Wealthy and mobile families and their advisors often put quite a lot of thought into the ‘hard’ requirements of legal and tax planning for family fiduciary structures such as trusts, foundations, and underlying companies and partnerships – hard requirements are issues such as:
- selecting the governing law and jurisdiction based on legislative requirements in the relevant trust, foundation, company, or partnership law;
- ensuring the tax, fiduciary (eg: does my PTC need to be licensed?) and financial services regulatory regime (eg: does my family office vehicle need an investment licence?) in the relevant jurisdiction that is selected works; and
- the same considerations in the jurisdiction of any settlor, beneficiary or protector (is it on a blacklist, what is the tax treatment and are there any double tax agreements that are relevant, investment protection treaty availability, issues around forced heirship, a community of property, asset protection etc).
Whilst the hard requirements are important, all too often the emphasis on them puts softer considerations of jurisdictional selection down as a second thought. However, these softer issues can be very important to the family office. So what are the soft considerations? They include the following (in no particular order), with different weights being applied by a family depending on their priorities:
Reputation: the reputation of the jurisdiction in the home countries of the family. With increasing transparency around cross-border structures with public beneficial ownership registers and enhanced scrutiny at home, families may want to select a jurisdiction that has not been associated with poor regulation, poor governance, aggressive tax planning, or in need of a tidy-up in the eyes of the financial action task force. This may come at the cost of increased tax or public transparency, but that is a trade-off that families are (increasingly) willing to make;
Governance and Political Stability: how well governed the jurisdiction is – is it predictable, stable, and free? How are the public finances and may there be a need to increase taxes in the relevant jurisdiction? Is it economically viable in the long run? Has the jurisdiction been tainted by corruption? What is the jurisdiction’s attitude to being blacklisted by other countries – is it apathetic?;
Legislative dynamism: Is the jurisdiction nimble and sophisticated enough to improve or tweak its laws on a timely basis?;
Banking: Is the jurisdiction difficult to bank, which bankers will provide services, and how long will it take to establish a banking relationship with the structure?;
Justice: access to justice and judicial independence – if there is a problem with the structure, how quickly can that be resolved and is the judicial process predictable? What is the process for legal appeals and what is the ultimate court of appeal?;
Fiduciary Service Providers: Does the jurisdiction provide for well-resourced, sophisticated, and responsive fiduciary service providers, and is there a sufficient number in the jurisdiction in case the one selected does not perform or diversification of fiduciary service providers is desired? There is nothing more annoying than requesting something basic from your fiduciary and there being no response for weeks! If you want to move the structure to another jurisdiction or another service provider, will the incumbent fiduciary be professional and act on this quickly, or will it drag its feet and fee gouge? Does your fiduciary service provider have the depth or a good succession plan (after all, fiduciary structures are usually intended to last over generations)? Is your fiduciary services provider able to say who owns it?;
Legal Service Providers: the number of legal service providers and the average capability within them is important. If a jurisdiction is selected with one or only a handful of law firms, this may have adverse implications for the speed and cost at which the structure can be serviced, and can cause issues in terms of the availability of representation if there is a dispute with multiple parties and the quality of that representation;
Accessibility: If the family needs or wants to meet regularly with the fiduciary services team, is that a single flight, or is it a multiple-waypoint journey that takes days? Does the jurisdiction suffer from environmental events such as hurricanes to the extent that it may impact the serviceability of the fiduciary structure?;
Time zone: Is the jurisdiction in a favourable time zone as regards the family or assets held within the structure; and
Cost: is it more expensive to establish and maintain the structure compared with its jurisdictional peers? If so why? Are service providers transparent with fee structures?
Quite often there is exposure to more than one jurisdiction, so the sort of considerations above apply to each jurisdiction.
Perhaps one of the major difficulties for families wanting to weigh these issues up, is that they can’t be verified accurately by a simple Google search. The family needs to deal with someone who has dealt with a number of jurisdictions and who knows the industry well. To that end, law firms specialising in the hard aspects of planning are a great resource for getting to understand these sorts of soft issues. Fiduciary service providers that are reasonably objective as regards jurisdictional selection can be another source of valuable insight.