With structuring also offering increasingly sophisticated solutions to international lifestyles, and wealth growing globally, it’s no wonder that the job of an advisor has become more comprehensive and at times more complicated. The author of this article considers some of the main areas to focus on.

The following article takes an overview of the cross-border issues many ultra-high net worth individuals must contend with and what they should do. The author of the item is Gilly Kennedy-Smith, partner at Mourant, the law firm. The editors are pleased to share these insights and hope they add to debate and discussion. The usual editorial disclaimers apply to views of outside contributors. Email tom.burroughes@wealthbriefing.com

$250 trillion. A number so vast that it’s hard to fathom, yet that is the figure that Boston Consulting Group (BCG) calculates was the total global financial wealth in 2020 (1).  A year that will be remembered for the worldwide COVID-19 outbreak wouldn’t create the market conditions for wealth growth, you might think, but $250 trillion is a record high. 

The same report predicts $65 trillion of further growth up to 2025. Of this, North America, Asia (excluding Japan) and Western Europe are expected to account for 87 per cent.

So the growth in wealth generation is global, presenting opportunities to a diverse range of families. This is heightened by the fact that many ultra-high net worth individuals and families live internationally, in a cross-border world.

This has wide-reaching ramifications for wealth advisors, who have to consider how their structures fit a family’s lifestyle, and account for various reporting, regulatory and taxation requirements around the world.

It’s good to talk
The golden thread weaved through any strong private client advisor-UHNW relationship is good communication.

A diligent advisor starts their dialogue with as wide-ranging a conversation as possible with their client, covering everything from the family tree to the source of wealth to family dynamics. Setting the scene gives the advisor a comprehensive sense of what the client wants from their structuring and how it can work best for them.

Cultural factors can have a huge impact on the most appropriate type of structure. It’s important to realise that in the West beneficiaries, of which there can be many, are often several generations removed from the original source of wealth than in the Far East, for example. 

In many Asian cultures it is still commonplace to pick a single beneficiary in each generation to look after the family, whether that’s through management of business interests, or as a figurehead.

In the Middle East, a more patriarchal dynamic is often still prevalent and this can impact structuring, the timing of distributions and succession of responsibility.

Whatever vehicle is deemed best, a key consideration is the practical impact of taxation and reporting requirements that will be present throughout the lifecycle of the structure.

Where the family are close to the source of the wealth then the practicalities of access to funds and the running of that business will often heavily dictate how the wealth will be structured.

We’re increasingly working on more corporate-like structures for UHNW clients, which generally have the advantage of being internationally recognisable. Every jurisdiction understands what a company is and will have a means of taxing it; that’s not always the case with some of the more specialist private wealth solutions which might favour those from either a common law or civil law background.

Even a discretionary trust, which is still the most popular form of trust in the offshore environment, can cause consternation in international markets, where tax authorities may be less familiar with it. 

Avoid a mid-life crisis
The pitfalls of dealing with multiple jurisdictions’ tax authorities are one thing, but different regulations and laws pertaining to succession, inheritance and asset transfers are perhaps more complex and need to be carefully considered by a private client advisor.

To take one example, imagine a French holiday home bought by UK-domiciled spouses married for the second time, to enjoy with their children from their first marriages. If that French property had an en tontine clause this would mean that on the first death the surviving spouse would be treated as owning that property and therefore their blood relations would have a share of the property. It might mean that the first-to-die's children would miss out on this element of the inheritance so the freedom of testamentary disposition in the UK estate could be used to ‘even out the inheritance’ position. This is because the location of the property dictates which succession laws apply, rather than your residence or domicile.  

There are exceptions to this, most notably where those owners were for example English and elected under EU Regulation 650/2012 (known as Brussels IV) for the law of their nationality to dictate which succession law applies to that EU-based property. This would address who can inherit and how, but it would not solve the issue of taxation of that property. The estate would bear an element of double taxation which may be mitigated by double tax treaties or unilateral relief. 

Cross-border living has only exacerbated scenarios such as this, as UHNWs and their families gain assets in more jurisdictions, educate their children abroad - who potentially meet spouses while working abroad, and manage their wealth in increasingly sophisticated structures. 

It’s often in the middle of a structure’s lifecycle where problems can arise, as the initial letter of wishes could easily become out of date as circumstances and family dynamics change over time. We tell our clients to review their letter of wishes every two-to-three years to reaffirm it reflects their wishes. This can save huge amounts of aggravation and wrangling later on, as wishes are often disputed and accounts are questioned.

Once again, communication is the simplest means of avoiding this type of conflict, not just between those setting up and those running the structures, but also with family members who might benefit.

COVID-19: conversation-starter
The pandemic has acted as a good conversation-starter for many UHNWs and their families; we’ve seen many instances where a lockdown-enforced bonding period has resulted in families considering together ‘what happens next’. That means accelerated succession planning for business ownership, changes in the timing of inheritances and gifting as well as an acute awareness of the need to have affairs in order well in advance of the death of the patriarch or matriarch.

Changes in capacity laws have made the news in the Channel Islands and the UK over the last couple of years, and this is one good excuse to discuss capacity which is something often overlooked in life planning. In order to have a clear picture and peace of mind, it is pivotal that families understand what arrangements are in place should a wealth owner become incapacitated.

That’s not a nice conversation to have, but it is a necessary one. We all want to avoid thinking about the end, but it’s also true that people are living longer so you need to think about what assets you own, whose names they are in and how an inability to access them due to incapacity would affect your family.

Families should consider if powers of attorney they have in place extend across all of the jurisdictions they hold assets in and if they will endure beyond a loss of capacity.

In a cross-border world it’s essential for UHNWs and their advisors to enjoy open discussions so that the family's needs can be met in the best way both during their lifetime and on their death. It might be that the family have financial ties to many countries, but those connections should be reviewed as they can significantly increase the complexity and cost of administering an estate when someone passes away.

With structuring also offering increasingly sophisticated solutions to international lifestyles, and wealth growing globally, it’s no wonder that the job of an advisor has become more comprehensive and at times more complicated. The first step to easing the workload is to think about lifecycles of structures, identify possible pain points before they arrive and pre-empt them through clear communication and understanding of the family's needs. 

The author

Gilly Kennedy-Smith is a Partner and leader of its Guernsey International Trust & Private Client team.

Footnote:

1, https://web-assets.bcg.com/d4/47/64895c544486a7411b06ba4099f2/bcg-global-wealth-2021-jun-2021.pdf