Every industry has seen sharp changes over the last year and a half due to the pandemic, but the wealth sector in particular has seen a major shift with the generational wealth transfer timeline shortening significantly.
The Covid-19 pandemic has forced older generations to re-evaluate their plans to transfer their wealth to younger generations. For ultra-high net worth (UHNW) families, protection and preservation of wealth—now and for subsequent generations—will be top of mind. Further to this, the pandemic has accelerated the wealth of the super-rich by 27.5% according to a UBS report, putting the pressure on UHNWs to ensure a successful wealth transition.
In the next 10 years, $15 trillion is expected to transfer hands to millennials, Gen Z and Gen Y, according to a recent IQ-EQ and Wealth-X report. Additionally, for UHNW individuals with more than $100 million net worth, 62% are over the age of 75, highlighting the urgency of the transition. Pre-pandemic, the wealth transfer for this generation was expected to begin in the next five years, but the impact of Covid-19 on elderly generations has accelerated the wealth transfer planning timeline.
With vast amounts of wealth transferring hands, UHNW individuals and families need to understand their options and have the right infrastructure in place to facilitate a smooth transition of wealth. Trusts and foundations will play a key role in facilitating this transition and mitigating the risk of wealth depletion.
Why Trusts And Foundations?
In the current economic environment of low interest rates and rising inflation, conservation of wealth is essential for UHNW families and their family offices. Trusts and foundations are key asset protection tactics and can have a wide remit within succession planning. They protect assets by enabling the effective separation of legal ownership from the enjoyment of assets and offer families the ability and flexibility to outline how they would like their assets to be held, preserved and distributed in the long-term.
Both trusts and foundations can be individually tailored to address the specific circumstances of an UHNW family and can be set up for an unlimited duration, allowing for maximum flexibility for the continuation of wealth across multiple generations. They also share the benefit of relative privacy, while being flexible enough to ensure compliance with regulation and tax laws. In terms of assets, trusts and foundations can hold any asset that a person may own, from cash and public securities to family businesses, to alternative assets such as private equity, real estate and luxury assets such as yachts and art.
Which Structure To Choose?
While deciding on a trust or foundation to facilitate the wealth transfer is the first step, UHNW individuals need to be equipped to understand the differences between the two structures, which is where qualified professional services, especially in cross-border family and/or investment situations comes in. Choosing between the vehicles is usually based on a UHNW family’s specific needs and circumstances, such as a family living across multiple different jurisdictions, however there are some key structural and practical differences and/or perceptions between the two.
Trusts are the most common and widely used wealth-holding vehicle in the world. A trust is a legal arrangement formed when the owner (settlor/grantor) of assets transfers legal ownership of those assets to a trustee for the benefit of a beneficiary(ies). The trust then holds legal title to the assets whilst beneficial enjoyment goes to the beneficiary(ies).
Private purpose foundations are less widely adopted compared to trusts, but nonetheless are used frequently in certain regions. They are a hybrid between a trust and a company as they are set up as a corporate, with a separate legal personality owning the property transferred by the founder. A foundation can transact in its own name, meaning that there is no separation of ownership, however it too can, and normally does, have beneficiaries as well.
Location, Location, Location
Globally, trusts have proved to be more popular than foundations, with trusts being the structure of choice in most parts of the world these days, with foundations still used in more select (often civil law) countries. However, this doesn’t make the process any simpler given the numerous legal and tax considerations.
For global UHNW connected families with U.K. connections like non-domiciled U.K. families and/or foreign families with family members or assets in the U.K., the use of a trust for both non-tax succession and tax planning remains very common (the Channel Islands remain the most popular jurisdictions for this group of UHNWs). For U.K. domiciled UHNW families however, choosing to set up a trust in the U.K. removes a number of headaches attributed to non-tax estate planning, succession and asset preservation as U.K. residents that set up a foreign or a non-U.K. trust can have negative tax implications on the family. If a U.K.-based UHNW family wants to forgo a trust, there are additional vehicles they can leverage, including family investment company (FIC) or family limited partnership (FLP). A FIC is an alternative succession vehicle for U.K. residents and allows the family to retain control of assets but transfer their value to heirs. A FLP is similar to an FIC but has added benefits including less fees when compared to trusts, and non-U.K. residents can use a FLP as a tax neutral vehicle. Both FLPs and FICs are popular private wealth structures in the U.K.
Similarly in the United States, trusts are the main framework of asset preservation, albeit with a couple of U.S. states having recently introduced foundations. However, each of the 50 states in the U.S. is considered as a separate trust jurisdiction with its own varying laws. While a standard code has been suggested to unify trust law, only half the states have signed up so far. This adds significant both choice and complexity for families when choosing to set up a trust in the U.S., as there are a number of tax considerations on a state and federal level to keep in mind. The U.S. has also proved to be an attractive trust jurisdiction for non-U.S. families with U.S. connections or simply as a sort of "midshore" jurisdiction (benefits of onshore and offshore attributes) of choice to locate their trusts.
Switzerland is another good example of the evolution of some trust jurisdictions into a more midshore offering. Trusteeship with Swiss-based trustees has been around for a long time (using trust law of other countries) but has had a sort renaissance of late with increased demand for such midshore offerings by clients globally. This interest has in part been reinvigorated by new licencing of trustees in Switzerland as well as trust law to be introduced in the next couple of years.
In Asia, Hong Kong and Singapore both have strong trust offerings, but don’t offer foundations. Hong Kong has a well-established trust industry, which makes up a core part of its financial services sector. The trust industry in Hong Kong has been further bolstered by a new licensing regime for trust and company service providers, which sets out a number of statutory due diligence and record-keeping requirements, making setting up a trust in HK more attractive for UHNW families. Singapore is one of the premier wealth management and trust hubs globally, and is an international financial centre for the wider Asian region. Singapore has recently modernised its trust law as part of a wider effort to promote wealth management in the country.
Finally, the last year and a half has shone a spotlight on just how unpredictable life can be and has kickstarted the generational wealth transfer for the UHNW Individuals. The world is changing rapidly and any ability to strategically plan for the future has been severely compromised but organising set plans can help UHNW families take back control of their wealth. To maximise their efforts, it boils down to choosing the right structure, in the right place and with the right trusted partner/provider to protect and preserve their wealth, which is where trust and foundations play a key role.
Steve Sokić is group head of private wealth at IQ-EQ.
