Succession planning

Succession planning involves looking ahead and making arrangements now, so that in the event of one’s death or serious permanent disability one’s affairs and the value of one’s estate can pass appropriately to those who will reap the benefit from them or will be required to carry the affairs forward. Thoughtful planning now, while one is in full control of one’s facilities, ensures that one’s wishes are carried out in the future.

Control of assets

One builds up assets during one’s lifetime and is fully familiar with their nature, whereabouts, and the best methods of using them. In the event of one’s death or incapacity, it is important that these assets are either effectively disposed of or passed to the management of those competent to deal with them. This may involve one’s planned disposal to one’s business partners, so that the value of the assets returns to one’s beneficiaries while the ongoing management is transferred to those competent to do so. Or it may simply involve the provision of qualified guardians, who will safely maintain the assets until the intended beneficiaries are themselves mature enough or capable enough to take them over.

For example, one may wish one’s children to benefit from the assets, but perhaps until they are mature or experienced enough to do so in their own names. In many countries, the disposal of at least part of one’s estate may be subject to local law or custom. Such laws or customs rarely make allowance for the specifics of family situations, so that assets may, by law or custom, be passed inappropriately to those not able to bear the responsibility effectively. A variety of routes are available within the law to provide more appropriate control of such assets at an appropriate time. Such routes may include trusts, wills, foundations, charities, or any combinations of these.

Trusts vs. Wills

Trusts

A trust is a more complex arrangement and is often more extensive than a simple will, however, for the right person, a trust offers significant advantages. A trust is established by the “settlor” (probably yourself and your spouse), who set up a trust deed, which describes one’s assets, ones beneficiaries and the circumstances by which the assets will be transferred in whole or in part to them.

The trust is administered by the trustees, who in common law countries are recognised as the beneficial owners of the assets held within the trust. In many regimes, trustees are subject to local taxes at rates different than those of the settlors and those of the beneficiaries. In particular, as trustees are often professional firms, they do not guide and may not, therefore, be subject duty, gift tax or inheritance tax. In the event of one’s death, trustees are already in place and will administer one’s affairs in accordance with the trust deed and other instructions that may have been given to them. Although a trust deed is a registered document, it does not become public property, so one’s affairs remain confidential.

The suitable use of trusts can provide extremely effective and flexible confidential means of managing one’s affairs and assets both in one’s lifetime and upon death. Indeed trusts could, if required, hold assets for several generations. They, therefore, offer potentially greater tax advantages, greater control and greater confidentiality than can be achieved through a will. They are, however, more expensive than wills, both to establish and to maintain, so a full discussion and analysis is often necessary to suggest which might be a better route. Tax Associates International (TAI) working with specialist providers is happy to provide this service. Please ask us for a consultation to see which suits you best.

Wills

A will is a formal statement signed before witnesses, which sets up your assets, your beneficiaries, the circumstances under which you would wish assets to be transferred to them and any caveats or conditions that you wish to apply. In the event of one’s death, an “executor” appointed within the will will have the legal responsibility of gathering in your assets, paying your debts, applying for probate from the jurisdictions in which you have tax exposure, settling any tax that is due and then distributing the residual estate in accordance with your wishes. In many jurisdictions, your will is not of itself binding, in some, your beneficiaries, acting together can set aside some or all of your will; in others, local law or custom can override your wishes for at least some or perhaps the larger part of your assets. On probate being granted, the will becomes public knowledge, so anyone can see the size of your estate and its main constituents.

Foundations

A Foundation is a legal entity and is recognised in civil law countries in particular where it can be used to provide similar arrangements to those described under trusts above. In a civil law country, the tax authorities can “look through” a trust and tax the beneficiaries or the settlor; in such countries, the foundation itself is the taxable entity; settlor and beneficiaries remain confidential and the foundation will be taxed at rates specifically applicable to it.

Trusts have a longer case history and, in countries that recognise them can follow a considerable body of precedent so their effective use can be larger assured. Trusts are recognised in common law countries such as the UK, USA, Commonwealth Countries (Australia, New Zealand, India, etc.); civil law applies across Europe, Scandinavia, and those countries colonised by the European powers). Under civil law, precedent may not be effective in that each case is determined on its merits. At the same time, there is a smaller body of case history relevant to foundations. However, if trusts are looked through, then a foundation is the better solution.

Forced inheritance tax issues

In many civil law countries and those subject to Shari’ah law or other religious-based laws or customs, inheritance may be determined by such local law or custom. In general, this can work well as family assets remain within and are distributed to set members of the family group. However, such distribution might sometimes be inappropriate where the beneficiary is underage, or is in some way unable to accept the responsibility that such distribution may bring. By planning in advance of one’s own death, one can legally place assets into trusts or foundations, which can more appropriately control or distribute the assets on one’s death. We would be happy to consult with you to help you decide which option may be best for you and your family.