Divorce, Trusts and Estate Planning

Divorce, Trusts and Estate Planning

In terms of South African statutory provisions, trust assets vest in a trustee of a trust in his/her capacity as trustee – held separately from his/her personal estate. In divorce matters, in particular where one deals with larger estates, we often find that some, or all, matrimonial assets are held in trusts, created for estate planning purposes or for tax purposes.  It is however not unusual for the only substantial asset, such as the matrimonial home, to have been placed in trust by one of the spouses during the course of the marriage.

Usually the children of the parties will be the beneficiaries and one of the parties the trustee together with an accountant.  Often, the party/spouse who has created the trust will ensure that he/she retains effective control of the trust assets and controls the decision-making process of the trust.  This is done by, for example, retaining the power to remove and substitute trustees.

The “sting in the tail” when using trusts as your alter ego

Commercially, using a trust merely to protect or shield assets from creditors in your estate invites risks of a court finding that the trust was used as the founder’s alter ego. In such an instance, and in order to satisfy the claim of creditors, a court may declare the assets held in a trust to be the personal assets of the founder of the trust, thereby exposing the assets to attachment and rendering the assets executable. [(First National Bank v Britz and Others [2011] ZAGPPHC 119; 54742/09 (20 July 2011)].

The leading South African case on the subject of “lifting the corporate veil” in a commercial context is Cape Pacific Limited v Lubner Controlling Investment (Pty) Limited & Others 1995 (4) SA 790 (A).  While in commercial cases it seems clear that our courts in certain circumstances are prepared to look at the substance of commercial entities and not merely their form, the corporate veil is, on the facts, rarely lifted.

In a Divorce context

In the divorce context, the approach of our courts has been similarly conservative, and the courts will not readily assail trust assets when dividing or distributing matrimonial assets.  On the other hand, there are instances where interests in trusts are taken into account without the necessity of lifting the trust veil.

Trust assets in South African law

There are no express specific statutory provisions which allow courts in South Africa to automatically treat trust assets as matrimonial assets in a divorce context or for that matter to make orders against a trust to transfer trust assets to a spouse.  The question which arises is: how to deal with a spouse’s interest in a trust when dividing the matrimonial assets or in the context of determining a maintenance claim?

Broadly, trust assets in South African law can be taken into account in certain instances such as where the trust is a sham and it is proved that the trust is not a genuine arm’s length entity, where a spouse has a claim for a redistribution of assets in terms of S7(3) of the Divorce Act 70 of 1979, or where the spouse has a claim against the trust as a loan creditor. A spouse’s interest in a genuine trust may also be relevant in determining a maintenance claim.

In the judgment of Badenhorst v Badenhorst (07/2005) [2005] ZASCA 116; [2006] 2 ALL SA 363 (SCA) (29 November 2005), the rule was laid down that in order to succeed with a claim that trust assets are to be included in a party’s personal estate, it must be proved that such a person actually controlled the trust and, but for the trust, would have acquired and owned the relevant assets in his or her own name.

The control which is exercised by the party must be de facto (in practice) and not de iure (in law).  In order to determine whether a party has de facto control, it is necessary to have regard to the terms of the trust deed and also to consider evidence of how the affairs of the trust were conducted and managed historically.  Accordingly, it may be easier to challenge the authenticity of a trust which was established by a spouse to frustrate the other spouse’s claim in circumstances where a divorce is pending or is contemplated.

It will be more difficult to challenge the genuineness of the trust there the trust was established during the course of the marriage well before the parties contemplated divorce proceedings for estate duty planning purposes or for tax purposes.

The provisions of the trust deed and an examination of past financial transactions of the trust, how the trust was conducted and managed, and determining whether the spouse in effect treated the trust assets as his own – with complete control over the assets – is essential.

In maintenance enquiries, income derived from a trust entity by a party, can be taken into account as part of a spouse’s resources.  It would be necessary to prove that the relevant spouse, historically, had access to capital and/or income from the trust.

In the unreported decision of Senior v Senior WLD Case Nol 98/22297 it was held that when making an order for personal maintenance it would be “proper and realistic to take into account all the parties’ resources, including the potential ability to receive or the likelihood of the receipt of benefits from discretionary family trusts.”
https://www.mdtcinc.co.za/yumna-mookrey/

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland? Switzerland is an attractive country and is granting substantial tax benefits to immigrating foreigners. The advantages of Switzerland include: (1) Residence permit granted to EU-citizens without major problems, (2) Purchase of real property possible, (3) Low tax rates in certain cantons, (4) Lump-sum taxation, (5) No inheritance tax for spouses and children in most cantons.

Is immigration to Switzerland still attractive to persons with no gainful activity there?

If a person thinks about leaving his home country permanently and taking up residence in Switzerland, he will have to think about his desires for life in the future at first and then about the legal requirements to be met and the taxation ramifications. When I am asked by potential immigrants about the best place in Switzerland to live from a tax point of view, I always recommend them to take a car and to drive through Switzerland. Then they should come back to me and tell me which place they like best. It will normally be possible to find acceptable tax solutions in most of the places in Switzerland.

In a second step, the following main issues need to be addressed:

  • Residence permit;

  • Purchase of property;

  • Taxation.

Residence permit in Switzerland

 As a general rule, only persons aged 55 and above who have a close association with Switzerland and are not gainfully employed in Switzerland can obtain a residence permit with non-employed status. They must have the necessary financial means at their disposal. As an exception, foreigners without a close association with Switzerland can be granted a residence permit since 2008 if they are of particular financial interest to the canton.

This means, in practice, that a minimum tax, which may range from CHF 400’000.00 to CHF 1 mio., always depending upon the canton of residence, is agreed and annually paid. According to NZZ (24 May, 2014), 389 such permits have been granted until present.

Due to the bilateral Agreement on the free movement of persons between Switzerland and the EU and a similar agreement between Switzerland and the EFTA (“the Agreement”), EU/EFTA-citizens are entitled to obtain a residence permit in Switzerland provided that:

  • they have sufficient financial resources; and
  • health and accident insurance equivalent to Swiss health and accident insurance.

It is accordingly rather easy for an EU/EFTA-citizen to be granted a residence permit in Switzerland at present.

The situation may, however, change due to an amendment of the Swiss Federal Constitution caused by a federal vote of the Swiss people on the so-called Mass Immigration Initiative. 50.3% of the votes were in favour of this initiative, which provides that Switzerland shall control the immigration of foreigners itself in the future.

The result of this vote is in contradiction to the Agreement. Under the Agreement, the EU has the right to cancel essential parts of the bilateral agreements with Switzerland, unless a mutual understanding can be found within the next three years.

For the time being, nothing has changed in practice. Immigration of EU/EFTA-citizens is still covered by the Agreement until Switzerland has released a law introducing limits to the immigration of EU/EFTA-citizens. The Swiss government hopes to be able to find a solution for continuing the bilateral agreements with the EU in the future.

Purchase of property in Switzerland

Switzerland had traditionally heavy restrictions on the acquisition of real property by foreigners. Some years ago, the restrictions in respect of the purchase of commercial property were abolished. Foreigners with no residence in Switzerland do, however, still need a permit for the purchase of private property in Switzerland. A permit will only be granted in special cases, e.g., vacation apartments in certain parts of Switzerland (maximum 200 m2).

A citizen of the EU/EFTA is entitled to acquire commercial and private real property without limits, if he is a resident of Switzerland. For other foreigners resident in Switzerland, certain restrictions apply until they have been granted a C-permit.

Taxation – Income and Net Wealth Tax – Lump-Sum Taxation

A person resident in Switzerland is subject to unlimited tax liability in Switzerland. He will have to pay income taxes at rates ranging between 20% and more than 40% as well as net wealth taxes ranging from 0.1% to 1% on his worldwide income and net wealth. Real estate and permanent establishments abroad are exempt from Swiss taxation.

The tax rate heavily depends upon the canton and commune of residence. Whilst the overall income tax rate in Wollerau, Canton of Schwyz, is at present 18.5%, cities like Zurich, Geneva and Lugano have maximum income tax rates between 40% and 46%.

A special tax system, the so-called lump sum taxation, can be elected by foreigners who, for the first time or after an absence of at least ten years, take up tax residence in Switzerland and do not engage in any gainful activity in Switzerland. Under this system, Swiss income tax is levied on the basis of the living expenses rather than on actual income. Under federal regulations, the living expenses must amount to at least five times the annual rent or rental value of the owned property at present.

Due to new legislation, this amount will be increased to seven times of the annual rent and must not be lower than CHF 400’000.00 for federal tax purposes. Whilst the new rules will come into force as of 1 January, 2016, persons who are already subject to lump sum taxation will be granted a grandfathering until 1 January, 2021.

Some cantons have, abolished the lump sum taxation for cantonal tax purposes (most importantly Zurich), whilst other cantons have introduced similar provisions as the Federation. In addition, a net wealth tax is levied by the canton, the basis of which is normally determined by a capitalisation of the taxable income at a rate of 5%.

For each year, a comparative calculation between the agreed lump sum tax and the tax on Swiss source income, foreign source income for which treaty benefits have been claimed and Swiss net wealth has to be made. The higher amount will be the basis for the annual tax.

Several double taxation treaties concluded by Switzerland (Belgium, Germany, Italy, Canada, Norway, Austria and the US) only grant treaty benefits to a person resident in Switzerland, if such person is subject to the generally imposed income taxes in Switzerland with respect to all income from the respective state. As a consequence, Switzerland introduced the so-called modified lump sum taxation.

Under this system, which can be elected for each state separately, the income from sources of the respective state needs to be included in the aforementioned comparative computation with the result that such income is deemed taxed in Switzerland under the respective treaty. According to my experience, this method seems, however, not to work with the US. In case of US source income, it is, therefore, recommended to agree with the cantonal tax administration to have such income subject to ordinary Swiss taxes.

On 19 October, 2012 a federal initiative regarding the abolition of the lump sum taxation on the federal and cantonal level has been filed. It is expected that the vote on this initiative will take place in 2015.

Should the majority of the voting people and cantons accept this initiative and thereby cause an amendment of the Swiss Federal Constitution, a law concerning the abolition of the lump sum tax will have to be released within three years. The acceptance of this initiative would, therefore, mean that the lump sum tax system would be abolished in Switzerland in 2018. It is not yet known, whether there will be any grandfathering rules.

Social security contributions

Persons who are resident in Switzerland and do not exercise any gainful activity in Switzerland are subject to Swiss social security contributions until age 64 for women and age 65 for men. The annual contribution per person depends upon the living expenses and the net wealth of the individual and amounts for the time being to a maximum CHF 24’800.00.

Inheritance and gift tax

For the time being, inheritance and gift taxes are only levied by the cantons. In most of the cantons, spouses and descendants are exempt from inheritance and gift tax, whilst the tax rates can be higher than 50% for third persons.

The canton of the last residence of the testator is entitled to levy the inheritance tax from the heirs. The residence of the heirs is not relevant for Swiss inheritance tax purposes. If the testator lives, e.g., in Monaco and gives a large portfolio to his heir resident in Switzerland, Switzerland is not entitled to levy any inheritance tax. Should the testator, however, be a Swiss resident and the heir a Monaco resident, the heir in Monaco would be subject to Swiss inheritance tax.

In 2011, an initiative for an amendment of the Federal Constitution was launched according to which inheritances exceeding CHF 2 mio. and gifts exceeding CHF 20’000.00 per year and person shall be taxed on  the federal level at a rate of 20%. The competence of levying inheritance taxes would thereby be transferred from the cantons to the federation. This initiative is not family friendly at all due to the fact that descendants and third parties will pay inheritance taxes at the same rates. Only spouses shall be exempt from inheritance tax.

It is very difficult to foresee, whether this initiative will be accepted in the federal vote which will most likely only take place in 2019 due to several complex issues. https://allemann-recht.ch/

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
Financial consequences of Death and Incapacity in Spain

Financial consequences of Death and Incapacity in Spain

Certain situations involve personal and financial consequences that one can foresee before they arise. A proactive approach entails foreseeing and regulating the consequences of death; and disability. What should I be aware of in each case? And which tools are available to me?

What are the main tools available to me in Spain to control the effects of my death, or of supervening incapacity?

There are very important personal and financial consequences attached to both death and certain life events or circumstances (like supervening incapacity), especially in the context of a family business, which can be shaped by the arrangements you make of your own free will.

Although most people are aware that they have the chance to control the use and distribution of their assets when they die, by providing a will, there are still not very many who devote the necessary time and resources to making proper plans and arrangements for their succession in all the related areas and possibilities. People often shun the idea of thinking about and controlling such a definite future event as death, and are normally even more reluctant to think about and control potential cases of supervening incapacity.

While it is not easy to embark on a thought process on these issues, if it is confronted as a responsibility, it will be an opportunity to gain a clear idea of your wishes, make sure they are fulfilled, and give peace of mind to the people in your family and business environment. This thought process will, in all likelihood, end with the signature of various legal documents which will be the means to realize your wishes.

Financial consequences of Death

Death generally entails the transfer of a person’s assets, rights and obligations to their heirs. A person’s legacy is guided by their wishes expressed principally in a will, or in the absence of a legal document setting out their wishes, by the provisions in the law.

While there are certain legal limits, such as forced heirship, which depend on the applicable law (and therefore on nationality and/or residence) the maker of a will has a considerable amount of freedom to make their own decisions. It is therefore crucial in succession planning to give thought to what your wishes actually are, and then make arrangements for those wishes, by asking and answering questions of the following type:

  • Are there any circumstances I am particularly worried about concerning my family or financial structure? Such as, for example:
    1. Administration of the assets of minors or incompetents.
    2. Unequal treatment among my descendants.
    3. Special protection for my spouse or long term partner (particularly if they are not the parent of my descendants).
    4. Protection of assets with regard to family members by marriage.
    5. And so on
    6.  
  • Do I want certain assets to be kept in the family after the next generation?
  • How and on what terms would I like to leave my assets?
  • I am not Spanish but do I have considerable assets in Spain?
  • Does the current structure of my assets fit the structure needed to fulfill my last wishes?
  • Are my wishes legally and economically viable?

These are just some of the key general questions that must be thought about to arrange for the will maker’s wishes, which may need to be controlled using the instruments provided in the legal system, such as: special administration of assets for minors, usufructs, fideicommissary or trust-type arrangements, appointing nominees, controlling the ultimate destination for assets, codicils etc., as allowed by the applicable law.

From a strictly formal standpoint, we wish to point out that the wills of Spanish nationals executed abroad are recognized as valid in Spain provided that their form is in accord with Spanish law or with the law of the place where the will was executed.

Further, for foreigners with assets in Spain, it will generally be recommendable for them to execute a codicil in Spain before a notary, which only contains provisions on the arrangements for assets located in Spain, and for that codicil to be registered at the Spanish registry of wills (Registro de Actos de Última Voluntad); in the absence of such a codicil, the arrangements for the assets in Spain will be governed by the provisions in any will executed by the foreigner which is valid according to his national law or the law of the place where it was executed.

Supervening incapacity

Greater life expectancy has increased the occurrence of age-related dementia, which in many cases is degenerative, often leaving sufferers unable to make their own decisions, and the occurrence of strokes, for example, which can result in the same type of impediment, temporarily or for life.

Aware of this fact, Spanish lawmakers drew up, some ten years ago now, Law 41/2003, of November 18, 2003, on the financial protection of people with disabilities, which gave anyone with sufficient capacity to act, the ability, in anticipation of being declared incompetent by the courts, to leave instructions concerning their person or assets in a notarized deed, including the appointment of a guardian or an administrator for their assets and measures for their supervision. This is known as self-guardianship.

Under these types of arrangements, decisions that were previously the domain of judges can now be taken by anyone.

As a result, to carry out proper financial planning, you will need to answer questions such as:

  • What will happen to my assets if I become incapacitated through an accident or illness?
  • Who will manage them?
  • Who will act on behalf of the shares in the family business?
  • How and with what type of control or supervision?
  • Who will take the decisions in relation to my personal care?

Further, aware of the reluctance of family members to have people suffering from those impediments declared incompetent, Spanish law allows a power of attorney granted by a person with full capacity to act to be able to continue in force, if they so wish, in the event of supervening incapacity, and also allows a power of attorney to be granted which will only come into effect if the grantor becomes incapacitated. In which the grantor can also say how their incapacity must be determined (it is usual practice in these cases for the principal to provide that their incapacity will be determined by producing two doctors’ certificates from independent institutions declaring that there is a physical or mental failing that prevents the principal from making their own decisions).

Lastly, Spanish law allows a living will or advance directive to be drawn up so that anyone can provide instructions on their healthcare, to be implemented if they have a terminal illness (within the applicable legal limits, since active euthanasia is not permitted in Spain).

The documents described above (self-guardianship, power of attorney in anticipation of incapacity and a living will or advance directive) are registered at various registries, to make sure they will be applied if the circumstances triggering them occur. http://arantxatobaruela.com

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
[email protected]