Rudi Bodenstein, Partner and Senior Trustee, Stonehage Fleming Jersey
Succession planning structures have come and gone, but trusts have stood the test of time. They have proven to be the most robust, tax-effective and flexible vehicle for inter-generational wealth creation, enabling families to achieve their desired financial outcomes no matter how complex these may be.
Why establish an offshore trust?
For families who want to live in the sun and have their money in the shade, offshore trusts provide multi-generational, tax-neutral asset protection from political risk and emerging market volatility. They also facilitate the diversification of portfolios across currencies and access to the global investment universe and cater for the complexities of families that may span the globe.
Which are the best jurisdictions to consider establishing an offshore trust?
Deciding where and how to set up a trust will depend on the outcomes you want to achieve and the trust's purpose. Jersey and Switzerland are the most popular jurisdictions because of their history, depth, and breadth of wealth planning and legal expertise. Mauritius is building its reputation as an attractive offshore trust jurisdiction.
How do they compare?
Switzerland: Switzerland has justifiably built a reputation as one of the foremost financial safe havens. The benefits of setting up a trust in this jurisdiction are that it is a country with a stable political and economic environment. The legal framework is predictable and the legal and regulatory system is well-developed, which is crucial for trusts because they usually have such long lifespans. It has a stable currency and relatively low interest rates in a global context.
Jersey: Jersey is a well-established and highly rated international financial centre with a strong track record in succession planning, wealth management and trusts. In fact, Jersey trust law is based on English law where trusts originated. The shared language and time zone supports an efficient relationship between Jersey and South Africa and the breadth and depth of skill and quality of service providers have always provided clients with confidence in the jurisdiction. It offers the advantage of robust financial regulatory oversight and accountability, a strong local legal framework and a sophisticated banking sector.
Mauritius: This is an up-and-coming trust jurisdiction that may meet the needs of clients familiar with the destination or based in African countries who can travel there with ease. However, it is not tried and tested in jurisprudence and lacks the same depth of expertise and experience as the other two global trust centres.
Getting the most out of trusts
It’s always advisable to prioritise simplicity and certainty when establishing succession-planning structures. Different strategies have been considered to achieve successful succession planning and efficient funding of offshore trusts.
The funding of an offshore trust with an interest-bearing loan remains a well-established and acceptable method that has proved effective. With wealth creation and asset protection, time in the market is your friend, and the future generations benefit from the compounding effect that comes with long periods of investing. A lender to the trust will pay tax on interest on the loan, but over time the tax-free capital gains in the trust should outweigh the tax on interest.
Given the costs of setting up and maintaining a trust and the tax consequences of dismantling it, families will get the full benefit of trusts if the assets are held within the trust for at least 10 years, and ideally across generations.
Ultra-high-net-worth families should also consider protecting future generations from gaining access to substantial wealth too early when they likely won’t have the experience to deal with it. To do so, the trust should be structured so that the entirety of the wealth is not immediately accessible to the beneficiaries upon the settlor’s death.
The bottom line
One of the most crucial succession-planning decisions a family will make is who they partner with to protect and grow their wealth and ensure it is passed on smoothly to future generations. That partner should ideally have access to a global team of experts who can consider all the potential tax, legal, and investment cross-border consequences of globally dispersed families and the associated financial and tax complexities.
Comments