The current economic environment is turbulent to say the least, with low (but increasing) interest rates, rising inflation and geopolitical instability. The good news is that creating trusts and foundations as part of your succession planning remains a savvy way to protect your assets from the swirling storms. However, there are many domicile options for your wealth holding, and choosing the right one is vital.
Balancing emotional and practical considerations
In all aspects of life, decisions are based not only on research and advice but also on a mix of emotion, circumstance and gut feel. We must also weigh up the practical and financial implications of our chosen course of action.
It’s no different when considering the right domicile for a trust or foundation – EQ and IQ must be optimally balanced. Factors uniquely pertinent to a family’s situation. Legal and regulatory idiosyncrasies of potential jurisdictions (considering reputation, regulation and legislation). All these need to be assessed so that high- and ultra-high-net-worth individuals (U/HNW), family offices and advisers can find the best solutions.
Here, we put both personal factors and jurisdictional considerations on the weighing scales in relation to three important themes: location, tax, and legislation and infrastructure.
1. Location
Personal factors:
Where you or your client (or their beneficiaries) are currently based will be an important ingredient in trust domicile decision-making. Not only that, but the desired location for future retirement, and if children are at school in different countries. For example, if someone regularly visits Switzerland and has strong relationships with Swiss banks, then there’s likely to be a personal preference for having their trustees in this familiar country.
Jurisdictional factors:
Then it’s about understanding the lay of the land and what foundations and trust structures are available in any given location. Hong Kong and Singapore, for example, have strong trust offerings, but don’t offer foundations. Then again, Hong Kong’s new licensing regime makes it attractive to U/HNW families. Reputation and ranking are also key. Wealthy families will invariably be motivated by the international standing of the chosen domicile, formed both through their own perceptions and experience and by media reporting and the Global Financial Centres Index ranking. Any time zone or language advantages or barriers will also come into the decision mix.
2. Tax
Personal factors:
While we are not tax advisers, where you or your client are currently resident or domiciled for tax will play a big role. For ‘non-doms’ living in the UK, tax will be a major consideration and therefore the Channel Islands or Isle of Man may be appealing. But if you’re UK domiciled, it’s usually most tax-efficient to opt for a UK domestic trust. Trusts domiciled in the United States, meanwhile, are subject to different laws and taxation rules in each state. It certainly pays to know.
Jurisdictional factors:
Tax neutrality is often the desired outcome. While tax is rarely the sole driver for families establishing trusts, it’s wise not to choose a domicile that inadvertently proves disadvantageous. Ascertaining whether a potential domicile is on the OECD’s ‘white list’ can also be a critical consideration for reputational and practical reasons.
3. Legislation and Infrastructure
Personal factors:
Does your trustee have a presence in the preferred jurisdiction for the trust or foundation? And do you have a good relationship with them? These are important questions. Lawyers will have preferred jurisdictions based on personal experience and knowledge. Seeking unbiased advice is therefore always recommended.
Jurisdictional factors:
When managing significant wealth, you deserve a depth and breadth of service providers. We advocate using a range, such as trustees, lawyers, accountants and investment managers. Then there’s regulatory oversight considerations: trustees or foundation providers must be properly regulated, licensed and supervised. Not to mention whether private trust companies (PTCs) are permitted in the first place.
Jurisprudence – reputation and experience of the judiciary – is significant (and here the Crown Dependencies each have years of experience). Should disputes arise, it is helpful to have trust law and trustees in the same jurisdiction, along with a robust court system.
Using head and heart
The personal vs technical – EQ vs IQ – balancing act of choosing the right domicile for your trust or foundation can seem daunting. As discussed, there are a myriad of considerations. Ultimately, the most important decision is choice of trustee, rather than jurisdiction. When it comes to wealth management, building a trusted relationship with advisers is essential. By appointing a trustee that you like and trust, who operates in several jurisdictions, you not only take into account emotional and practical factors, but crucially, you get the best of both.
