As high net worth individuals and families become increasingly sophisticated and international, their needs are more complex than ever. More robust, flexible asset management, and estate planning solutions are increasingly becoming the order of the day.
Though there is – and doubtless always will be – a place for ‘plain vanilla’ Trust structures, a raft of alternatives exist which can accommodate a wide range of requirements. Increasingly, we are looking at multiple entities, multiple vehicles, and crafting bespoke solutions to suit clients’ specific objectives and circumstances.
There are many reasons for taking a more open-minded approach when establishing structures. Tax planning is no longer the core driver behind the choice of structure: issues including succession planning, asset protection and family governance are becoming high priorities. Of course, tax planning remains a vital consideration and all structures must be advised by a tax expert to adhere to all compliance and reporting requirements.
Since the Covid-19 pandemic, families have had more time to consider what else is important to them, and engage in inter-generational discussions about what they want to achieve. This matters, as any structure should be designed with longevity in mind: they are meant to endure from one generation to the next and beyond. Therefore, it is vital to bear in mind the shifts that may take place as family wealth is handed down, and to understand different individuals’ viewpoints and goals so that the correct structure can be devised from the outset, but with the flexibility to evolve with each generation.
For example, it is important to know how the family wants to interact with each other on financial and business matters, what level of involvement they want the next generation to have in family operations, and at what stage. Factors such as culture, religion, jurisdiction and tax residency of the family members should also be taken into account.
There are several alternatives to the Trust that merit consideration:
A Private Trust Company (PTC)
This is a company that is incorporated for the sole purpose of acting as a trustee for a Trust or group of Trusts for a particular family. PTCs are attractive to those who wish to maintain an element of control, for instance by being on the board of the PTC, either with or without a professional adviser alongside. They are also used for succession planning, as different types of shares can be issued, giving family members different rights and authority depending on the level of involvement they intend to have in the business affairs.
A Foundation has a legal personality, which means that the assets belong to the Foundation itself, and its governing Charter and Rules can be tailored to fit the wishes of the founder. In Guernsey, it is possible to differentiate between beneficiaries to provide a suitable gateway for the succession of the next generation. For example, a beneficiary can be ‘enfranchised’ (with full rights) or ‘disenfranchised’ (where parents choose to protect children by only giving them limited rights to information until they are of an age to fully understand the financial affairs of the company). Foundations can also be used in PTC structures, as the vehicle that owns the shares in the PTC or can act as a Private Trust Foundation (“PTF”) itself where the foundation would be established specifically to act as trustee of one or more trusts.
A Family Investment Company (FIC)
FICs are most commonly used by UK resident and domiciled families for whom setting up a Trust may be tax disadvantageous. Parents will often manage the day-to-day company affairs and sit on the board of the company, but they will transfer the value to the children who will own the shares. It is common for different classes of shares to be issued with different voting and decision-making rights to safeguard the interests of future generations.
A Limited Partnership
Often used by clients in the private equity space and for listed investments, limited partnerships are popular with investors who wish to limit liability up to a particular capital sum without necessarily having to be concerned in the day-to-day management of the partnership.
A Protected Cell Company (PCC)
PCCs are popular vehicles for families with multiple asset classes within their portfolios. They are comprised of a ‘core’ and a number of ‘cells’, which allows for the segregation of assets (and is thus what makes it different from a traditional Guernsey company). In this way, rather than exposing all its assets to liability for every contract, a PCC can limit its liability for a particular contract to a specified pool of assets only.
There is no one solution that is right for every instance: all families are unique and need a tailor-made approach. The correct structure may even involve a combination of multiple types of entities, depending on the rationale, the proposed activity or activities, family culture and the assets in question. While Trusts remain a very appealing choice in many cases, ‘plain vanilla’ is not for everyone and families would benefit greatly from being aware of and considering the wider menu of alternative options on the table.