As part of a series examining the changing world of trusts and other structures, this publication talks to international law firm Withers.
This publication has been speaking to private client wealth managers and lawyers about the kind of structures that clients want to use, how they are affected by changing government tax rules and other regulations, as well as the changing face of inter-generational wealth transfer.
In this article, we talk to Ugo Privitera, a registered foreign lawyer at Withers, the international law firm. The topics are, by their nature, international in scope so we hope that readers from across the world will find the answers valuable.
When you sit down with a client to talk about wealth structures, typically what's the first question you ask?
“Why have you decided to take wealth planning advice?”. A clear picture of a client's asset classes and locations, intentions and purposes is essential. Clients will normally have an understanding of the risks which they want to minimise or avoid through our advice, and the objectives they want to achieve. We clearly need to bear those in mind. However, we need to identify solutions on a case-by-case basis by also taking into consideration risks and factors - tax, legal, regulatory and geopolitical ones - which the client may not be aware of. Pre-designed wealth planning solutions no longer belong to our era.
Name some popular misconceptions about trusts.
There is a common misconception that trusts are only used to achieve tax avoidance. Although there are sometimes clear tax advantages in setting up a trust (think about the protection from UK inheritance tax for persons who are not domiciled in the UK) and tax optimisation may be a factor, but the reasons for establishing a trust are as varied as the client's personal and financial circumstances may be: asset protection, multi-generation succession planning, avoiding forced heirship rules, taking care of the needs of young, irresponsible or incapacitated beneficiaries, and avoiding lengthy probate procedures are all relevant factors, depending on the clients' goals. Often, clients think that trusts are tools which are only available to high-net worth individuals; they are too expensive to set up and maintain, and/or they will completely lose control over the trust assets, and/or there are limitations as to the type of assets which may be settled. These are simply myths which we need to demystify. They are common among continental European as well as Asian clients, but I believe the cultural approach is changing.
What kind of clients are using trusts?
It follows from the above that there is not a specific category of clients who are using trusts. If this is certainly true in relation to clients asking for advice on will planning, as international wills will almost invariably contain will trusts depending on the client's assets and family situation, there might be some scepticism in the use of lifetime trusts by clients who come from countries whose legal system is not inspired by common law principles. However, if the benefits of using trusts in light of any relevant circumstances are carefully explained, then even the most reluctant client will be willing to set them up, where appropriate, due to the great flexibility they provide.
What sort of trust types (they come in many forms) are in demand at the moment, becoming more popular, less popular, and why?
The answer to this question will probably vary on the basis of the geographical location of the client and the advisor. By way of an example, Asia has seen a shift in focus from wealth generation to wealth planning in recent years: bespoke trusts are used for multi-generational succession planning purposes with a view to ensuring that younger generations benefit from financial security, whilst taking into account the increasing geographical and family complexities and the long-term support needed by the older generation.
In other areas of the world, such as in Europe, offshore irrevocable discretionary settlements are still used to achieve tax efficiencies or asset protection. It cannot be stressed enough that the choice of a trust type will always revolve around the specific needs of the individual client.
Tax and demands for transparency are obviously affecting the trusts sector. What in your view have been the main effects? Has this dampened the use of trusts or changed how they are set up?
The Common Reporting Standard, FATCA, public registers in the UK and continental Europe, increased scrutiny over tax planning vehicles around the world, and economic substance requirements have all had an impact on the trusts sector. On the one hand, clients are looking to set up their trusts in reliable, stable and reputable jurisdictions; they are also considering consolidating and streamlining existing structures into a single jurisdiction with real substance; generally, they are looking for holistic solutions for increasingly diversified asset classes (with art having grown in importance as an alternative to the usual financial assets). On the other hand, many local trust companies are increasingly finding it too burdensome to comply with the regulatory, legal and tax requirements of clients from certain jurisdictions: high quality advice, specialism and global presence (as well as a wisely-thought fee structure) are playing a key role in deciding who the winners in the market are.
What is happening with the use of foundations, private placement life insurance and other structures, particularly outside Common Law jurisdictions? Are you noticing a shift towards these even in CL jurisdictions and, if so, why?
Foundations are becoming increasingly popular not just in traditional civil law jurisdictions but also in common law ones. The greater level of control which they afford are clearly more suited to certain types of clients; they are used alone or in combination with private trust companies, with Jersey, Guernsey and Isle of Man being the jurisdictions of choice - also for some Asian families.
Life insurance products are still a popular choice, both in continental Europe and in the UK, as the tax deferral as well as the tax-free withdrawals they provide are particularly appealing for certain clients who live a particularly mobile life.
When long-term plans are not in point, peripatetic international clients are just considering moving to particular jurisdictions which have introduced favourable territorial tax systems for the wealthy: Italy, for instance, is now becoming a very popular destination due to the relatively new (wrongly defined) "res-non-dom" regime which shelters offshore wealth from Italian taxation for fifteen years (also providing for the possibility of tax free remittances). With Brexit looming, this regime has been widely considered by UK-based clients who are about to become deemed domiciled in the UK.
Trusts and other structures obviously cost money to establish and run. In your view, what has happened to the fees and costs over the past decade or more, and what do you predict?
The complexities of the ever-changing global regulatory, legal and tax frameworks have probably had two effects: clients are now more aware of the need to have well-run and compliant structures, which must be reviewed continually, as must the costs connected with running them. However, on the other hand, advisors and service providers have taken this opportunity to provide “mentoring” to their clients and, to secure their loyalty, have sometimes shifted towards fixed-fee arrangements. Overall, in the longer term, the traditional fee structure based on time spent will probably tend to fade away and this will ultimately benefit families and individuals seeking to establish trusted relationship with their wealth planning advisors.