Should I use a Liechtenstein foundation as a private trust company for my family?

Should I use a Liechtenstein foundation as a private trust company for my family?

Many families use trusts as an estate planning vehicle and for wealth preservation. Increasingly, instead of using a trustee company owned by a financial service provider, a private trust company (PTC) is appointed as a trustee. The use of a Liechtenstein foundation as such a PTC offers several key advantages.

Advantages of a private trust company

However, there has been a growing trend to create a so-called private trust company (PTC) to act as a privately held trustee company only for the trusts of one family. A key advantage of using a PTC is that instead of transferring the family wealth to a company that acts as a trustee for hundreds of trusts, the family has its own trustee which is not shared with others.

This removes the risk that the trusts of a certain family are affected by problems that have nothing to do with it. In contrast, if a trustee company owned by a financial services provider is used as a trustee, there is a chance that reputational or other issues relating to a specific trust spill-over to the trusts of another family because they share the same trustee.

Moreover, in case of a PTC, the client determines who will act as the PTCs initial directors. If a trust company is owned by a financial services provider, the composition of the board of directors generally cannot be changed.

Furthermore, using a PTC facilitates the transition to another administrator of the family trusts, should this be desired. In a traditional set-up, the trust assets are registered in the name of a trust company which is owned by a financial services provider. If a new trustee is appointed, it is necessary to transfer the legal ownership of the trust assets to the new trustee.

Additionally, in most cases the outgoing trustee company will request an indemnity against any liabilities it may have from acting previously as a trustee. If a PTC is used and it is intended to exchange the administrators of the family trusts, only the directors of the PTC need to be replaced.

A common set-up of a private trust company structure

In a common set-up, the PTC is a company limited by shares. While using a PTC has several benefits, it begs the question who should act as the shareholder of the privately held trustee company. In most cases, the shareholder cannot be the settlor of the trust because then the shares of the PTC would be part of his estate which would frustrate the estate planning purpose of the trusts. A common set-up to solve this problem has been to establish a separate purpose trust whose only purpose it is to hold the shares of the PTC.

The main drawback of this approach is that again a trustee is needed for the purpose trust holding the shares of the PTC. In most cases, a trustee company owned by a financial services company is used for this purpose. This means that the reasons for not using such a company as a trustee of the family trust are still present. However, they are moved to a remoter level and are mitigated because the only assets held by the trustee company of the purpose trust are the shares in the PTC.

Using a Liechtenstein foundation as a PTC

Using a Liechtenstein foundation removes entirely the need for a trustee company owned by a financial services provider and at the same time reduces complexity. The structure then simply consists of a Liechtenstein foundation acting as trustee of one or more family trust.

A Liechtenstein foundation essentially is a fund endowed for a specific purpose which acquires the status of a legal person. It has no shareholders and therefore the question who holds the foundation does not arise. Such a foundation can be established with the sole purpose to act as the trustee of one or more trusts for the benefit of a certain family.

An illustration of this set-up:

It should be noted that when a Liechtenstein foundation acts as a private trust company, generally no special business license is necessary in Liechtenstein. This was clarified recently by a submission of the Liechtenstein government to parliament dealing with an amendment of the Trustee Act. The Liechtenstein Trustee Act deals with the regulatory framework for professional trustees and trust companies. In this submission (BuA 42/2013, p. 40 et seq.), the Liechtenstein government clarified that a PTC does not qualify as a professional trust company and does not require a license under the Trustee Act.

The government noted that a Liechtenstein PTC, like all other Liechtenstein companies without a special business license, requires a member of the board who is licensed as a professional trustee or in an employment relationship with such a professional trustee. According to the Liechtenstein government, no separate regulation of the entity acting as a PTC is necessary.

The government pointed out that the licensing requirement only applies to “professional” trustees and that a privately held trustee company typically does not meet this criterion because it is not used with the goal to create profits. The government also mentioned that the fact that the directors charge a fee to the PTC is not harmful either.

Furthermore, the government stated that even if the Liechtenstein entity charges a trustee fee to the trusts, it still does not need to be regulated because the PTC offers its services only to a closed circle of persons. The government also specifically confirmed that a Liechtenstein foundation can act as a PTC.

Conclusion

In a summary, a Liechtenstein foundation can therefore be used as a private trustee company that acts as the trustee of the trusts for a certain family. This leads to a relatively simple and cost-efficient structure and does not require a special licensing or other regulatory procedure.

The only legal requirement is the need for a local board member of the foundation who has a special business license, i.e. at least one board member of the foundation must be licensed as a Liechtenstein professional trustee or must be employed by a licensed trustee. https://www.marxerpartner.com/details-en/alias/dr-iur-markus-summer

Is it beneficial to set up a trust for estate planning purposes?

Is it beneficial to set up a trust for estate planning purposes?

Estate planning involves the effective structuring of assets so that they may be transferred to the people nominated by you, in your will, without paying unnecessary taxes or estate duty.  Proper estate planning will also reduce uncertainties regarding your estate upon your death.

Estate planning in your personal name

One of the major disadvantages of your estate devolving in terms of a will is that your entire estate is frozen upon your death, including bank accounts and any bank accounts held jointly.  Therefore, if you have a spouse and/or minor children dependent on you, this method would not effectively cater for their needs whilst your estate is wound up, which could take several months.

In terms of Section 4A of the Estate Duty Act 45 of 1955 (hereinafter referred to as “the Act”), each persons’ estate is entitled to an exemption on assets of up to R3.5 million.  Estate duty of 20% is levied on assets that exceed the R3.5 million exemption, except where assets are transferred to a surviving spouse.

Section 4A(2) of the Act allows for the surviving spouse, who subsequently passes, to utilise the remainder of the exemption of the first-dying spouse, if any.  Therefore, if for example the first-dying spouse only utilises R2 million of his/her exemption, the balance of R1.5 million will be added to the second-dying spouse’s exemption.  The second-dying spouse will therefore have an exemption of
R5 million available to him/her.

Where spouses die simultaneously, the spouse with the smallest estate will be deemed, for the purposes of Section 4 of the Act, to have died first.

Trusts

There are several advantages of establishing a trust for estate planning purposes.  One of the most notable is that the trust does not “die” when you die.  Therefore your estate is not liable for estate duty.

Further to this, all growth on assets of a trust is similarly not subject to estate duty as the growth on such assets is attributed to the trust.

A further advantage of a trust is that the assets are not frozen upon death and the trust can therefore continue to support your dependants upon your death.  This is often considered as a major advantage as it could take several months to wind up a deceased estate.  During that time, your dependants will not have access to assets like, for example, bank accounts.

Furthermore, the assets of the trust can be protected from creditors. This is only the case if the trust is not an alter ego, as held in First National Bank v Britz and Others [2011] ZAGPPHC 119; 54742/09
(20 July 2011).  If a trust is being used merely to protect assets from creditors in your estate and you are in control of the trust and its assets, it may be found that such trust is an alter ego and the court can declare that such assets are in fact personally held by the founder and should therefore fall within their personal estate.

Conversely, a trust also places many duties on the trustees.  A high level of responsibility is placed on trustees and they are expected to act diligently, carefully and independently, in the interest of the beneficiaries and in accordance with the trust deed.  Trustees can be sued for not carrying out their duties properly.

Furthermore, trust administration can be costly and time consuming as proper records must be kept and tax returns submitted.  Trustees are expected to be meticulous with documentation of transactions by the trust, bearing in mind that their objective is to act in the interest of the beneficiaries.

Testamentary Trusts

Testamentary trusts (mortis causa) are the most common form of trusts used in estate planning as they only come into existence after the death of the testator.  These trusts are especially beneficial where a testator wishes to protect minor children or dependants who are not capable of managing their own affairs.

A testamentary trust is formed by the testator inserting a trust clause into his will, which serves the same purpose as a trust deed.

The trust is administered by trustees appointed in the will and usually comes to an end after a predetermined period or event, for example when a minor child attains the age of majority.

Assets that form part of a deceased estate may be moved to this trust by trustees who are appointed in the deceased’s will.

Summary

Choosing the most effective way to plan your estate depends on your personal circumstances.  As seen from above there are several pros and cons to each model and it is up to you to decide what is best suited for your personal circumstances.

Estate planning in your personal name attracts estate duty at 20% of assets over and above the R3.5 million exemption.  Should your estate be in excess of R3.5 million you may wish to consider a trust or a testamentary trust.  Further, upon death, the estate of the deceased is frozen pending finalisation.

A trust places many onerous duties on the trustees.  Running a trust is costly and there is always a risk that such a trust could be set aside if it is proven to be an alter ego of the founder.

A testamentary trust is only created upon the death of the testator – there are therefore no costs involved with the trust prior to the testator’s death.  There is therefore also no risk that this trust could be set aside on the basis of it being an alter ego.  Further, your dependants can continue to utilise the trust assets while your estate is wound up.  You also have the benefit of not paying estate duties. https://www.linkedin.com/in/liesl-rae-fischer-7b287b196/?originalSubdomain=za

How to implement strong Family Governance?

How to implement strong Family Governance?

When dealing with family governance, family advisors should keep in mind the following steps: establishing a proper diagnosis of the family needs, implementing appropriate tools and increasing involvement toward family.

Implementing strong family governance

First, family advisors must pay particular attention to the following: family governance cannot and must not be mixed up with corporate governance, even though family play a key role in family held corporations. Both entities do not follow the same goals and are therefore not subject to the same kind of management.

Family governance must be understood as a body of rules and tools designed to enable the family to be more efficient when dealing with its own goals and with a family held corporation.

Hence specific tools should be set up. To determine those tools, officers and advisors should go through several steps and should have a comprehensive understanding of the family, its goals and the individuals who are parts of it. In order to so, Advisors should first establish a proper diagnosis. This step is by far the most important one and Advisors should ask any questions they think are relevant to establish it, during personal and confidential interviews with each family member.

At the end of this step Advisors should have a clear representation of the family: its members, a clear understanding of their responsibilities and their place in the family, how each individual is seeing himself in the family and how each of them is being seen by the others.

A comprehensive knowledge of the family assets must also be made available to the Advisors who should then rank them according to the family goals. It is to be noticed here that the most valuable assets for a family may not have a high worth. Advisors must therefore pay attention to the history of the family and its core value.

This is one of the reasons why family governance differs significantly from corporate governance. Legal advisors may become useful at this step in order to solve any issues regarding the right of each members of the family. It is also to be noticed here that understanding a family organization and history can take time. It is important for adviser to spend time with the member of the family.

In order to help family advisors to reach this first step they may design and use grids, filing them during personal interviews with each family member or by asking those members to file them later. It is important that those members have the feeling that they can disclose everything and that they are free to ask any questions. To avoid waste of time it is recommended that those questionnaires use “yes or no” questions or a scale of value.

Two elements must be analyzed with particular attention: the already existing family organization and what bring its members together. Those elements can be analyzed through several criteria. Communication between members about common goals is particularly relevant.

Once the diagnosis has been established it must be communicated to the family members and should be subject to discussion. This would constitute a first step toward implementation of good family governance.

If the diagnosis of the family situation was properly made, the second step should be easier. Indeed, this step is basically the development of family governance tools, helping to create and maintain a common interest in the family. Those tools can be different and must be adapted depending on the needs of the family, its members, their level of education and level of involvement. As examples, a code of conduct, an association, a foundation, a corporation, a family trust or a contract embodying and formalizing the relation inside the family could be used. This can also be used to help the family to reach its goals by making management of the assets easier.

Nonetheless, it is important to keep in mind that those tools are only tools. They must be able to change when required in order to always meet the needs of the family, its evolution over time and its projects. Therefore, governance of the element that embodies the family organization must be implemented as is the governance of the family. Legal and business advisors could be very useful to help determining the most appropriate tools, their legal consequences and the tax consequences that may arise. Indeed, each country may offer different legal and business tools which could be used to reach different goals.

All members of the family should get involved in this organization and have some responsibility in it. This how family governance leads to great success. Furthermore, this would help to foster communication, relations and would improve commitment of the individuals to the family.

It is important to be noticed that in France, for example, but this could be generalized to most country, 67% of the family held corporations who did not succeed to stay in the family for more than three generations failed to do so due to lack of communication, according to the family members. Hence, family advisors play a key role in family success. Indeed, they must be able to facilitate communication and to understand evolutions of the family: they are a link between generations. Family advisors must meet members on a regular basis in order to know them and to meet the future needs and evolution of the family.

At this point it might be useful for the family advisors to organize seminars, in addition to the family meeting that could be held, in order to provide family with training on very specific subject such as finance, law, business, tax… It is also a good opportunity to strengthen family tie: it might be a good opportunity for individuals living far from each other to meet and discuss. Those seminars should not be held too frequently and should stay the occasion to discuss very specific subjects which take time to think about: the level of information that individuals will have to understand is fairly high and presence of the whole family is necessary.

Finally, family advisors, in order to serve the family will have to rely on a well established network of lawyers, business and financial advisors. Family advisors will be the one who find those experts and who will organize their intervention. More than pure technical subjects those professionals should work on the family governance with a global approach, close to the one required for family advisors.

 

https://yards-avocats.com/en/team/jerome-barre/

Strong Family Governance

Jérôme Barré

Yards Avocats