Challenges for Wealth Structuring in Asia - and a Potential Solution

Asia: A Driver for Changes in Wealth Structures?

I have recently heard it said that clients in Asia may be driving a new and different client model for the wealth management business due to their very specific requirements. Further, it has been suggested that this is potentially challenging the fundamentals of the wealth planning structures that have historically been used in other parts of the world. The argument goes that the usual rules of the road for wealth structures (eg, trusts) are not acceptable to them.

It is an interesting thought.

Over the last 15 years there has been a substantial increase in the development of flexible legislation in the leading offshore jurisdictions relating to trust products, For example, the BVI and the Cayman Islands introduced Vista trusts and STAR trusts respectively and further, the trust laws in Guernsey and Jersey have been updated (providing, for example, for settlor reserve power trusts).

Laws have also been adopted to reduce the extent of the personal liability of directors of trust companies. Whilst this may, in part, be due to the requirements of clients in Asia, there is perhaps a deeper philosophy at play which, in line with other areas of management, is providing for a more team based solution for clients who may no longer be entirely content to rely on outside parties to advise them. They are to some extent encouraged to take on more of a role in the administration of the wealth structures, this is particularly so with private trust companies where settlors, beneficiaries, family members, and other advisers may all be on the board of that trust company.

The Unique Asian Market

Against this background and the irrepressible rise in the strength of the Asian economies, what are the issues and concerns of clients in Asia? What are the unique challenges presented in the Asia region and how are these being addressed by practitioners on the ground?

The initial point to make in relation to this is that there is no single ‘Asian market’ − what is referred to as the Asian market is really a combination of various different markets.

However, for all of the increasing wealth within Asia and the significant wealth in the hands of some families in the region, and notwithstanding the extensive opportunities for families to plan for their future (particularly given their likely global mobility and global investment base), the planning for wealth succession and intra-generational transfer is (as one senior practitioner who has been based in the region for many years described to me) "lamentable".

There are many and varied reasons for this and to some extent this could be a generalisation, but practices in Asia tend to boil down to: issues of culture with regard to a patriarch over his unquestionable authority; a patriarch's failure or concern to relinquish control; the failure of succeeding generations to be able to address their concerns properly; discussions around death being extremely sensitive, as well as in large parts of the market there being a lack of infrastructure, experience and general education as to the options that may be available. Each of these issues is not unique to the Asian market and they do not only exist with respect to families in the region, however, they are issues that arise in Asia with a greater frequency and predictability than possibly other parts of the world. There is common thinking that this may change for a variety reasons.

A Solution?

Given these various challenges and in particular issues around control of assets there has been a sharp focus on the use of private trust companies (PTCs) as a solution for some families. A PTC is a company whose sole purpose is to act as trustee for specific trusts or related groups of trusts, typically in respect of a particular family. One of the key benefits of the PTC is the opportunity for the (often) patriarch and his family to create a structure which retains greater control over decisions made in relation to the trust and the family wealth assets than certain ‘traditional’ trust structures.

A PTC structure can be developed as a specific solution to suit the needs of the client and their family, taking into account important aspects of their financial, tax and regulatory requirements whilst retaining flexibility of management.

Since assets which are transferred into a trust cease to belong to the client and are held by the trustee on the terms of that relevant trust (or group of trusts), a PTC can give a client confidence that the trust (which may often contain broad powers and discretions) will be administered by reference to those who have a good knowledge of, and are sensitive to, the particular circumstances of the case.

Certainly one of the key aspects of wealth planning in Asia is that a family's assets may still be trading companies and are not necessarily ‘bankable’ assets. The transfer of those trading assets needs to be handled carefully and sensitively to avoid conflict and tensions between the generations and intra-generationally.

Considerations on Jurisdiction

Before embarking on any planning it is important to understand what the options are. In this case we recommend consideration is paid to the following aspects in relation to the jurisdiction of the incorporation and operation of the PTC structure (note the two may not be the same):

1. The political stability of the jurisdiction. An offshore jurisdiction of choice should not be subject to local volatility or an unstable environment. Clients in volatile and unstable environments may well wish to use offshore jurisdictions for that reason.

2. Clients will wish to establish a structure which has certainty. Legal certainty is therefore an important consideration and the quality of a jurisdiction (the legal infrastructure of a jurisdiction) should be measured, ie, the breadth of experience of lawyers, as well as the independence of the judiciary and, ultimately, consideration of the final court of appeal. Clients do not expect litigation but problems may arise from time to time and the client should be confident that there will be a well-considered, unbiased outcome, based on the rule of law.

3. Care should be taken to ensure appropriate taxation is only charged in the relevant jurisdictions of the parties to the trust − there should not be any tax leakage in the jurisdiction in which the trust is created.

4. Clients may want to make use of the modernity and flexibility that many of the leading jurisdictions have incorporated into their legislation.

5. Pricing, this is always an issue.

6. Jurisdiction perception – both locally and internationally. A client will want to operate in a jurisdiction, which allows him to carry out business that he requires without political and administrative hurdles (ie not on blacklists).

7. Experience of service providers. The client should investigate and understand the experience of its proposed service providers. A PTC should be regarded as a legacy and be properly established and advised from its inception so as to give it the best possible start to its life. It should be regarded as a living entity and be impartially reviewed on a regular basis to ensure its aims are being met.

8. This has been the source of enormous focus in the last few years. BVI, Cayman, Guernsey and Jersey share a common background in English law with its common law providing a broad duty of confidentiality for fiduciaries (trustees themselves as well as directors of PTCs). This is overlaid in certain jurisdictions by statutory and regulatory requirements to maintain confidentiality. Having said that, well regarded jurisdictions such as BVI, Cayman, Jersey and Guernsey have entered into a program of agreements with certain other jurisdictions to assist with the mutual exchange of information to mitigate anti-money laundering and financial crime generally.

This is an area which will continue to develop but clients should seriously consider the appropriateness of establishing structures in jurisdictions which fail to enter into such international dialogue. Those jurisdictions are likely to have restricted (or heavily penalised) access to markets, as well as being perceived as a potential reputational risk. In these circumstances, it may be difficult to deploy capital and receive returns from investments, as well as to generally operate the structure with professional and competent advisers and service providers.

Issues relating to PTCs

1. The first issue to consider in relation to the PTC is the ownership structure. There are a wide of variety options:

2. A family (or settlor) owns the shares directly in the PTC. However, this is possibly storing up issues for the future as it is likely that those shares will include the power of appointment and removal of the board of directors. Shares personally owned will also pass on death into the estate of the legal owner. This may not be desirable.

3. A non-charitable purpose trust holds shares in the PTC. For instance, the laws in Guernsey and Jersey have been specifically drafted to provide for this structuring option. This helps to mitigate the issues identified in a. above.

4. In addition to a non-charitable purpose trust, there are a variety of entities that can own a PTC ranging from a foundation to a company limited by guarantee. All of these can be tailored to suit the families' specific requirements.

5. The composition of the board of the PTC. Tax and applicable regulations will need to be taken into account, though the board can be populated with as many directors as may be considered appropriate. The board will typically include a professional trustee to provide day-to-day administration of the PTC. The board should be able to property function on a practical basis.

6. The participants involved in developing and operating the structure need to understand the requirements and aspirations of the settlor and the family members. This type of understanding is not developed overnight – there must be a long-term commitment provided by everyone if the structure is to operate at its optimum level.

Whilst there may be consistent areas of concern from clients in Asia in relation to their wealth planning, the leading offshore jurisdictions continue to develop flexible and innovative rules and legislation to cater for their needs.

The typical PTC structure can provide many benefits to families in Asia and address the issues and concerns they may face. However, clients should give careful consideration at the outset to the practical issues and potential pitfalls in tandem with a well experienced and impartial adviser.

Paul Christopher
Partner

Mourant Ozannes
British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Jersey and London.