The Trust as a Family Holding Structure 

The Trust as a Family Holding Structure 

A Trust can provide a very good solution for the long term holding and preservation of family wealth. Trusts have been used for generations for the holding and preservation of family wealth.

A trust can arise in several ways, but the most usual in the context of family wealth is either by virtue of the lifetime act of an individual, or by virtue of provisions left by an individual under his will, and so coming into effect upon his death. 

General introduction of the Trust as Family Holding Structure

It can sometimes be difficult to explain what a trust is, but at risk of oversimplification, a trust can be described as being the situation which arises where an owner of property causes that property, either by lifetime transfer, or by virtue of provisions under his will, to be transferred to persons, known as trustees, to hold for the benefit of other persons, known as beneficiaries.

The trustees generally hold the legal title to the trust property, but the beneficial entitlement, or the beneficial interest, lies with the beneficiaries.  The beneficiaries are entitled to require the trustees to perform their trusteeship according to the governing instrument, usually either an inter vivos trust deed or a will.

They need not themselves have been a party to the establishment of the trust. Trustee, on the other hand, hold a position of considerable responsibility. Two of the traditional tenets of trusteeship are that a trustee may not profit from his trusteeship unless authorised to do so, because all profits belong to the beneficiaries, and a trustee may not delegate his responsibilities as trustee to someone else, again unless specifically authorised to do so.

Thankfully, modern trust instruments are invariably drafted to include the capacity for trustees to be paid for acting as trustees, and for appropriate levels of delegation to be done to enable trustees to function efficiently in the modern world.

The identity of the beneficiaries of the trust, and their respective interests, can be fixed at the outset, or alternatively they can be determined as an identifiable group such as the descendants of a person, with the question of allocation of assets or benefits amongst those beneficiaries being left to the trustees, although generally with some background guidance provided by the settlor or testator in a letter of wishes.

Such latter type of trusts are generally described as discretionary trusts, as opposed to the former type of trusts which are described as fixed interest trusts.  Where a settlor or testator is concerned with long term holding and preservation of family wealth, it is inevitably a discretionary trust which is used because it provides the opportunity to cater for future events and circumstances as they arise and develop and avoids the requirement of having to decide in advance on how family wealth should proceed down the generations.

Planning for family wealth preservation down the generations, and particularly where it is inevitably going to be a multi jurisdictional matter, is always going to throw up particular problems which have to be dealt with in their particular circumstances.  Trusts can provide solutions under several different headings.

Choice of trustees

It is self evident that the choice of a trustee to handle substantial family wealth, and particularly so where this involves an operational business, is an important aspect.  It is invariably going to involve a professional trustee, often a financial institution. Reputation and competence are paramount.

An individual considering the selection of a trustee will generally wish to become familiar with the candidate under consideration. This can be an extremely valuable process in terms of ensuring that the trustee has a good background knowledge of the family and of the assets to be placed in trust.  It also enables the introduction of the existing family advisers to the trustee to allow for a smooth transition to the trusteeship once it has been established.

Settlor control

Successful individuals with wealth created by themselves often find it difficult to consider transferring that wealth to trustees and ceding control over it, all the more so where the wealth continues to be represented by a successful group of operating companies. At its most extreme, this can lead to the realisation that it may not be appropriate for such an individual to consider making a lifetime trust, but rather should be covered in terms of a will to become operative on death following which the individual’s capacity to control is inevitably curtailed.

Alternatively, a measure of control can be retained by the individual through retaining a direct shareholding in one or more group companies giving either positive control, or maybe some specific negative sanction. This can also be achieved through the mechanism of the terms of the trust itself by requiring the trustees in certain circumstances to seek the consent of the settlor for certain specified transactions.

However, it is important that any settlor control retained in respect of trustees’ actions or decisions should be limited to particular aspects only, because too much retained control can result in claims that there is no real trust at all. Such claims may arise in the areas of taxation, or creditors or succession, and possibly frustrate the overall intention behind the making of the trust in the first place. https://www.linkedin.com/in/john-hickson-1b855b79/?originalSubdomain=ie

Various aspects of the Trust as a Family Holding Structure

Various aspects of the Trust as a Family Holding Structure

Various aspects of the Trust as a Family Holding Structure

A trust can provide a very good solution for the long term holding and preservation of family wealth. Trusts have been used for generations for the holding and preservation of family wealth.  A Trust can arise in several ways, but the most usual in the context of family wealth is either by virtue of the lifetime act of an individual, or by virtue of provisions left by an individual under his will, and so coming into effect upon his death. 

Family office

Trustees in many cases effectively function as a family office, looking after the family’s wealth, and being involved in many aspects of the lives of the family members. A professional trustee will very likely have its own internal capacity to provide many additional levels of service beyond pure trusteeship as such.  Alternatively, trustees may choose to use outside service providers for different aspects, or they may seek to establish a family office company which they hold as part of the trust assets. Such a family office company can be self standing with its own management and employees, remunerated by fees charged to the various entities to which it provides its services. 

The advantage of the trust structure is that there is a trustee who is ultimately responsible for all aspects encompassed by the trust, and subject to the trustee operating properly in accordance with the governing trust instrument, decisions ultimately lie with the trustee which can help to minimise disputes and disagreements.  It does not mean that disputes and disagreements at family level will not arise, but a third party decision maker can often take the heat out of disputes and disagreements.

Privacy

Wealth is a privilege for those lucky enough to enjoy it, but it also brings burdens of varying degree and in various contexts.  While professional trustees in most places have to be regulated for prudential purposes, it is generally the case that details of particular trusts, their assets and beneficiaries remain matters that are private unlike, for example, in the case of companies where annual filings, including accounts, have become the norm. 

A particularly important point in this context is that where assets are put into trust during an individual’s lifetime, they will not need to go through the probate process at his death.  The probate procedure in most places involves an element of public information, generally including the terms of the will, and the value of assets covered by the grant of representation to the estate.  Using a trust may be able to assist in maintaining personal, commercial and financial security for a family and its businesses and other assets.

Claims by creditors and others

A trust may be of assistance against claims made against an individual by creditors and others, certainly against speculative claims which are essentially founded only in their nuisance value against a wealthy individual. This can include matrimonial and heirship claims, but as these are generally referable to statutory entitlements, the statute will generally override the ability, whether wholly or partly, to defeat such claims by putting assets in trust.  Cross border claims can bring their own issues in the sense of whether the courts of a country will strike down a trust which was legitimately created under its law, by reference to a matrimonial or heirship claim under the law of another country. 

While the position of the settlor of a trust is sometimes exposed in this manner, the position of the beneficiaries should generally be better.  As a beneficiary of a discretionary trust does not have any actual immediate interest in any trust assets, those assets cannot be actioned in respect of the beneficiary’s liabilities.  The most that might occur would be for a court to make an assumption in matrimonial proceedings, for example, that a beneficiary had a reasonable expectation of receiving benefits from the trust, and hence the assets might be notionally brought into account in the division of the individual’s own assets as between that beneficiary and the spouse of that beneficiary.

Beneficiaries

A trust exists for the benefit of the beneficiaries, but this does not mean that it must be divided up amongst the family members in the short term.  The maintenance of family wealth is generally a long term aspiration for the benefit of the current and also future generations of the family concerned.  This can enable the trustees to consider a policy suited to the nature of the trust assets, and the divergent competencies and characteristics of the beneficiaries from time to time. This is easier to deal with where the trust assets are comprised of portfolio type investments. 

The trustees in such circumstances have to manage a large pot of value and consider the manner in which it should be used to provide benefits to the beneficiaries.  It is obviously much more difficult to manage where the principal asset comprises an operating group of companies.  There will be tensions at beneficiary level between beneficiaries who might wish to manage some of the businesses and reap rewards in terms of ownership, and beneficiaries who feel they should be able to receive value from the trust, whether to establish alternative businesses or to engage in laudable, but less remunerative activities such as the arts of philanthropy

This is where competent professional trustees will need to draw on their experience, and to use their skills to reconcile such tensions.

Philanthropy

A trust can cater for a family’s philanthropic aspirations by including charities as potential beneficiaries. 

Settlor guidance on the nature of those aspirations will assist trustees in this context, or guidance from time to time from representatives of the main family branches.  Where the circumstances warrant it, the trustees may see fit to establish a separate charitable fund as a carve out from the main trust fund to facilitate separate management in order to focus on the specific charitable areas which they desire to benefit.

Conflicts of interest

Much of a trustee’s job is determining and balancing the conflicting interests of beneficiaries. Inevitably, on occasions, some beneficiaries will consider themselves losers in such conflicts, but provided the trustees have acted in accordance with the governing trust instrument and have properly considered all relevant matters, and not any that are not relevant, they should not be exposed to any sanction in respect of their decisions.

The position is very different where trustees may find themselves exposed to a personal conflict of interest with regard to their position as trustee.  Trustees must act for the benefit of the beneficiaries, and except for matters specifically permitted under the governing trust instrument, such as entitlement to remuneration for their trustee services, must endeavour to ensure that conflicts of interest do not arise. 

If a conflict of interest should arise, any loss to the trust fund occurring in consequence may be considered to be due to a breach of trust, in respect of which the trustee will be required to make good the loss to the trust fund. On the other hand, if a benefit should occur to the trust fund in course of a trustee conflict of interest, the trustee has no inherent entitlement to any additional remuneration as a result.

Trustee charges

As a relic of former times, trustees are generally not permitted to profit from their trusteeship unless appropriately authorised to do so by their trust instrument. Professional trustees are obviously not going to act without being able to charge their normal fees and so trust instruments invariably contain authorisation for trustee to be paid their normal level of fees.

Trustee Indemnity

Trustees have a general indemnity under law in respect of expenses incurred in the exercise of their trusts and powers, and they are entitled to pay or discharge such expenses out of the trust assets.  This will invariably be extended by more specific terms in trust instruments clarifying that trustee liability will be confined to loss caused by trustee’s wilful misconduct or wilful breach of trust.  This is necessary to enable trustees to act honestly and properly in circumstances which may result in certain beneficiaries feeling aggrieved.  Trustees indemnity clauses which seek to exculpate trustees for loss to the trust fund due to their negligence are generally unlikely to be upheld. https://www.linkedin.com/in/john-hickson-1b855b79/?originalSubdomain=ie

What are the advantages of prenuptial agreements for international families?

What are the advantages of prenuptial agreements for international families?

Prenuptial agreements can be used to protect international family wealth and to ensure a fair settlement for all parties without the necessity of going to court.

This article relates to international families and their use of prenuptial agreements to make wealth planning decisions for the future. We look at what they are, how the courts view them in different jurisdictions and how and why they are currently being used.

What are prenuptial and postnuptial agreements?

‘Pre-nuptial agreements’ are also referred to as pre-marital agreements, ante-nuptial agreements and often shortened to ‘prenups’. They are contracts made by two parties in contemplation of marriage. They outline each party’s responsibilities and property rights in the unfortunate event of their marriage breaking down.

A ‘post nuptial agreement’ is one which is entered into during the marriage and may be, as with a prenuptial agreement, made in case of marital breakdown, or one which has been made following the breakdown of the marriage (a ‘separation agreement’). Post nuptial agreements made in contemplation of marital breakdown are often drawn up to re-enforce a previous prenuptial agreement. For ease of reading, we will refer to prenuptial agreements here.

Why do couples enter into prenuptial agreements?

In certain jurisdictions, prenuptial agreements are the norm. In others they are considered unusual, and frankly, unromantic! But there are good reasons for entering into an agreement these days in particular for wealthy families with an international lifestyle and a range of assets held globally hoping to ensure that this wealth stays with that party or his/her family:

  • to provide asset protection: protect family wealth from what has become an increasingly generous series of awards in favour of the weaker party and the vulnerability of inherited wealth, particularly in some common law jurisdictions. Where the wealth has been brought into the family solely by one party, and this could be for many reasons but including where one party is older and has successfully accumulated wealth by his own efforts or because a party has the benefit of family and inherited wealth. It is common for prenuptial agreements to ring fence premarital assets and allow for a fair distribution of only those assets which are accumulated during the marriage;
  • to simplify matters on divorce, create certainty and avoid lengthy and expensive litigation;
  • To protect the interests of children from a previous marriage;
  • Although traditionally seen as a tool for the wealthy, a prenup can also record and allow compensation to a party for giving up employment, or moving jurisdictions for the sake of the family.

How do the courts view prenuptial agreements?

There has been a significant change in attitude towards prenuptial agreements in recent years. Originally they were seen by the courts as a threat to the flexible jurisdiction which prevailed protecting the rights of the financially weaker spouse. In common law countries such as England and Hong Kong, family law has been designed to ensure a fair division of marital property, dependant on a number of different factors to determine who should get what in order to allow the parties to carry on with their lives as comfortably as possible after divorce.

The trouble was, the outcome was unpredictable and could differ from one judge to another, depending on his exercise of his judicial discretion. If there was a prenuptial agreement is was just one of the factors the court would consider. Prenuptial agreements were seen as a tool of the wealthy to limit the rights of the weaker spouse by making her (traditionally) sign an agreement which would arrange that a certain amount would be payable dependant upon the number of years they were married, how many children they had and so on.

However, with the increase in awards, particularly in common law jurisdictions, the perception of the prenuptial agreement has changed to one of prudent planning, so long as the rights of the weaker spouse and children are protected within the document.

Very recently in England, the Law Commission has recommended that there be a change in the legislation to make prenuptial agreements legally binding. This has been controversial as in many sectors of society, particularly the Church, prenuptial agreements are considered against public policy as they undermine the idea of marriage as a life long union. Now the papers are all reporting that DIY divorce will become all the rage as couples can write their own contracts before getting married which the courts will recognize as valid.

In reality, society has changed over the years and divorce has become commonplace. Consequently the courts have become more sympathetic to the parties’ wish to regulate their affairs in what is hoped to be a cost efficient way. In most jurisdictions, however, safeguards have been put in place to ensure that such agreements are fair, that financial responsibilities are met and they are not designed by the parties to defeat creditors. Some guidelines common to many jurisdictions are set out below.

Guidelines

Generally, a prenuptial agreement will be enforceable if:

  • Both parties have received independent legal advice – although this is not always fatal if a party was able to take legal advice but chose not to;
  • There has been full disclosure. It is important that each party has the information material to his or her decision and each party had intended that this agreement would govern the financial consequences of the marital breakdown;
  • There is no evidence of duress, fraud or misrepresentation which would in any event put a contract into question, but in addition to this, evidence of undue influence and other unworthy conduct, such as exploitation of a dominant position to secure an unfair advantage, may render the agreement unenforceable. It has been suggested that there should be at least 28 days between signing the agreement and the wedding to allow proper consideration of the implications of the agreement and to ensure that there is no question of pressure at the time of signing;
  • The agreement must be fair. If one party wishes to ring fence inherited or pre marital assets, it is as well to compensate the other party in the division of the post marital assets. If the marriage is long, inherited wealth, pre marital assets and trusts will all be more vulnerable to a claim. The law differs from one jurisdiction to the next in respect of premarital and inherited wealth but in England and Hong Kong the needs of both parties will be considered first. If there is any surplus for distribution, factors such as the duration of the marriage and whether the inherited or premarital wealth has been mingled and used by the parties in their general living expenses will be relevant. If so the funds will be vulnerable, even if there has been an attempt to ring fence that asset by, for example, putting it in a trust.
  • Special care should be taken to provide for children and the inclusion of a review clause is advisable as the contract may become less relevant over time.

Are nuptial agreements enforceable in all jurisdictions?

For the international client, it is important to know where prenuptial agreements will be enforceable. There is a tread, even where they are not enforceable, that they should be taken into account:

  • In most countries in Europe as well as the US and Russia, prenuptial agreements are strictly enforced and in China, they are enforceable under Article 19 of the Marriage Law;
  • In Canada, New Zealand and Australia they are binding generally. In Canada they are binding, so long as there has been independent legal advice and full disclosure. Further the courts can intervene if the provision for division of property is unfair. In Australia, prenuptial agreements are binding pursuant to Part VIIIA of the Family Law Act. In New Zealand, they are binding unless a court considers that letting the contract stand would cause ‘serious injustice’;
  • In England and Wales, following the 2010 Supreme Court case of Radmacher v Granatino, prenuptial agreements are enforceable, subject to certain conditions, and we await the outcome of the Law Commission’s report;
  • In Singapore, following the Court of Appeal case of TQ v TR, where, in addition to allowing the principle that a pre-nuptial agreement may be considered in a court’s determination of a fair result, it further held that foreign prenuptial agreements governed by foreign law will be given significant weight and would normally be enforceable
  • In Hong Kong, a recent case has determined that the English case of Radmacher is good law in Hong Kong too. Therefore it is likely that prenups, providing they contain the right conditions, will be enforceable.’

Are nuptial agreements enforceable between jurisdictions?

It is material where the agreement has been finalised but it is more important where the case is heard. In Radmacher v Granatino, the case involved a prenuptial agreement which had been settled in Germany, between a German wife and a French husband with a German law clause. As the couple were resident in London at the time of the divorce, and the petition was issued there, the matter was determined by the English court.

In Germany, the agreement would have been strictly enforced, in England, before its determination by the Supreme Court, it was not. The current disparity between jurisdictions can often give rise to a dispute over forum. The party in whose favour the prenuptial agreement has been made may well go to great lengths to establish that that country should hear the dispute as to financial division particularly where the contract is strictly enforced.

At present, if the case is to be heard in England or Hong Kong, the outcome is less certain. A governing law clause may help in a forum dispute, but may not be determinative. If there is a forum dispute, the whereabouts of the assets will be material.

Conclusion

Given the prevalence of prenuptial agreements and the fact that in most jurisdictions they are enforceable, they are a useful tool for international wealthy families. They are regularly viewed as prudent wealth planning, along with the creation of family trusts. The fact that inherited wealth and trusts, which would normally be vulnerable to asset division upon divorce, particularly in England and Hong Kong, can be ring fenced with a prenuptial agreement is particularly attractive.

However, even where such agreements are enforceable, care must be taken with the drafting as many agreements end up being litigated – the opposite of the parties’ intentions. There have been a string of high profile cases in Australia over the last few years. The idea of the ‘DIY prenup’ is therefore not an attractive thought and experts in the field should be consulted to avoid expensive court battles. https://www.withersworldwide.com/en-gb/people/philippa-hewitt

Protecting your wealth and estate with an Anguilla Foundation

Protecting your wealth and estate with an Anguilla Foundation

The History of the Anguilla Foundation

The Anguilla Foundation is a versatile platform for Estate Planning and Asset Protection. The Anguilla Foundation finds its roots in the common law trust and, over the centuries, particularly thanks to the Liechtenstein, Austria and Panama models, has evolved into a unique wealth preservation vehicle, combining the benefits of both a trust and a company.

An Anguilla Foundation is distinguishable from a trust, in that it has the rights and duties exercisable by the trustees of a trust (but not by the trust itself) and is capable in its own right of transacting business and of entering into legally binding contracts. It has separate legal personality, the ability to hold assets in its own name and the ability to contract with third parties and to sue and be sued in its own name. But instead of having shareholders, as a company, a foundation holds the assets for the benefit of beneficiaries or purposes.

General Principles

A foundation is administered for the benefit of its beneficiaries and/or purposes in accordance with contractual principles. Such principles are more familiar in Civil Law jurisdictions, where people find it difficult to understand the concept of equitable rights and fiduciary obligations, inherent in the concept of trusts

In contrast to the position under an Anguilla trust, no beneficiary, object or purpose of an Anguilla Foundation has any right “in specie” against the property endowment of the foundation. Subject to the terms of the foundation’s declaration of establishment or by-laws, any assets of the foundation available for distribution to a beneficiary are not capable of being alienated or passed by bankruptcy, insolvency or liquidation, or liable to be seized, sold, attached, or otherwise taken in execution by process of law. Nevertheless, any beneficiary of an Anguilla Foundation may enforce the due administration of the foundation in accordance with the terms of its declaration of establishment and by-laws.

An Anguilla Foundation is irrevocable and not subject to any perpetuity periods. The foundation council may, however, decide to dissolve the foundation, if its purpose can no longer be realised or if there are no assets left in the foundation.

Pros and Cons

The concept of a foundation with separate legal personality is well understood in Civil Law jurisdictions. The main objective of The Anguilla Foundation Act is to enable Anguilla to provide a flexible vehicle for use by clients, especially those based in civil law countries, by offering a modern, lean and workable estate planning concept, with which they are much more familiar than they are with the Common Law trust concept.

Added to that, some of the unique features offered by the Anguilla legislation set the Anguilla Foundation apart as one of the most straightforward, yet sophisticated, foundation models available, and highly suitable for estate planning and asset protection.

Unlike trusts, where changes in trustees often involve highly contentious issues concerning the indemnities to which trustees are entitled, either on retirement or on distributions of assets, no such issues arise in the case of foundations, with consequent cost and time savings.

The legislative framework of the Anguilla Foundation renders it possible to hold assets for beneficial purposes that can be drafted to achieve almost any required result. This could include the mimicking of the non-voting depositary receipts sometimes provided for in foundations created under Dutch law, or a wide variety of other special purpose beneficial provisions.

Entrepreneurs seeking to provide for the welfare of successive generations of their family are frequently concerned to ensure that after their death their business is not broken up or sold. To achieve this, the use of a purpose trust to hold the shares, or possibly to hold a separate class of voting shares, has often been seen as a solution.

Likewise purpose trusts are frequently used to hold the shares in private trust companies established to manage the “family office”, managing the trusts and other personal financial interests for a particular High Net Worth family. In both these cases an Anguilla Foundation is likely to be seen as a more attractive alternative, providing, as it does, the additional insulating layer of corporate personality (the corporate veil). https://www.websterlawbwi.com

Harry Wiggin

Harry Wiggin

Webster Law
Preserve your assets with a Principal Residence Trust

Preserve your assets with a Principal Residence Trust

Preserve your assets with a Principal Residence Trust

The family home is often one of the key family assets. It can be the object of friction among family members, and be subject to tax on sale or death, unless proper planning is implemented.  A trust can be used to address these issues and minimize risk of loss.

Clients often ask me, “How can I best protect and preserve my assets, such as the family home, for my heirs?”

I recently advised a couple before their upcoming second marriage, who wished to discuss what legacies they wanted to leave to the children they each had from previous marriages.

I suggested they each get independent legal advice (“ILA”), but they insisted on being advised together, so I had them sign an acknowledgment and waiver of ILA.

They were both contributing to the purchase of a new home, and wanted to ensure that on death the one-half contribution of each went to the children of the first marriage of each.

I recommended that they establish a Principal Residence Trust (“Residence Trust”) to hold the new home. As they were to settle the Residence Trust on themselves as trustees, for the benefit of themselves and the respective heirs of their estates, a simple change in legal title would be registered.

I explained that the Principal Residence Trust would preserve the availability of the Principal Residence Exemption from future capital gains that may be realized on the disposition of the home, under the Income Tax Act (Canada) (“ITA”). On the death of either of them, the Residence Trust would continue to own the home, so no probate tax would be payable on the value of the home. On the purchase of this Cdn$2 million home, the probate tax in Ontario would otherwise be about Cdn$30,000.

On the death of the first spouse, the surviving spouse would have the power to deal with the assets of the Residence Trust in his/her discretion, but preserving those assets for the beneficiaries of the Principal Residence Trust. After the death of both spouses, the trustees would be empowered to deal with the matrimonial home in accordance with their respective wills.

I pointed out that the ITA’s definition of a Principal Residence allows for a trust to own the home and, on disposition, designate specific family members who have been beneficiaries of the Residence Trust and have ordinarily inhabited the home. In the case where this home is the only one claimed by the designated individual as his/her principal residence for each particular year of ownership, the trust may claim the Principal Residence Exemption. https://www.grllp.com/ 

Principal Residence Trust

Lorne Saltman

Gardiner Roberts LLP
+1-41-6625-1832
www.grllp.com
lsaltman@grllp.com