OCTOBER 2015 MONTE-CARLO
Succession structuring for international business families
[ ROSE CHAMBERLAYNE ]
FAMILY BUSINESSES make up a significant part of the world’s economy, but only
US-based trusts for foreign settlors [ RODERICK BALFOUR ]
THE 1996 US TRUST legislation indicated
a move to US-based trusts. More recently, the HIRE Act and FATCA ‘discovery’ made foreign trusts disadvantageous to US persons. The ‘directed trust’ is facilitated by the law in South Dakota. Asset protection there is strong, and bank secrecy is robust. The ‘Dynasty Trust’ is possible, although the American Bar Association is not in favour of perpetual trusts. There are powers to alter trust deeds. The Governor has a task force, keeping the trust law up to date. The foreign grantor trust is advantageous for trusts with US beneficiaries, if the grantor is not a US person and has a power of revocation (s672).
The HIRE Act and FATCA ‘discovery’ made foreign trusts disadvantageous to US persons.
018
The ITPA Green Book 2017
www.itpa.org
A ‘blocker’ protects against
estate tax on US assets – and probably on grantor’s other assets. Problems arise when the grantor dies: a step-up of base cost is available if action is taken promptly. The Dynasty Trust can exempt non-US assets from US estate tax for generations. A pour-over trust can be utilised to limit penal tax exposure of US beneficiaries on undistributed income. A FBAAR return will be required unless custody is in the US. Portfolio debt plus US trust structure can serve to reduce tax on US real estate gains. The US is not a signatory to the CRS, which offers an opportunity at least while the CRS settles in. There is more information available at
www.virtustrust.com.
a small percentage survive into the next and subsequent generations. Family owners have a strong emotional attachment to their business. A solid governance platform is required to ensure continuity over generations – a family purpose, binding procedures and good governance. Giving up control can be a major obstacle. There is a need to deal fairly between family members. Discussing mortality can be difficult. Machinery to deal with conflicts needs to be put in place during the founder’s lifetime. The design of a structure may begin with discussions with all the parties, to arrive at agreed purposes, procedures, distribution and investment. The structure may make use of a private trust company, a family constitution, a family office, a foundation or executive entity. The second layer of good governance is a defensive strategy, regularly reviewed. Checks and balances are needed. Who can the founder trust? The need is for clear purpose, assessing risks, disincentivising attacks, securing the structure and best practice operation. A bilateral investment treaty can be useful. Different vehicles may be required for business and personal assets. As far as possible the differing rights and obligations of each of the family members need to be defined. A family office can help to solve many problems.
There is a need to deal fairly between family members.
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