Darwin meets offshore
Charles Darwin is best know for his contributions to evolutionary theory and he is less well known as an offshore visionary, despite this it seems only fitting to quote him as the offshore fiduciary world continues to evolve. Darwin stated that ‘it is not the strongest or most intelligent who survive but those who can best manage change’. As relevant as this quote is for the survival of a species it is also equally important to the offshore fiduciary industry today.
Aside from the global onslaught of new legislation, regulation and industry consolidation which offshore fiduciaries are managing on a daily basis, there are yet more significant trends which are affecting the industry.
Firstly, the motives for establishing a fiduciary structure are evolving from what they were merely ten years ago when achieving tax efficiencies, in the majority of instances, was a principal driver. Although tax planning remains a consideration, we are increasingly seeing families establish large complex structures where the principal motives are succession planning and asset preservation.
Secondly, the industry is looking to newer markets such as Asia for the next generation of settlors.
Diminishing tax benefits
It is well documented that the tax benefits to be gained from establishing an offshore structure have drastically receded in recent years. Following the financial crisis, a number of countries have implemented austerity measures and have scrambled for ways to increase their tax revenues. We have seen that, as part of a wider ‘revenue generating’ exercise by countries, the offshore industry and, more specifically, the taxation of trusts and their principals has come under increased international scrutiny.
In searching for additional revenue, various countries have introduced legislative changes which have reduced the tax benefits that have historically been available to families establishing offshore trusts. With this in mind, families and their advisers have refocused their attention on why a trust should be established in the first instance. We are finding that people are now increasingly concentrating on the ‘non tax benefits’ a structure has to offer them and their family.
Greater focus on-tax benefits
This awareness is being compounded by families becoming more aware of disputes relating to the distribution of a family’s wealth when effective estate planning has not been implemented. Despite many cultures having an aversion to discussing the passing of a matriarch/patriarch, they are opening their eyes to the fact that these disputes tend to arise upon their death and the long-term effect on a family’s dynamics and harmony, not to mention the asset which was intended as an ongoing legacy, can potentially be devastating.
Arguably, from a common law perspective, the estate planning tool which offers the greatest flexibility, and which is the most frequently used, is still the traditional irrevocable discretionary trust. Wider, non-tax benefits include succession planning, managing forced-heirship situations, confidentiality, administrative efficiency and the consolidation of assets, asset preservation and jurisdictional
diversification and protection from economic and political instability.
It is perhaps this last driver that is contributing in part to the increased focus being placed by some trust companies on Asia. Concerns surrounding economic and political instability are especially applicable for families based in emerging markets or regions which have historically been unstable resulting in uncertainty in relation to both personal and financial security. These regions are also experiencing significant growth in first generation wealth and, as this generation ages, there is a real need for assistance to help manage the succession process. On paper this looks like the perfect breeding ground for an evolved generation (or perhaps, to
return us to Darwin for a moment, species) of trust clients.
If you add into the mix the development of the private wealth industry in Asia, which has benefited significantly from some of the troubles the sector has seen in Switzerland, you would think that establishing an office in Asia would be top of every trust company’s agenda. However, the realities of life on the frontier are challenging. Those first movers are having to adapt their approach as their potential clients have a different set of validation criteria for trust providers, and expectations of what having a trust entails and the value that it brings (and therefore what the trustees can command as a fee) are very different from those in the more mature trust markets.
Both families and their advisers will agree that, despite the tax benefits of settling a structure diminishing, the overall benefits of a structure are still overwhelmingly strong and continue to justify their establishment whether they are in the East or the West. However, managing and adapting to the shifts in the industry is now of the utmost importance for an offshore fiduciary provider, suggesting that Darwin truly was an offshore visionary after all.
The Lawyer - Briefing, Offshore, 17 November 2014