Bermuda

Estate Planning For High Net Worth Indians


By Naresh Chand, Senior Associate, Appleby, Bermuda, and Heidi Maharaj, Associate, Appleby, BVI (01/07/2011)

India has recently begun to sign up to Tax Information Exchange Agreements (TIEAs) with other countries, having signed its first TIEA late last year (with Bermuda) and another more recently with the British Virgin Islands (the BVI).

 

On the signing of the TIEA with the BVI, the occasion was described with the usual rhetoric, namely that the agreements are intended to foster improved relations between the two countries with the exchange of information on civil and criminal matters in the name of adhering to international standards on tax transparency. It is certainly true that TIEAs are expected to improve economic co-operation between signatory countries. However, the recent TIEAs entered into by India are perhaps more symbolic of its increasingly influential role in the global economic landscape.

 

It is common knowledge that India has one of the fastest growing economies in the world and its emergence as a world economic power is patently illustrated by the growing number of billionaires the country has spawned of late. In 2010,according to Forbes Magazine, the number of billionaires in India stood at 69, with only the United States and China having a greater number. Some rightly say that this is a truly remarkable achievement for a country that only gained its independence in 1947.

 

Furthermore, India’s burgeoning middle class is currently estimated to stand at approximately 300 million people. It is evident that there is a growing need for wealth structuring and planning advice and also the need for increasingly sophisticated structures.

 

Offshore trusts are used by high net worth individuals the world over and there would be no reason to suggest that they would not be equally as useful for wealthy Indians as a vehicle for their cross-border tax and estate planning, succession planning and asset preservation. The laws of India are derived from principles of English English common law and equity (as a consequence of British colonial influence, marked by the era of the British Raj). Trusts should not, therefore, be as incomprehensible as they are perhaps perceived to be in civil law jurisdictions.  

 

Why Create an Offshore Trust?

 

Tax Mitigation and Tax Neutrality

One of the basic features of an offshore (and onshore) trust is its use as a mechanism to minimize taxes. Offshore trusts are particularly useful in an international context where it is not uncommon to find that family members are located in different parts of the world, many having homes in several jurisdictions. Utilising a tax neutral offshore jurisdiction as a hub for the assets of a multinational family can facilitate effective tax planning.

 

Estate and Succession Planning

Trusts are ideal structures for holding the shares of a family trading company in addition to being a sound mechanism to achieve an orderly succession of control of the company following death or retirement.

 

A simple structure involving a BVI VISTA trust would enable the shares of a family company to be retained in trust indefinitely (without the threat of trustee intervention) and control could remain with the settlor (through his directorship in the underlying company), instead of being left in the hands of a potentially inexperienced trustee lacking the entrepreneurial flair required to manage a successful business. A clear and workable succession mechanism with regard to the appointment of future directors (and therefore continued control of the company) can be provided for under VISTA.

 

Also, the often burdensome and disruptive process of having to obtain probate following death, thereby preventing a timely and efficient distribution of the shares in the company (or any of the settlor’s assets for that matter, especially where spread across several jurisdictions), is avoided where those shares are held through a trust. Correctly structured, an offshore trust may provide the mechanism to control the distribution of assets upon death by very simply ensuring that the assets do not form part of the deceased’s estate.

 

Private Trust Companies

Private Trust Companies (PTCs) are commonly used by wealthy families as a replacement for institutional trust companies and can offer significant opportunities for families in their generic wealth planning strategies. Under a PTC structure, the settlor (together with his trusted advisors, if necessary) is able to control the PTC through his representation at board level. He is also able to influence the manner in which the trusts under the PTC’s management are administered.

 

Where personal ownership of the shares of the PTC could give rise to tax or other problems for individual shareholders, it is common practice offshore for the shares of a PTC to be held through a non-charitable purpose trust so as to ‘orphan’ the ownership of the PTC.

 

Asset Protection

It has long been possible to ring-fence assets to protect against future personal liability (thereby preserving the trust assets for the beneficiaries) including in connection with claims from creditors, by transferring those assets into an offshore trust. The BVI is not a particularly aggressive asset protection jurisdiction but one is certainly able to achieve some level of preservation of assets through a structure involving a BVI trust.

 

In addition, the BVI has enacted robust conflict of law rules designed to prevent foreign judgments based on, for example, forced heirship claims or those from a foreign divorce court from being recognised or enforced. This may appeal as a concept to the large Muslim minority in India whose personal affairs are generally governed by Islamic law.

 

Charitable and Philanthropic Activities

Microsoft founder Bill Gates and legendary investor Warren Buffett, billionaires and notable philanthropists, have said recently that they wish to raise the profile of philanthropy with their Indian counterparts, such as Mukesh Ambani, who is believed to be India’s richest man with a fortune in the region of US$27 billion.

 

Trusts can be used to complement structures designed to advance philanthropic initiatives. These could include programmes the purposes of which do not strictly fall within the legal ambit of what is considered to be charitable. A non-charitable purpose trust may be created for any purpose as long as the purpose is not immoral, unlawful or contrary to public policy.

 

Reserved Powers

Settlors may appreciate the general benefits of creating a trust over their assets but at the same time will often express a desire to retain as much control as possible over those settled assets. The mere thought of giving up control of a business that one may have spent a lifetime nurturing into a thriving business may be considered alien to many. Fortunately for such individuals, many offshore centres, including the BVI, have enacted legislation enabling the reservation of prescribed powers and rights over the trust. This has opened the way for a level of settlor participation not permitted before and is clearly a welcome development for those wary about relinquishing control. The VISTA trust is, of course, in the mould of a reserved power trust.

Why the BVI?

The BVI is a leading offshore financial centre with an internationally recognised financial services infrastructure which enjoys a long history of providing sophisticated professional services to an international clientele. With modern legislation and a pool of highly qualified and experienced lawyers and trust professionals to draw on, the BVI offers innovative and user friendly trust products that retain the essential elements of tradition while avoiding conventional limitations on the use of trusts.

Furthermore, it has benefited from stable, business-friendly and proactive governance that features regular consultations with industry and the private sector when seeking to make regulatory or legislative changes. Ongoing changes continue to create new opportunities for clients to establish innovative structures involving BVI trusts and other entities.

 

Conclusion

 

India is a relatively new market for offshore trusts and many types of offshore product such as the PTC or the VISTA or purpose trust. However, it is expected that there will be an increasing appetite for these products, or structures involving them, in the years ahead amongst those advising the growing wealthy elite in India as more and more information about them and their benefits permeates the professional private client community, alongside the upsurge in wealth creation in India.

 

An interesting adjunct of India’s economic ascendancy is that as standards of living improve, it is not unreasonable to expect that those who left India (or whose parents left India) many generations ago, fondly known as non-resident Indians (NRIs[1]), may at some future point in time consider returning to their motherland. Prior to making such a move, however, they



[1] A non resident Indian is an Indian citizen who has emigrated, a person of Indian origin who is born outside of India, or a person of Indian origin (PIO) who resides permanently outside of India. It is estimated that the NRI and PIO population across the world amounts to over 30 million people.