Very few of us live our lives in adherence to some master plan. Even for those that do, it is usually the case that our affairs tend to get more complicated as time passes by. Assets will often grow in number, type, location and value; and new family members are added by birth and marriage. Each new addition comes with its own set of issues, characteristics and requirements. When it comes to family office wealth planning arrangements, it is very often the case that structures are created to facilitate the tax-efficient acquisition of a new asset or the protection of family financial capital from a specific threat at a specific point in time.
In addition to changes in personal circumstances, the landscape within which we all live is also continuously evolving. In recent years there have been many far-reaching changes to legislation and the regulatory environment within which structures operate. Many of these changes would have been almost impossible to predict and their impacts, both intended and inadvertent, can be monumental. For example, the introduction of FATCA and the Common Reporting Standard now means that huge swathes of personal data are systematically shared between countries with very few exceptions.
Given the above, it is no surprise that many families find themselves with an array of structures that have evolved through circumstance, but that they might not always stand the test of time. As many of these structures are also perpetual, it should be clear that there is a very real need to periodically review such planning from time to time.
Whilst there is no one-size-fits-all approach, any review will likely encompass what is often referred to as a “do nothing analysis”. With death being a certainty for each of us, it is important to understand that, even for those that have not made specific arrangements, there are legal processes that need to be followed that will determine who receives what, how and when. An analysis of current arrangements should be compared against desired outcomes and action plans put in place to address any gaps. Such an analysis should cover each of the following areas:
Documentation
Testamentary documents, structure terms, articles of incorporation, expressions of wishes, shareholder and other contractual documents that will influence the transition of wealth should all be reviewed to ensure that they are consistent and match the current thinking. Where there are unwritten agreements serious consideration should be given to putting these in writing or at least a reaffirmation of their terms so that all concerned are in alignment as to their content and intent.
Jurisdiction exposure
The locations of assets, structures and people will all have a bearing on the process and outcome of any wealth transition. From a wealth structuring perspective, many jurisdictions were commonly used in the past that have since fallen out of favour. This may result in these structures being unable to perform the functions that they were intended for at the outset. In many cases, this will only be tested upon the occurrence of the transition event, by which time any change may be extremely difficult, time-consuming and expensive. An understanding of all the relevant laws that will affect the transition is essential. Where the outcome of the application of those laws is not in line with desired outcomes then it’s worth asking if there is something that can be done to avoid their application or lessen their impact?
People
As noted above, when it comes to how wealth is held it is often the case that structures are created with a preventative mindset. The principal objective is likely to be the optimisation of tax and/or the protection of the assets concerned from specific events such as bankruptcy or divorce. As a result, it is not unusual to see insufficient attention paid to the people whose lives are directly affected by the wealth concerned, as well as the roles they are expected to play. Even when consideration is given to this most important aspect at the outset, the passing of time may well render the current position unsatisfactory. A structure created when children are infants may well contain terms that are inappropriate for grown adults and the number and nature of family members may have expanded beyond the scope of current arrangements.
For families of wealth, members are often expected to play multiple roles in addition to being a family member (e.g. director, employer, employee, beneficiary, trustee, protector, council member etc). Where this is the case, are they aware of these roles, are they happy to fulfil them and more importantly, have they been equipped with the necessary knowledge and expertise to perform them effectively?
Service providers
Almost without exception, each family of wealth will be reliant on external service providers to some extent. Given that relationships are often central to the provision of these services it is important for families to periodically review these relationships to ensure that their service providers continue to be aligned with their needs. It is equally important for families to understand the succession arrangements in place within each service provider. Relationships will often be embodied through a small number of individuals, and whilst staff turnover is to some extent inevitable a sound policy for attracting, developing and retaining talent will certainly give comfort.
Where third parties (both individual and corporate) assume roles of power (e.g. executor, trustee, foundation council member, protector and directors etc) it is important to review these arrangements to determine whether the family have sufficient checks and balances to ensure such persons can be properly held to account. Where individuals are appointed, suitable succession and alternate mechanisms should also be considered.
The Greek philosopher Heraclitus is quoted as saying “change is the only constant in life”. The huge changes brought about in all of our lives by the global pandemic are such that few could argue. As death is a certainty for all of us, it is surprising that preparing for it receives so little attention. The peace of mind that comes from the knowledge that your family office wealth planning arrangements are up to date, robust and positioned to enhance the lives that matter most to you is enormously comforting.