where possible anticipate, the needs of the client and appoint the appropriate people to assist.

Trusts will often have an investment manager. The investment manager must be given clear parameters to work within and consider investment criteria, the risk level, capital and income requirements.

For added control of investments some trusts may have investment committees to help monitor the investment of assets.

Whatever structure is decided upon, increasingly HNWIs want to have continued input in the decision making process.

Involvement from HNWIs in wealth planning solutions in the British Virgin Islands

Trustees want to minimise their exposure to risk in respect to the value of investments and HNWIs often want to increase their control of the investments within the trust, without jeopardising the trust structure.

Two of the principal trust methods in the BVI used to alleviate the concerns of the HNWI include establishing a trust under the Virgin Islands Special Trusts Act (VISTA), or utilising the Financial Services (Exemptions)Regulations, 2007 and incorporate a Private Trust Company (PTC) to act as trustee of a trust.

VISTA

The VISTA legislation contains statutory provisions prohibiting the trustee from interfering in the management and control of the underlying company, save for certain grounds of intervention contained in the trust deed. This ensures that the trustee does not get involved in management decisions and is not allowed to diversify the assets.

The grounds for intervention can be determined both by the trustee and the HNWI. The trustee may insist on a ground such as prohibiting the underlying company carrying on business in certain countries that may pose a reputational risk to the trustee, and the HNWI may include a ground covering fraud by one of the directors. There are no restrictions on the grounds that can be included but an Appointed Enquirer should be appointed in the trust to monitor the grounds and raise any issues, when appropriate, with the trustee.

Another key advantage is that the HNWI is able to use the Office of Director Rules (ODRs) to determine who should be the directors of the company held under the trust. This typically covers provisions for the appointment and removal of the directors, as well as the financial terms of the appointment. This is crucial for control and ensures that the client can determine the directors of the company and, therefore, control the directors of the assets further down the structure for the term of the trust.

The HNWI has a number of options when preparing the ODRs:

  • appoint an individual or a committee whose role is to communicate to the trustees who should be the directors
  • constantly update them allowing the HNWI to react to changing family dynamics and adjust as he/she gets used to the structure in place
  • create clear closed rules if the HNWI has pre-determined ideas as to the identity and succession of directors of the underlying company throughout the life of the trust.

This illustrates the variety of options open to the HNWI in controlling the directors and the underlying company, adding to the value of VISTA.

Private Trust Companies

Occasionally, the HNWI may prefer not to transfer control of their assets to a third-party, unrelated institutional trustee, for a number of reasons such as peace of mind, confidentiality or trust, or the need for unique or specialised commercial knowledge, not possessed by the institution, to manage the underlying asset. A PTC addresses these concerns and allows the client to retain control of the assets while separating legal ownership.

A number of jurisdictions have introduced PTC legislation to cater for this requirement for HNWIs.

The key advantages of BVI PTCs are:

  • No licence required
  • No local director required
  • No capitalisation requirements
  • No need for a physical presence in the BVI
  • Confidentiality can be maintained
  • Cost efficient compared to many other jurisdictions

The HNWI and/or family members can be directors of a PTC. It is common practice to appoint the HNWI as director with an institutional/ trust company director. The HNWI can steer the PTC in business decisions while the institutional director ensures that the trust is administered correctly. If the HNWI wishes to provide all the directors of the PTC, they can still appoint a trust company to provide administrative support services.

The Directors of the PTC do not have to be based in the BVI, but the constitution of the board and physical location of the directors may be tax sensitive. In such cases, PTCs commonly use institutional/ trust company directors (located in the BVI or other offshore jurisdictions), who may in turn employ family members to manage the business/ underlying assets.

PTC and VISTA combined

It is important that the legal ownership of the shares of the PTC is carefully considered – the ownership confers legal control over the PTC and, therefore, ultimate control of the assets of the trust.

If the shares of the PTC are in the individual name of the HNWI, his death may give rise to delay and unwanted expense while probate is obtained in the BVI before the shares can be validly transferred. If a proper will has not been drawn, or the deceased was domiciled in a jurisdiction with forced heirship rules, the shares (and therefore control) could pass to individuals who are not intended to benefit, or are unfit to exercise control.

To avoid this, the shares of the PTC could be placed into a separate trust, which will allow the settlor to determine the directors of the PTC beyond his lifetime, enable family conflicts to be managed and maintain confidentiality.

The planning for this allows the two key BVI trust solutions to be combined. A non-charitable purpose VISTA trust is created with the sole aim of holding the shares of the PTC, utilising both the purpose trust legislation in the Trustee Act and the VISTA legislation.

The non-charitable purpose VISTA trust ensures that the ownership of the PTC will not be disrupted by the death or incapacity of the HNWI or other controlling party, and can last for the lifetime of the trust. There are various measures by which the HNWI may collapse the purpose trust and reclaim ownership of the shares, should they choose to do so.

Creating sustainable structures

In a world of increasing transparency, and with the recent changes in the economic environment, it is apparent that it is essential to have appropriate wealth management structures in place to manage the assets of wealthy families and HNWIs, limit the risks and achieve the desired investment goals.

There are still many opportunities for international wealth planning and it remains the duty of professional wealth planners to guide and advise clients, creating sustainable fiduciary structures that are essential to the future of the international wealth planning industry. The BVI offers ways of doing this by involving the HNWI directly, without jeopardising the legitimacy of the structure, and ensuring the reputation and risk of the trustee remain protected.

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Jonathan Bailey

Jonathan Bailey TEP is In-house Trust Counsel at Equity Trust (BVI) Limited.

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