Intergenerational wealth transfer part 2: Execution

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.