Mark Fleming, ‘The ten-year view’, STEP Journal (Vol27 Iss5), p.21 18 June 2019

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Mark Fleming

Head of Private Client

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Mark Fleming offers a review of the key offshore structuring trends in the last decade. Click here to download in PDF

In 2019, there is a trend on social media known as the ‘#10yearchallenge’, which sees people posting pictures of how they looked in 2009, compared with the present day. In this column, I apply this approach to the private client context to explore how structures for ultra-high-net worth (UHNW) families have evolved in the same period.

Growth in international families
Today, the world has ‘grown smaller’ due to technological advances, while UHNW families have invested, lived and traveled more widely than before. As a result, sophisticated multi-jurisdictional planning has become even more critical, from a tax and non-tax perspective.

There has also been a growth in the number of structures having a blended use of different entities, both onshore and offshore. Such structures will often roll up to at least one offshore entity with tax treatment driven by the home jurisdiction of ultimate beneficial owners, settlors and beneficiaries, and in relation to the location in which assets are held.

Dealing with international families means that trust service providers (TSPs) need to be more readily aware of tax legislation in differing jurisdictions and provide greater international coverage to their clients. Where such providers are located around the world, they must now provide a joined-up  approach by running particular entities within a structure from different offices.

Bespoke solutions
Though the families and their structures are becoming more international, it is apparent that the days of having 20-plus entities in differing countries within a structure are gone. This is principally due to know-your-client and anti-money laundering requirements raising the cost of compliance. Many of the more complex structures set up in the past will now be subject to review to determine whether they are fit for purpose, and, depending on the outcome of this analysis, will then be rationalised.

As the legal considerations for international families has become more complex, so have their structures. As a result, a more considered approach to the interplay between the various entities has developed. It is key not to ‘over engineer’ structures, otherwise there can be unwanted operational or tax consequences. The goal in these situations is to set up or rationalise a structure that uses the entities within it to meet family needs in relation to governance and the family business as a whole, and from a tax and economic perspective.

‘The ability for a structure to evolve in the future has grown in importance over the past decade as the “great wealth transfer” approaches’.

Co-investment vehicles
There has been an increase in co-investment vehicles in the last ten years as families have decided to invest where they have common goals, be it within families or among like-minded family groups. In such situations, companies are often used (including family investment companies) and funds have become more prevalent. These can sit beneath a trust and thus be part of an overall succession or wealth-transfer vehicle.

Family offices are increasingly involved in the investment aspect of such structures.

The great wealth transfer The ability for a structure to evolve in the future has grown in importance over the past decade as the ‘great wealth transfer’ approaches. Judging by the trends of the past few years, TSPs are likely to see potential splits in family structures, creating individual elements and ‘group’ entities that all family members are linked to, i.e. the family business. Such instances are invariably driven by the specific circumstances of family members that need to be catered for.

There is a very real risk of matters becoming contentious if the family transition is not managed in a clear, collaborative and transparent manner, and this can also be a driver for the break-up of an existing structure.

There are certainly fewer structures in play than in 2009, but these tend to be more complex and larger in value, and, in line with the future needs of families, have a greater focus on governance and international touchpoints. Structures still have some tax focus, but it tends not to be the primary driver; succession planning, wealth preservation and asset protection are today seen as every bit as important, if not more.

There is an ever greater variety of entities used in 2019, as the toolkit available to offshore jurisdictions has expanded; however, conversely, there is also a focus on making sure that a chosen structure is both simple and flexible. Structuring for long-term success certainly gives the trustee an interesting perspective, and looking to the past decade here helps offer up some important lessons to take into the next ten years. #20yearchallenge, anyone?