Succession planning and wealth preservation in uncertain times

This article features in Issue One of our Private Wealth Perspectives Newsletter.

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Families have always been concerned to ensure that their assets pass in accordance with their expectations and are protected, and their loved ones are looked after. These concerns have been heightened particularly by recent events which have led to an increased use of offshore¹ trusts and foundations by individuals in the Gulf Cooperation Council (GCC) to protect assets against geopolitical risks. But many of their concerns, including the wish to protect those assets from claims by creditors on bankruptcy and former spouses on divorce, are universal. This article suggests options for GCC residents who have assets in the region as well as assets in other countries.

As regards the type of arrangement, even if someone has a local personal or family office that assists with management and reporting, it may still be helpful to use different legal arrangements to deal with local and foreign assets. This article focuses on the foreign element and in particular, trust structures.

And, as with most things in life, it pays to get the right advice: we look at the importance of this first. We all know people who have saved money on legal fees because it was a 'simple' arrangement, using an offshore company, and everything worked fine…until it didn't.

Through our litigation practice we see an increasing level of fallout resulting from people not having taken proper advice and, frustratingly, albeit not for the litigators, it continues. It is surprising that we still see individuals (often very wealthy ones) whose succession plan is no more than signing blank share transfers or registering shares with a nominee, while leaving instructions to transfer them to others on the owner's death. This type of 'planning' does not work, as any such 'instructions' are not valid after death and anyone who acts on them could find themselves personally liable if the transfers are challenged by the rightful heirs.

The need for local legal advice

Before turning to the options for structuring foreign assets, it is useful to understand why local advice is always important. In fact, when we say local legal advice we mean two different things.

First, it means advice that is relevant to the person who wishes to arrange their personal affairs, particularly when this means either transferring assets into a new structure (such as a trust) or preparing testamentary arrangements, such as a will. In both cases there may be personal laws, in written legislation or other law, such as Sharia, that need to be considered. 

Second, it means advice that is relevant to the asset in question. For example, there may be local laws that govern the ownership of real estate which prevent someone from transferring ownership in a certain way. In relation to business interests, there may be local laws, or shareholder agreements governed by local law, which again prevent certain transactions, and which will require the advice of a locally qualified lawyer. 

In short, it is always important to take advice from a lawyer qualified to advise on the matter in hand. Some advisers have been inclined to promote a one-size-fits-all approach for all assets; we think this is rarely, if ever, appropriate. We are able to advise on the design and management of an offshore structure, but will always look to other qualified lawyers, whether in the Gulf or elsewhere, to advise on matters outside our expertise. And, of course, advice needs to be implemented carefully and any structure maintained appropriately: governance and compliance are as important for succession planning as they are for the business.

The benefits of structures such as trusts

Subject to personal and local issues being resolved, there may be a high degree of flexibility available to a GCC resident who wishes to structure their foreign assets. 

Our primary focus is on structures that can be established, and indeed tested, during an individual's lifetime; that planning is sometimes referred to as inter vivos. Inter vivos planning can be contrasted with testamentary planning, which is the use of wills. In fact, the two can be used in conjunction with one another.

Wills dealing with offshore assets can be useful for managing the succession to the shares in offshore companies and, in many cases, their use can accelerate the probate process, as the offshore probate procedure can start immediately. Without an offshore will dealing with assets in that jurisdiction, it is normally necessary to go through the relevant inheritance procedure in the local jurisdiction first, before an application can be made in the offshore jurisdiction. In fact, they can be used for any assets that are not held within a trust structure, but it is important to bear in mind that there are limitations to the succession planning that can be achieved using wills. In most offshore jurisdictions, including Jersey, Guernsey, Cayman and BVI, succession to movable assets (such as company shares) is determined by the law of the deceased's domicile.² That means that, where the deceased died domiciled in a jurisdiction which applies Sharia law, the gifts in a will dealing, for example, with shares in a company in any of those jurisdictions, must therefore comply with the Sharia law applicable in the jurisdiction of the deceased's domicile.

Another reason we see for creating lifetime trusts (rather than using a will) is to stress test the arrangements and, if necessary, amend them so that, once the settlor is no longer alive, they will have had the reassurance that the arrangements are already fit for purpose. 

We look at possible different models below, but the potential advantages of a lifetime trust structure include the following:

• The structure will have a degree of separation from the principal's own assets, which may be helpful from an asset protection perspective. (An individual should not create a trust if there is a risk of insolvency, but if creditors appear some time later, or a different threat arises, it is possible that a pre-existing trust may provide a degree of protection.) However, the degree of asset protection which the structure is likely to provide will depend on its terms: a trust which reserves significant powers to the settlor will be less effective for this purpose, other things being equal, than one which gives all significant decision-making powers to an independent professional trustee.
• Subject to the proviso above regarding asset protection the settlor³ can have, if required, a high level of involvement with the decision-making even after the assets have been placed into the trust. 
• There is a high degree of flexibility around who to benefit and how. This is a key advantage of an offshore trust over a will in that it does not need to be valid under the laws of the settlor's home jurisdiction and it will have the benefit of the relevant firewall legislation (discussed further below) which creates much greater flexibility for succession planning. This can be of great benefit where a settlor does not wish to follow Sharia succession rules precisely, perhaps because they only have daughters and do not want other relatives to benefit, or are a Muslim with both Hindu and Muslim children and want all the children to benefit equally. In addition, it is possible to delay the transfer of capital to heirs if there is a concern about them receiving too much, too young.
• There may be an element of tax efficiency. Of course, this depends on the circumstances and specific tax advice must be taken.⁴

At the most fundamental, such arrangements should bring peace of mind: ownership and management can continue even after the death of the principal, and the succession will happen as planned, without the need for complex and time consuming probate processes. If the arrangements are accepted by the family during the settlor's lifetime, it may reduce the potential for disputes after their death.

Possible models and structures

Below are three possible models of increasing degrees of sophistication.

Model 1: this contains a trust, holding the assets directly. The trust can contain flexible terms for the management and distribution of the trust property. It can also contain powers for a protector⁵ to exert influence over the trust. At the most basic, that might be a power to hire and fire trustees.  If more sophisticated arrangements are required, there might be detailed powers for the protector to manage the trust's investments.

Model 2: this is as for Model 1, but an offshore holding company has been inserted to hold the assets, which is quite common. Additionally, a private trust company (or PTC) has been incorporated to act as trustee just for this family. There is not sufficient space here to discuss the pros and cons of PTCs in detail. In short, however, there has been a trend towards using PTCs with higher value structures (say over USD 50m) where the advisors believe this may provide some additional control and/or protection.

Model 3: this is as for Model 2, but there are multiple holding companies, and a separate entity (possibly a foundation) whose sole purpose is to act as the governance entity. In this way, the protector and PTC protections can still be included, but more complex governance discussions and decisions can take part in an entity that is outside the value structure (the foundation will not hold any assets). This separation of value and control may be useful in certain higher value and/or more complex situations and is similar to some family office arrangements.

Choice of structure and jurisdiction

Certain jurisdictions, for example, Jersey and Guernsey in the Channel Islands and Caribbean jurisdictions including the BVI and the Cayman Islands, have built a strong reputation over many years for the establishment and management of trusts and more recently, foundations.6 

Key considerations when choosing a jurisdiction for a trust structure may include:

• political and economic stability;
• a well-established legal system and judiciary;
• a strong local talent pool of lawyers, trustees and other advisors;
• ease of communication, to include time zone and air connections.

All four jurisdictions have enacted detailed conflict of laws7 provisions. While there are differences between them, they all broadly provide that, where the law of their jurisdiction is chosen to govern the trust:

• that choice is valid, even if there is no other connection to the jurisdiction;
• all matters in relation to the trust are governed by the law of that jurisdiction;
• the trust cannot be challenged, nor can any transfers of property to the trust be challenged on the ground that a foreign law does not recognise trusts or that the trust defeats any forced heirship rights or rights conferred by a personal relationship to the settlor (such as marriage) (these are sometimes called the 'firewall' provisions).

These firewall provisions provide a significant degree of protection against attacks to offshore trusts on the ground that they defeat foreign forced heirship rights, for example.

Modification of information rights

Even with the benefit of the above firewall provisions, a common weakness of trusts established to avoid the application of forced heirship provisions in their local jurisdiction is that the heirs are typically also beneficiaries of the trust, so can normally obtain information about the trust as a beneficiary and use that information to assist in an attack on the validity of the trust in their home jurisdiction. For those clients who want a greater degree of protection in those circumstances, they should consider a structure which allows them to modify beneficiary's information rights. That can be achieved using the STAR8 trust regime in the Cayman Islands, a foundation (in Jersey or Guernsey) or a foundation company (in Cayman). 

This ability to modify or exclude beneficiary information rights can be a helpful tool in other circumstances as well, such as minimising the disruption (and cost) that can be caused by a vexatious beneficiary.

We have also assisted Muslim clients, who wish to ensure that they comply strictly with Sharia law, by treating the assets in the trust as if they were still owned by the settlor during their lifetime, with the trust assets passing to the settlor's Sharia heirs on death. In those circumstances, we have provided for the calculation and payment of zakat and for paying the settlor's personal creditors from the trust assets when they pass away. Under normal trust law rules, the zakat beneficiaries and creditors may be treated as beneficiaries in those circumstances, with the rights to information (and to bring proceedings against the trustee to enforce their rights) which come with it. Those rights can be excluded or modified using a STAR trust or a foundation. With regard to the distribution after the settlor's death, the trust deed can provide that the trustee is able to rely on an opinion from a Sharia expert by reference to the relevant Sharia inheritance certificate, where relevant, as to how the trust fund should be distributed.

The terms of the trust can also mandate that the trust fund may only be invested in Sharia compliant investments and provide for a Sharia expert or a Sharia investment committee, to investigate and adjudicate on the issue.

The use of foundations

A key distinction is that foundations are incorporated entities with a clear legal existence, whereas a trust is a legal relationship. Foundations are often attractive to those more accustomed to civil law, or to those who want the certainty of an identifiable legal entity.

These factors, and others, used either independently, or in combination, enable clients and their advisors to create bespoke structures, capable of achieving a wide range of outcomes. 

Like families themselves, wealth structures are capable of infinite variety.

Conclusions

For GCC residents, it is often helpful to implement different succession arrangements for their local and foreign assets. Local personal advice is critical but where it is appropriate to set up an offshore structure, we have the expertise to help.

Mourant bring together contentious and non-contentious lawyers in a genuine 'one-firm' approach, enabling us to advise seamlessly on the appropriate jurisdiction in which to establish and administer private wealth structures and to work together without jurisdictional boundaries. Our team also advises on trust and foundation law, including trusts holding private wealth as well as those used in the commercial sphere (eg, pensions and EBTs), and complex trust disputes.

1 In this article, we use 'offshore' to refer to the four jurisdictions on which Mourant Ozannes advises, namely the British Virgin Islands, the Cayman Islands, Guernsey and Jersey, although much of what we say applies equally to many other offshore jurisdictions. 

2 'Domicile' can be summarised as an individual's 'permanent home' and is determined by the application of a set of legal principles. An individual's domicile is not necessarily the same as their nationality, or the country in which they happen to be living.

3 'Settlor' is the term for the person who transfers the assets into the trust. 

4 This article does not deal with tax: it is assumed that tax planning is not a primary motivator for the readers of this article. However, appropriate tax advice should of course be taken whenever it may be an issue.

5 'Protector' is not a legal term of art, but it is the term commonly used for a third party who has some degree of influence over the trust. The settlor of a trust can also be the protector.

6 Foundations may be established in Jersey, Guernsey and (with the foundation company) the Cayman Islands but not yet in the BVI.

7 These are the rules which specify which laws are to apply to certain issues, in an international context.

8 'STAR' stands for Special Trust – Alternative Regime, which is a creature of Cayman statute