Private Wealth 2020 covers 31 jurisdictions. This edition discusses tax, succession, trusts and foundations, family business planning, wealth disputes, fiduciaries, citizenship and charitable planning.
Last Updated: August 12, 2020
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. The COVID-19 pandemic has presented an immediate disruption to such mobility and may result in long-term consequences to globalisation. New and increasingly complex challenges have arisen in planning during life and at death, as countries attempt to address the effects of the pandemic and as families are affected by multiple, 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 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 also will 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 their 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 COVID-19 Pandemic
The rapid spread of the COVID-19 virus has been called the defining global health crisis of our time. The resulting pandemic has caused the deaths of hundreds of thousands of individuals worldwide and continues to devastate. The pandemic also has created an unprecedented economic crisis. Many countries have incurred considerable debt in record time to protect their economies and their residents, and may choose to implement new strategies to alleviate such debt, whether by increasing tax rates, or by enacting new forms of taxation such as wealth or exit taxes. In past economic crises, some governments have sought forced loans from private companies and individuals or have nationalised private companies in key sectors. It is possible that these strategies may again be considered.
These times of uncertainty have also generated attention to personal planning. Clients may need to balance the desire to move assets out of their estates with the ability to access such assets in times of financial hardship. The risk of nationalisation in particular creates the need to ensure private clients separate personal wealth from assets in companies that can be nationalized, which may prove difficult given a family’s wealth often is predominantly in its family business.
The pandemic has also resulted in the increased use of electronic tools in international estate, trust and tax planning. With private client data increasingly accessible via electronic platforms, the need to safeguard against security vulnerabilities has never been greater.
Clients now face challenges due to new and continually changing restrictions on travel that have resulted from efforts to contain the spread of the COVID-19 virus. Such travel bans may impact clients’ tax residency or may have significant immigration consequences. Some jurisdictions have addressed these considerations proactively. For example, the UK and the USA have clarified that being unable to leave the jurisdiction due to COVID-19 restrictions may result in a specified amount of time spent in the USA or the UK, as the case may be, to be disregarded for many residency determination tests. New or increased exit taxes may also discourage clients from moving to other jurisdictions in the long term.
The Demand for Increased Transparency and Oversight
The global drive for transparency continues to be a dramatic force of change in the international private client world. 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 has achieved 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. 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. Notably, taxing authorities around the world have delayed CRS due dates in response to the COVID-19 pandemic.
Expansion of mandatory disclosure
The European Union has expanded the scope of mandatory disclosure beyond the CRS with the adoption of DAC6, a European Directive requiring 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, under certain circumstances 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; and the use of shell or holding companies or nominee arrangements. DAC6 is retroactive to 25 June 2018, which means that intermediaries and their clients may already have substantial reporting obligations under the disclosure regime. While the reporting requirements were to begin in July of this year, as a result of the COVID-19 pandemic, the European Union has enacted relief whereby member states may postpone the deadlines for DAC6 reporting up to an additional six months. Many countries have adopted such extensions, and others have announced their intentions to do so.
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 fifth Anti-money Laundering Directive (5AMLD), which broadens the availability of EU member states’ national registers of ultimate beneficial ownership of trusts. Beginning this year, 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, since 2018, 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. Requests have been made to delay implementation of 5AMLD requirements in light of difficulties created by the COVID-19 pandemic.
The EU has also indirectly imposed transparency obligations on offshore jurisdictions through the publication of a list of non-co-operative tax jurisdictions. In February 2020, the "blacklist" contained 12 non-co-operative jurisdictions, including several US territories. 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.
The effect that the COVID-19 pandemic will have on this trend toward transparency is unclear. The Great Recession saw a global, coordinated response to the financial crisis. While the COVID-19 pandemic has yet to see an organized effort on a similar scale, the resulting economic crisis may stimulate nations to unify their efforts. The consequences for universal tax reporting remain to be seen.
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. The COVID-19 pandemic likely will increase the occurrence of such disputes as, for example, trustees must determine whether to distribute assets to beneficiaries in difficult financial positions and make investment decisions in a volatile market. Litigation in the areas of bankruptcy and fraud also may increase as a result of the economic crisis caused by the pandemic.
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 introductions to the 2018 and 2019 editions of this Guide named increased political volatility worldwide as a significant change in the preceding years, highlighted by the reintroduction of broad-scale tariffs in international trade, Brexit and the ongoing negotiations between the EU and the UK regarding the path forward, and the continued consolidation of authoritarian regimes around the globe. The COVID-19 pandemic has only increased worldwide political turmoil. 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.
The COVID-19 pandemic has resulted in increased uncertainty as countries determine how to address the ensuing health and economic crises. Such uncertainty will impact the trends discussed above – transparency, the increase in trust and estate litigation and political volatility. 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. The development of law around these new challenges in the shadow of the pandemic and resulting economic crisis will be of increasing importance, and we have asked the authors of this year’s edition of the Guide to describe the current state of the law in their respective jurisdictions, and how it has been affected by the COVID-19 pandemic.