The Private Wealth guide provides expert legal commentary on the key issues for high net worth individuals. The guide covers the important developments in the most significant jurisdictions.
Last Updated: August 13, 2019
The pace of legal, cultural and technical developments around the world increases each year, and international estate, trust and tax planning continues to evolve with them. Decades of globalisation, combined with the unprecedented mobility of the world’s wealthy, have made it common to have clients whose residences and assets range across multiple jurisdictions. This can lead to planning challenges during life and at death, as families are often affected by multiple, and often conflicting, tax laws, rules of inheritance, treaties and cultural norms. As a result, international private client lawyers must work closely with legal advisers in many jurisdictions to ensure that advice is not being given in isolation, and that all the factors affecting a client’s planning have been identified.
Understanding and appreciating the cultures (both legal and national) of the various jurisdictions is also vital, and lawyers who do so will be increasingly valuable, whether in non-contentious planning or in trust and estate litigation. Making an effort to bridge cultures and languages will also make mistakes much less likely. Lawyers who function as a team, who respect the intricacies and unique aspects of each legal system, and who recognise that an appreciation of language and culture is fundamental to successful cross-border work, will have enormous advantages over lawyers who see multi-jurisdictional planning or litigation as separate pieces where each lawyer has responsibility only for his or her jurisdiction. The Chambers Private Wealth Global Practice Guide is designed to help encourage and facilitate this cross-border co-operation.
A few recent global trends in the law that relate to families, their businesses and their planning are discussed below.
The Demand for Increased Transparency and Oversight
The most dramatic force of change in the international private client world continues to be the global drive for transparency. Governments are increasingly focused on cross-border arrangements and structures and have implemented regulatory schemes that require the exchange of tax-related information. For example, the United States overcame initial resistance to achieve near-complete international compliance with the Foreign Account Tax Compliance Act (FATCA).
The Common Reporting Standard (CRS), the reciprocal automatic information exchange agreement developed by the Organisation for Economic Co-operation and Development (OECD), has been adopted in over 100 jurisdictions; reporting commenced in 2016 and came fully into effect last year. The CRS requires entities (including trusts and foundations) to report information on controlling persons. For entities, the controlling persons are generally the individuals who exercise control over the entity or who have a direct or indirect controlling ownership interest in the entity. For a trust, the controlling persons are defined to include the settlors, the trustees, the protectors (if any), the beneficiaries or class of beneficiaries, and any other natural persons exercising ultimate effective control over the trust (whether directly or indirectly). Of course, few of these individuals (who may be resident in numerous jurisdictions) actually control a trust, yet the broad reporting requirements are creating significant compliance burdens and challenges for trustees and financial institutions dealing with trusts. The global reach of the CRS has also made the co-operation of teams of advisers across multiple relevant jurisdictions that much more important.
The European Union now seeks to expand the scope of mandatory disclosure beyond the CRS with the adoption of DAC6, a European Directive that member states must implement by the end of this year. DAC6 requires tax, accounting and legal professionals ('intermediaries') to report their clients’ qualifying cross-border planning arrangements. Any cross-border arrangement involving one of 18 specified 'hallmarks' is subject to disclosure. The hallmarks include, inter alia, the transfer or conversion of assets to a type that is outside the scope of the CRS; the movement of funds to a jurisdiction that does not participate in the CRS, such as the United States; and the use of shell or holding companies or nominee arrangements. Once in force, DAC6 will be retroactive to 25 June 2018, which means that intermediaries and their clients may already have substantial reporting obligations under the new disclosure regime.
In addition to increased emphasis on the automatic exchange of information in programmes that purport to make the information available only to tax and law enforcement authorities, some governments and organisations have moved for even greater transparency, demanding public registers. For instance, in July 2018, the European Parliament and Council adopted the 5th Anti-money Laundering Directive (5AMLD), which broadens the availability of EU member states’ national registers of ultimate beneficial ownership of trusts. Beginning in 2020, trusts’ beneficial ownership information must be made available:
The United Kingdom has already enacted similar legislation in the context of shareholders of corporations, which requires the disclosure of persons with significant control. Since 2016, all UK-incorporated companies and limited liability partnerships (LLPs) have been required to maintain and hold open for public inspection a register of natural persons with significant control. Furthermore, beginning last year, UK-resident trusts, as well as trusts with UK assets or income, have been required to provide information for inclusion in the UK register of trusts. In response to 5AMLD, the UK has announced plans to expand the register of trusts to include additional categories of non-UK trusts with connections to the UK, such as trusts that enter into a business relationship with a business subject to the UK’s anti-money laundering regime. As required by the EU regulation, the register, which is currently available only to government institutions, will be available to the categories of persons described above.
The EU has also indirectly imposed transparency obligations on offshore jurisdictions through the publication of a list of non-co-operative tax jurisdictions. In March 2019, the EU added 15 jurisdictions to the 'blacklist' of non-co-operative jurisdictions, including several US territories and the United Arab Emirates. Numerous offshore jurisdictions have adopted, or have announced plans to adopt, local laws and regulations that implement the provisions of DAC6 and 5AMLD.
These developments coincide with the increasing criminalisation of tax and compliance advice. In recent years, the UK Criminal Finances Act, the US Foreign Corrupt Practices Act, and similar laws have threatened private client advisers with criminal penalties for their clients’ misconduct, effectively co-opting them into the oversight of client behaviour. Under the UK Criminal Finances Act, a corporate body (eg, a law firm or a financial institution) that fails to institute policies designed to prevent the facilitation of tax offences or money laundering by its employees could itself be subject to substantial fines or termination of licences.
The substantial reporting burdens imposed by these types of regulations have already had a notable impact on the offshore trust world. Many smaller trust companies simply do not have the resources to comply with the complex regulations, and the risks of incorrect reporting often outweigh the benefits of taking on clients from certain jurisdictions.
Some commentators have questioned the efficacy and fairness of the burden placed by these expansive transparency and oversight frameworks upon individuals, families and advisers. In particular, practitioners are increasingly challenging the requirement that court proceedings relating to trust administration or related intra-family matters be kept open to the public where not specifically requested by the parties. These proceedings generally involve non-contentious petitions, brought with the consent of all the interested parties. Under such circumstances, the public’s general interest in transparency may not justify the impairment of the litigants’ privacy. Commentators suggest that the norm of public access to court proceedings in the UK and other jurisdictions is likely to drive trust administration business to offshore forums.
Rise of Estate and Trust Litigation
The world is in the middle of the greatest generational transfer of wealth in history, and cross-border estate and trust litigation has never been busier. Trustees find themselves entangled in a rising number of complex and costly cross-border disputes, often serving as the target of aggrieved beneficiaries (or excluded family members) in jurisdictions that have forced inheritance laws or that do not recognise trusts.
Whether representing fiduciaries or challengers, anticipating litigation can go far towards increasing the likelihood of obtaining a favourable result (whether through the courts or negotiated settlement). The greatest risks in multi-jurisdictional trust litigation come from the potential clash of laws and procedures of the different countries, yet these inconsistencies also create opportunities for surprise and victory. The litigation team that truly understands the intricacies in each jurisdiction and appreciates the contrasting cultural forces can exploit the gaps that are created to their substantive and procedural advantage.
The introduction to the 2018 edition of this Guide highlighted increased political volatility worldwide as potentially the most significant change in the preceding year. In the 12 months since, worldwide political turmoil has become only more disruptive. The reintroduction of broad-scale tariffs in international trade, the uncertain path forward for Brexit in the UK, and the continued consolidation of authoritarian regimes around the globe are just a few examples of fluctuating political landscapes. The substantial changes to legislation, policy and politics which have resulted have created risks and opportunities for clients who live and work across multiple jurisdictions. To provide sound advice, advisers must understand the full import of political changes worldwide and their potential consequences.
All these trends and forces – transparency, the increase in trust and estate litigation, political volatility – will continue and will receive the most publicity. But of course, the world of private client advice does not involve only these areas. Much of our work relates to helping families structure the succession of wealth in responsible and lasting ways, preserving long-existing family businesses, encouraging family harmony and protecting family assets for both current and future generations. These needs will also continue and grow.
New challenges that are emerging include, for example, adapting current laws and structures to evolving methods of reproduction due to scientific and medical advancements. These range from the increasing use of surrogacy arrangements to the birth of children from frozen embryos after one or both of their biological parents are dead, and even to posthumous conception and reproduction. Laws to address questions of inheritance rights and the definition of such terms as 'issue' and 'legitimate' in these contexts either do not exist or conflict among jurisdictions. Digital assets, including virtual currencies such as Bitcoin, mark another new territory that national legal systems will need to address. To reflect the increasing importance of these issues, we have asked each of the authors in this year’s edition of the Guide to describe the current state of the law in their respective jurisdictions.
of the authors in this year’s edition of the Guide to describe the current state of the law in their respective jurisdictions.