Structuring And Jurisdictional Selection For Family Offices

Operational Location

Jurisdictional selection for family office operations primarily concerns where the family office is based and from where it will conduct its day-to-day management activities. Key factors to consider include:

• Regulatory environment: A supportive legal and regulatory framework is crucial. Jurisdictions with favourable regulations for wealth management and financial services can provide a conducive environment for family office operations. This includes data protection laws, financial service regulations, and specific family office governance structures.
• Tax considerations: Tax efficiency is often a primary concern. Jurisdictions with advantageous tax regimes for income, capital gains, and inheritance, can offer significant benefits. Additionally, double taxation treaties should be considered to avoid paying tax in multiple jurisdictions.
• Political and economic stability: Stability in the jurisdiction ensures that the family’s assets and operations are less likely to be affected by political or economic upheavals. Politically stable jurisdictions tend to provide a secure environment for long-term planning and investments.
• Access to talent and services: The availability of specialised professional services, including legal, financial, and investment expertise, is essential. A jurisdiction with a robust infrastructure for financial services and a skilled workforce is preferable.
• Privacy laws: Privacy is a significant concern for many high-net-worth families. Some jurisdictions offer stronger privacy protections, which can be a determining factor in choosing where to base family office operations.

Structuring Strategic Assets

Selecting a jurisdiction for holding strategic assets (like real estate, financial assets, and valuable personal property) is another critical decision:

• Asset protection: Certain jurisdictions offer strong legal protections against creditor claims, seizures, nationalisation, or lawsuits. Trusts, foundations, and holding companies in these jurisdictions can be used to safeguard assets.
• Tax efficiency: The jurisdiction in which assets are held can impact the tax exposure related to those assets. Optimal structuring can reduce taxes on dividends, capital gains, and inheritance. Jurisdictions with favourable tax policies might be selected to minimise the overall tax burden.
• Regulatory compliance and flexibility: Compliance with local regulations is critical, and some jurisdictions offer more streamlined processes than others. This includes ease of transacting, reporting, compliance with international standards, and flexibility in corporate structuring.
• Market access and investment opportunities: Jurisdictions may be chosen based on their access to specific markets or investment opportunities. For example, holding financial assets in global financial hubs can provide better investment opportunities and services.
• Cultural and strategic considerations: Selecting a jurisdiction where the family's language and culture are prevalent can facilitate efficient operations and interactions. This alignment helps in managing assets more effectively, as it reduces risks of language and cultural misunderstandings. It also ensures that legal and business practices are more familiar and aligned with the family’s expectations. Similarly, the geographical location of the jurisdiction relative to the family’s primary place of residence or business interests can be crucial. Proximity can lead to easier travel, quicker response times for managing assets, and more direct oversight. Additionally, being in a similar or nearby time zone can facilitate communication and coordination, enhancing the efficiency of managing investments and other strategic assets.

The Offshore / Midshore / Onshore Trichotomy

In the context of private wealth management, jurisdictions are often categorised into onshore, midshore, and offshore:

• Onshore jurisdictions are typically highly regulated and transparent financial centres that adhere strictly to international standards and regulations. These jurisdictions are recognised for their economic stability, well-established legal systems, and comprehensive regulatory frameworks. They often have extensive treaty networks to prevent double taxation.
• Midshore jurisdictions offer a balance between the stringent regulation of onshore jurisdictions and the tax and privacy benefits of offshore centres. These jurisdictions comply with international regulatory standards while still providing favourable tax regimes and financial incentives. They provide a blend of regulatory compliance and financial incentives such as lower tax rates compliant with international efforts to improve transparency while still providing confidentiality. They are generally accessible for international businesses with good infrastructure.
• Offshore jurisdictions are popular for their low or zero tax rates on certain types of income, minimal reporting requirements, and privacy for investors. They are often used for setting up trusts, holding companies, and other structures that benefit from these features. They offer tax efficiency, including low or no taxes on capital gains, dividends, and inheritance. Often, they provide enhanced privacy and asset protection features and simpler regulatory environments, which can be advantageous for setting up trusts and other asset protection structures.

Each category offers distinct advantages and characteristics, impacting decisions about where to locate assets, operations, and legal structures.

Structural Options

Structuring family office assets involves using various legal entities and vehicles to optimise asset protection, tax efficiency, risk management, and succession planning. Structural options and their typical uses include:

• Trusts: Trusts are commonly used for estate planning and asset protection. They legally separate the ownership of assets from the beneficiaries, thus providing protection from creditors and legal claims, and facilitating controlled distribution of assets to future generations. Trusts offer flexibility in how assets are managed and distributed, and can be tailored to specific family circumstances and goals, including tax planning and privacy enhancement.
• Foundations: Similar to trusts, foundations are used for asset protection and succession planning, especially in civil law jurisdictions where trusts are not recognised. They are independent legal entities that own and manage assets for the benefit of specified beneficiaries. Foundations provide a high degree of control and can be structured to ensure long-term governance of family assets.
• Companies: Companies are often used to hold commercial investments, operate businesses, or own significant assets like real estate. They can isolate risks associated with different asset classes by separating each into distinct corporate entities. Companies facilitate efficient management, provide liability protection, and can be used strategically for tax benefits.
• Limited Liability Companies (LLCs): LLCs combine the liability protection of a corporation with the tax efficiencies and operational flexibility of a partnership. They are often preferred for holding real estate or for business ventures where the tax pass-through benefits and management flexibility are desired.
• Limited Partnerships: Often used for collective investment purposes, including private equity or real estate investments. They allow investors (limited partners) to benefit from the investment’s returns without taking on management responsibilities or incurring significant liability.
• Special Purpose Vehicles (SPVs): SPVs are typically used to isolate financial and legal risk by ring-fencing certain assets or liabilities. They are common in complex financial transactions, like securitisations or project finance. SPVs can enhance creditworthiness and provide tax and accounting efficiencies.
• Insurance Wrappers: These are investment accounts wrapped in a life insurance policy, used primarily for tax planning and investment growth in a tax-efficient manner. They can offer tax deferral, estate planning benefits, and confidentiality.
• Protected Cell Companies (PCCs): PCCs are corporate structures with segregated cells whose assets and liabilities are legally separate from those of other cells within the same company. They are used for managing different investment portfolios without the risk of cross-contamination between assets.
• Variable Capital Companies (VCCs): A VCC is a type of corporate structure that is flexible in managing share capital. They are often used for investment funds. VCCs offer flexibility in issuing and redeeming shares, distributing dividends out of capital, and can house multiple sub-funds.
• Captive Insurance Vehicles: Captives are insurance companies set up by a parent company to insure the risks of its owners or related businesses. They help reduce insurance costs, improve cash flow, increase risk coverage, and provide tailored insurance coverage.
• Private Label Funds: These are investment funds set up by family offices to manage their own assets, instead of investing in external funds. They offer tailored investment strategies, lower fees, and greater control over the investments.
• Unit Trusts: Unit trusts are collective investment schemes that pool money from multiple investors to invest in a diverse portfolio of assets. Managed by professional fund managers, they are designed to provide investors with access to a broader range of securities than most could purchase individually.

Each structural option has its specific applications and benefits, making them suitable for different aspects of family office asset management. The choice depends on the family’s objectives, the operational role, the types of assets involved, and the regulatory and tax environments of the jurisdictions in consideration.

In conclusion, the structure and operational design of family offices must be carefully tailored to accommodate the complexities arising from the family's growth, the diversification of assets, and the geographical distribution of family members and assets.

When a family and its assets are primarily located within a single country, a centralised, domestic approach is typically effective. This strategy allows for streamlined operations and management, while still integrating global expertise and services as needed.

However, as families expand across borders, whether deliberately or organically, the complexity of managing wealth increases significantly, often necessitating a multi-jurisdictional approach. This approach is not only necessary but also advantageous, as it leverages the benefits of various jurisdictions to optimise asset protection, tax efficiency, and compliance with international regulations.

From practical experience, many global families find a multi-jurisdictional strategy to be effective. This involves conducting day-to-day operations from an onshore or midshore jurisdiction, where regulatory frameworks and access to professional services are robust. Simultaneously, strategic assets are often structured in offshore jurisdictions that offer favourable tax regimes and enhanced privacy protections.

This bifurcated approach can allow families to balance the need for operational integrity and accessibility with the benefits of confidentiality and fiscal efficiency, thus providing a holistic solution to complex private wealth management challenges.

Henry Brandts-Giesen
Henry is a leader in the Family Office & High Net Worth Group at Dentons.