David Cooney
Group Partner*
Guernsey
Each family's circumstances will ultimately determine the nature and extent of these transfers, and any general comments on this topic must be taken as such. It is important to note that no transfers are mandatory. However, failing to plan for such transfers can lead to tax inefficiencies and complications, such as the freezing of a business in the event of the owner's incapacity or death, until a court-appointed deputy or a grant of representation is obtained.
In this first of two articles, we highlight some considerations that clients, intermediaries, fiduciaries, and advisors may need to address. In the second article, we will explore offshore structuring tools that might assist in achieving the client's goals in passing down their wealth.
Identify the assets
The starting point is to identify the assets that can be transferred while ensuring the client retains enough to maintain their lifestyle, with a buffer for future medical costs or other unexpected eventualities. This exercise will likely reveal several related issues that need consideration. For any identified assets, it is necessary to establish whether there are any restrictions that may limit their transfer. For example, are there shareholders' agreements or pre-emption rights that need to be terminated or released?
If there is borrowing secured over the assets, the relevant lender's consent may be required before any action can be taken. If the assets are in a structure, it is essential to determine whether the terms of the structure allow for the desired transfer and to consider the integrity of that structure and the degree of control the client can have over it.
Identify the recipient(s)
The identity of the recipient(s) can also raise issues, especially if the goal is to retain the integrity of the asset by transferring it to a single person rather than dividing it among a wider class of recipients. It is important to consider whether it would be better to skip a generation. While this might have perceived advantages, the impact of parents being passed over in favour of their children should not be overlooked. A wide division of assets may seem fairer and result in less immediate resentment, but it may lead to future administrative complications and complexity.
In the event of a subsequent family dispute, the wide division of assets may exacerbate matters, as restructuring or settlement may be required to resolve issues. The assets previously received may become the battlefield over which family disagreements and resentments are played out.
The more widely assets are divided, the greater the number of potential touchpoints with future issues such as divorce, bankruptcy, incapacity, or disinterest. Consequently, the initial planning and actions will likely be more complex and protracted. Finding the perfect solution might be difficult or impossible, so some form of compromise will likely be required. It is crucial to identify and evaluate all relevant factors and considerations at the outset before any action is taken. This will allow the client to proceed with open eyes and a clear understanding of the likely outcomes.
If the decision is made to transfer the assets to a single recipient, but the asset involves other family members (e.g., shares in a company for which they work), consideration must be given to the impact on family relations. Thought should be given to addressing concerns and resentments that may arise from family members having to work for a company owned by their sibling rather than their parent.
Once the intended recipient(s) have been identified, it is necessary to establish whether they are willing to receive the assets and take on the associated responsibilities and obligations. Do they have tax or ethical considerations that might impact their willingness to receive and steward the assets? Will they accept the level of reporting and scrutiny that comes with ownership, which will likely increase over time?
Degree of freedom for recipients
The client must consider the degree of freedom they are comfortable for the recipient(s) to have in administering and devolving the assets. Although handing over a 'built from scratch' empire might be attractive and sensible in theory, passing ultimate control to someone else might prove challenging in practice. If an outright transfer is too much initially, what form of partial gifting would the client be comfortable with? Or would it be better to establish a structure to hold the assets, allowing for some form of oversight to be retained?
We will consider possible structuring options in our second article on this topic. A further complication may be that the intended recipient(s) have had little or no involvement in the day-to-day administration and management of the assets. If so, they may need educating on the practical administration of the assets and the family's current attitude towards their stewardship. Involving third parties who can provide ongoing advice and guidance may be appropriate and helpful.
Charitable purposes
Does the client want some or all of their assets to be applied for charitable purposes instead of passing them to their family? If so, consideration must be given to managing the family's expectations, which may now be frustrated, and whether it would be helpful to seek their buy-in to this plan. For example, having them have some say in the particular charitable endeavours furthered by the assets.
Wider considerations
Given that multiple family members may require advice, and that advice could differ depending on their personal circumstances, careful consideration is needed to determine whether the same advisor or firm can represent the whole family. It may be more appropriate to involve independent advisors for different branches of the family.
Lastly, appropriate tax and regulatory advice must be obtained before any steps are taken. Although tax considerations should not dictate the entire process, they will likely influence the direction of the planning.
In conclusion, intergenerational wealth transfer planning requires careful consideration of various factors, including the identification of assets and recipients, potential complications, and the importance of tax and regulatory advice. By addressing these issues at the outset, clients can proceed with a clear understanding of the likely outcomes and make informed decisions that align with their goals and objectives.
