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

External Threats To Middle Eastern Family Business

External Threats To Middle Eastern Family Business

Common flaws in family business legal structures in the Middle East and the resulting risks

Middle Eastern family business legal structures often reflect serious and potentially catastrophic weaknesses through failure to shield and protect the founder and the core assets from serious external threats to the business like legal risks.

There is a strange paradox associated with Middle Eastern businesses. On the one hand, family businesses are the real strength and spine of the Middle Eastern economies. Alongside sovereign enterprises, family businesses dominate the business landscape. On the other hand, close examination of particular Middle Eastern family businesses, even very large ones, frequently reveals frailties and fault lines which expose them to external threats and business risks; and to far less visible threats from the inside.

In many cases these weaknesses will not be obvious to the outside observer, or even to the families themselves.

External Threats

Typically, Middle Eastern family businesses are highly diversified and have many compartments. Unfortunately, the famous 1912 shipwreck the RMS Titanic also had many compartments – but because those compartments were not totally sealed and separated the Titanic sank to the bottom of the ocean when the ship tilted and the rushing waters flooded over the dividing walls into every compartment.

The typical Middle Eastern family business is completely exposed to a disaster in one compartment of the business spreading to the other compartments. Why? The answer is that there are serious weaknesses evident in the most commonly used family business structures, e.g:

  1. businesses are often set up as sole establishments owned by an individual within the family (often the founder) therefore one catastrophe (e.g. a fire in a large building owned by the founder himself) carries financial consequences and exposures directly to the core of the family’s asset base;
  2. many families operate an array of businesses through registering multiple branches of a family “mother company”, a shoddy structure design. Taking this cheap and convenient shortcut means that every liability of every branch is a direct liability of the core mother company (usually the company which owns all the major assets);
  3. failure to have a coherent corporate structure often leads to the twin evils of reliance on borrowings secured by personal guarantees and a failure to track and identify adequately the performance or losses of individual businesses within the family’s portfolio.

For the above reasons, many family businesses in the Middle Eastern inhabit glass villas – and any major hailstorm will prove catastrophic.

What Can Families Do?

Good legal advice can help families. For example:

  1. create a corporate legal structure for the family which has watertight compartments;
  2. isolate “blue chip” investment assets from entities carrying on trading enterprises with business risks and borrowings;
  3. create a corporate legal structure which is both bankable and “deal friendly”;

Conclusion

Many Middle Eastern families run enormously successful and growing enterprises, using “cutting edge” business models and technology. Yet, all too often their legal infrastructure is shoddy, creaky, rusty and dangerous. It is high time families overhauled their legal infrastructure, before a setback in one compartment sinks the entire ship

Note: An extended version of this article was first published in “The Oath”, the Middle East Law Journal for Corporates in May 2014. https://www.linkedin.com/in/gary-watts/?originalSubdomain=au

Liechtenstein foundations and trusts for asset protection and wealth preservation

Liechtenstein foundations and trusts for asset protection and wealth preservation

What benefits do Liechtenstein foundations and trusts offer for asset protection and wealth preservation?

Some of us are in a fortunate position where asset protection and wealth preservation are not much of a concern because we live in countries where corruption is rare, governments are relatively stable and creditworthy, courts and governmental authorities are efficient, crime rates are low and chances that illegitimate claims will be enforced against our assets are remote.

For people living in a country where one or more of these factors are missing, however, the danger to their assets may be real and the fear that their wealth may fall into the hands of others without justification may be well-founded. For those who are legitimately concerned about asset protection and wealth preservation, Liechtenstein foundations and trusts offer distinct advantages which will be described below.

Liechtenstein foundations

Let there be no mistake: Liechtenstein provides legal assistance in criminal matters to other countries and has entered into treaties allowing the exchange of information in tax matters with an increasing number of jurisdictions. Furthermore, the creditors of a founder or settlor of a Liechtenstein foundations or trust are not without protection under Liechtenstein law: any gratuitous transfers to a trust or foundation may be challenged by creditors of the founder/settlor within one year from the transfer. If such creditors can prove intent of the founder/settlor to defraud creditors, the statute of limitations is five years.

However, for those who are looking for a safe haven for their assets without any pressure from existing creditors and want to structure their wealth in a tax-compliant way, Liechtenstein foundations and trusts offer the following advantages:

(1) Protection of privacy

In case of Liechtenstein (private) foundations, registration in the trade registry is voluntary. Even if a private foundation is registered, the identity of the founder or the beneficiaries is not disclosed. The names of the foundation council, however, are mentioned.

In case of Liechtenstein trusts, there is a registration requirement (mainly to ensure the payment of the annual tax of CHF 1,200), but this registration does not include the names of the settlor or beneficiaries.

(2) No pre-trial discovery proceedings

In contrast to a number of jurisdictions, in case of pending or threatened litigation there is no duty to disclose documents to the adversary. The only documents that may need to be disclosed upon a court order in the course of litigation are documents so-called “common documents” of the plaintiff and defendant, such as written contracts between them, or other contracts where there is a preexisting obligation to disclose them.

(3) No enforcement of foreign judgments

Liechtenstein does not enforce foreign judgments without a re-litigation on the merits unless there is an enforcement treaty (or other binding declaration) in place with the country whose courts rendered the judgment. This distinguishes Liechtenstein from a large number of jurisdictions, in particular those influenced by common-law, which often enforce foreign judgments if they were rendered in fair proceedings. Other jurisdictions only enforce foreign judgments if the other country would do the same, but have a presumption of such reciprocity.

So far Liechtenstein has only concluded enforcement treaties with Switzerland and Austria and a multilateral convention on the mutual enforcement of certain child support judgments. Liechtenstein is not a member to the Lugano Convention on Jurisdiction and the Enforcement of Judgments, and EC Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments does not apply.

In the absence of an enforcement treaty, foreign judgments may be used by a plaintiff to obtain a preliminary court order in Liechtenstein. However, the defendant may bring legal action against such a preliminary order so that the dispute will need to be re-litigated in Liechtenstein in any event.

(4) Short statute of limitations for a challenge of the transfer of assets to the foundation

In order to protect creditors, any gratuitous transfers to a trust or foundation may be challenged by creditors of the founder/settlor within one year from the transfer. The statute of limitations for transfers to the foundation/trust is five years from the transfer of assets to the trust or foundation if creditors can prove intent of the founder/settlor to defraud them.

After the expiry of these deadlines, no challenges of the transfer of assets to the foundation or trust are possible under Liechtenstein law, provided that the Liechtenstein foundation/trust is structured appropriately. In particular, decisions must be taken by the foundation council/trustee, and the foundation should not be seen as the alter ego of the settlor/founder or the beneficiaries.

(5) No attachment of the interest of beneficiaries

Both, Liechtenstein foundation and trust law, grant considerable flexibility when it comes to the determination of the rights of the beneficiaries in the trust or foundation documents. However, when asset protection is a concern, in many cases a discretionary structure with several possible beneficiaries is preferable where distributions of the capital or income of the foundation or trust are left to the discretion of the foundation council/trustee. This will ensure that there are no legal claims of the beneficiaries that can be attached by third parties.

Taxation of Liechtenstein trusts and foundations

Liechtenstein trusts are subject to an annual tax of CHF 1,200. Liechtenstein foundations may apply for the tax status of a “Private Asset Structure”, provided that they only hold private wealth and do not engage in economic activities. A foundation taxes as such a Private Asset Structure is only liable to pay the minimum annual profit tax of CHF 1,200, and no tax filing needs to be made.

However, even without this special tax status, certain types of income, including all dividends and capital gains from participations and any revenue from foreign real estate are exempt from the otherwise applicable 12.5% profit tax. In case of a foundation which only holds the shares of a holding company, it may therefore not be worthwhile to seek the status of a Private Asset Structure because any dividends and capital gains from the participation will be tax exempt even under regular taxation.

Besides the taxation in Liechtenstein, in each case the tax consequences of the establishment of the trust/foundation and any distributions from the trust/ foundation in the jurisdictions of the settlor and the beneficiaries need to be considered carefully with the assistance of local advisers. https://www.marxerpartner.com/

liechtenstein foundations

Markus Summer

Marxer & Partner