It is surprising how often there is truth in the old adage ‘money does not buy happiness’.
For decades Bermuda has worked with some of the world’s wealthiest people. Over the years I have come to appreciate that, regardless of origin, successful entrepreneurs and wealthy individuals have common concerns, including:
planning for succession of business control and wealth;
preservation of the family’s assets as the family grows and separates (physically and philosophically);
instilling the family’s core values/philosophy in future generations;
providing for the needs of descendants (without damaging their drive and personal development);
protecting the privacy of the family; and
how to ‘give back’ to society - charity/philanthropy.
These observations are not unique, a survey of 136 private client lawyers indicated that after tax planning, the issues which are most frequently raised by clients are: asset protection (53 per cent), family business structuring (51 per cent), succession (44 per cent), domicile/residence (29 per cent) and estate/trust disputes (27 per cent). Further, 40 per cent of global wealthy families have experienced family conflict as a result of family wealth.[i]
While Latin American families are similar to other internationally wealthy families, there are a number of interesting differences. Latin American families have higher rates of business ownership and a higher consideration for extended family in wealth planning.[ii] Traditionally these are two of the biggest ‘problem areas’ for succession and wealth planning. Perhaps this explains why 61.3 per cent of Latin American families have a greater focus on seeking family-wealth advice (which is more than double the global average).[iii]
In Bermuda we have worked with wealthy families from all over the world to develop structures and mechanisms to address their concerns.
Some of the Tools
In Bermuda many structures and tools have been designed to address the concerns facing successful entrepreneurs and wealthy families. One of the most flexible and useful tools is a ‘trust’.
It is important to observe that while a ‘fideicomiso’ has some conceptual similarities to a ‘trust’, a Bermuda trust will be subject to the body of Bermuda trust law stretching back to the doctrines of equity and English statute law in force in 1612 as modified and interpreted by Bermuda legislation and courts.
The concept of a Bermudian ‘trust’ can be explained by a simple example. Mr S, a very successful entrepreneur, is approaching the end of his life. He realises that unless he plans for the succession of his business empire it is very likely that his family will engage in a war for control - damaging family harmony, breaking apart his empire, and ending his dream of creating a dynasty.
To avoid this happening, Mr S plans to transfer control to his trusted, honorable and wise advisor. While Mr S has absolute faith/trust that his advisor will carry out his wishes, he is comforted by the knowledge that Bermudian laws impose legally enforceable obligations on his advisor to preserve and protect his empire, and carefully use the assets to preserve family harmony, nurture and care for those people or charities named by Mr S. Bermuda has comprehensive trust laws that ensure the trusted advisor (the trustee) will carry out the provisions of the trust set out by Mr S (the settlor) for the benefit of the designated beneficiaries (his descendants). Bermuda has developed legislation designed to protect and preserve the integrity of the trust, the structure and the assets from third parties or disgruntled family members that might seek to thwart the intentions of the Mr S.[iv]
One of the most useful features of this trust structure is that the law recognises a separation of the elements of ownership into two parts consisting of (in simple terms):
legal ownership, which is the right to control the asset, including power to buy/sell, make investments, etc.; and
the beneficial ownership, which is the right to enjoy the benefits flowing from the assets.
This allows for a very flexible ownership/control structure.
Who Uses Trusts?
Bermuda trusts are used by wealthy people around the world, including Latin America. The Wealth Report 2013 shows the offshore trust is the vehicle preferred by private client lawyers[v]. Even where families are from civil law jurisdictions, where trusts are an unfamiliar concept, these families are finding that as their family becomes more multijurisdictional there is an increasing opportunity to include trusts in their structures.
What Are Trusts Used For?
Successful entrepreneurs are concerned with succession of both business control and wealth. Well over 50 per cent have concerns about how the next generation will manage the funds they will inherit[vi]. The growing incidence of divorce around the world also presents another challenge for families which do not want to see substantial proportions of inheritance being awarded to estranged spouses or to the children of second husbands and wives[vii].
Many structures used in Bermuda are designed to preserve control for the entrepreneur/settlor during their life and provide for smooth succession upon death or retirement. A simple structure would involve the creation of the family’s very own trustee company to administer a Bermudian trust formed to hold assets for the benefit of the entrepreneur during his/her life, and after his death provide for a division of the wealth and control. In some instances a family may wish for an equal division of value or wealth, but wish to ensure that certain assets go to designated beneficiaries/children. A typical example is for the operating company to go to those children that are actively involved in the business. This can be done using a Bermuda trust.
The creation of a private trustee company is actually very common and usually inexpensive. Statistics show that one third of private client advisors expect to see an increase in the use of private trust companies for their families. A private trust company is often the center piece of the family’s holding structure, since it can be designed to promote family harmony/unity, instill the family philosophy in future generations, and to train and educate descendants on how to successfully manage the family business and wealth. Private trust companies are often expanded into family offices, again a structure seeing increasing interest, with approximately half of families surveyed expressing interest in single family office structures.[viii]
Divorce and forced heirship
Laws of many countries dictate how assets are to be divided upon the divorce or death of the wealthy entrepreneur. One of the advantages of placing assets in a Bermudian trust is that the trustee has legal title to the assets (remember, trust law separates ownership into two parts). The assets are no longer owned by the entrepreneur, and may not be included in the division of assets. Even if the foreign court treats the assets as belonging to the entrepreneur, Bermuda has enacted laws that prevent Bermudian courts from using trust assets to satisfy judgments of foreign courts in divorce, forced heirship or bankruptcy proceedings[ix].
In addition, a Bermudian trust can often contain provisions designed to stop his descendants from challenging the structure. A ‘no contest clause’ would bar any descendant of the settlor from receiving an ‘inheritance’ if they challenged the structure or commenced legal proceedings.
Bermuda has a tradition of protecting the privacy of individuals involved in legal proceedings. Cases involving trust disputes are almost never reported, and it is standard practice to seek a ban on publication.
In addition, trust structures also protect against public disclosure of ownership information for assets. Bermudian trusts are not registered. There is no publicly available information regarding trusts, settlors or the beneficiaries. Also, when trust assets need to be registered (eg, shares of a company), the trustee is shown as the legal owner (remember that ‘ownership’ is divided into two parts). Many entrepreneurs find this additional layer of privacy helpful in business dealings or when they are concerned about threats, such expropriation or kidnapping.
Bermuda is one of the oldest private client jurisdictions in the world. We have a great deal of experience in assisting families designing structures that help avoid some of the pitfalls wealthy families encounter. To use another in old adage ‘practice makes perfect’.
[i] The World Report 2013, Futurelex Ltd, Hereford House, 23/24 Smithfield Street, London, UK, page 4-5
[ii] 2013 World Wealth Report, Capgemini, http://www.capgemini.com/sites/default/files/resource/pdf/wwr_2013_1.pdf at p. 25
[iii] Ibid, at p. 26
[iv] Trust (Special Provisions Act) 1989, and others
[v] World Report 2013, at p. 6
[vi] Ibid, at p. 10, less than 1/5th believe that the next generation is prepared.
[viii] Ibid, at p. 5
[ix] Trusts (Special Provisions) Act 1989