Private Wealth 2023

Global Outlook – Private Wealth in 2023

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.

International practice

New and increasingly complex challenges have arisen in planning during life and at death, as countries attempt to stabilise economies reeling from the effects of the pandemic and the conflict in Ukraine, 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.

Cultural differences

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 their own jurisdiction. The Chambers Private Wealth Global Practice Guide is designed to help encourage and facilitate such 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 COVID-19 pandemic has been called the defining global health crisis of our time, causing the deaths of millions of individuals worldwide and creating an unprecedented economic crisis. Many countries incurred considerable debt in record time to protect their economies and their residents. As they struggled to bolster supply chains and tamper inflation, many jurisdictions placed a renewed emphasis on the enforcement of current tax laws and negotiating or enacting increased tax rates and new forms of taxation, such as wealth or exit taxes.

These times of uncertainty also generated attention to personal planning. Clients needed to balance the desire to move assets out of their estates against the ability to gain access to such assets in times of financial hardship. The risk of nationalisation in particular was increased, and continues to create the need to ensure private clients separate personal wealth from assets in companies that can be nationalised, which often proves difficult given that a family’s wealth is often predominantly tied up in its family business.

Emerging from the pandemic, the increase in digitalisation and rise in remote work opportunities created a highly mobile environment. Individuals are now more transient than ever before. We have also seen an increased use of electronic tools in international estate, trust and tax planning. With private client data being increasingly accessible via electronic platforms, the need to safeguard against security vulnerabilities has never been greater.

Global shifts in immigration and tax policies have fuelled this mobility trend. For example, some jurisdictions provide “Residence-by-Investment” schemes and/or preferential tax treatment for certain new residents. Such policies have been met with some criticism in recent time due to anti-money laundering concerns and the effect on local communities. Recently, Portugal has ended its programme. Presumably this will continue to be an area of focus in cross-border private client practice. 

Crisis in Ukraine

Russia’s military invasion of Ukraine in February 2022 has caused many thousands of civilian deaths and displaced many millions of people.

In response to the crisis, the European Union, the USA and other countries have imposed economic sanctions against Russia, with broad international economic ripple effects.

These sanctions have had a significant impact on private client advisers, who must keep abreast of rapidly changing guidance in relation to clients with ties to Russia. Individual violators of sanctions are generally subject to strict liability and face stiff penalties.

The Global Economy

The lingering effects of the pandemic and Russia’s invasion of Ukraine created economic conditions that many forecasters predicted would lead to a global recession. These events, combined with persistent inflation and rising global interest rates, continue to generate concern regarding an impending recession. All of these factors have dramatic consequences for our clients and their business interests.

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 USA 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 OECD) has been adopted in over 100 jurisdictions and 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.

However, some commentators have suggested we may have seen a high-water mark in the area of transparency. By way of example, the European Court of Justice had introduced an amendment to the Anti-Money Laundering Directive in 2018, providing that beneficial ownership information of companies incorporated in the member states should be accessible to the general public. However, in November 2022, the Court declared this amendment as invalid, balancing the public interest objective of the amendment against the right to privacy under the European Union Charter. Information on beneficial ownership now must only be accessible to persons and organisations who are able to demonstrate a “legitimate interest”. While this decision signals a potential retreat in the drive to increase transparency, the extent to which public access will be curtailed is unclear.

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 a number of specified “hallmarks” is subject to disclosure. The implementation of DAC6 varies by jurisdiction. DAC6 is retroactive to 25 June 2018, which means that intermediaries and their clients may already have substantial reporting obligations under the 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 fifth Anti-money Laundering Directive (5AMLD), which broadens the availability of EU Member States’ national registers of ultimate beneficial ownership of trusts. Since 2020, trusts’ beneficial ownership information must be made available to:

• professionals and institutions subject to anti-money laundering rules, including attorneys and financial institutions acting within the framework of customer due diligence;
• persons who can demonstrate a “legitimate interest” in the information, as determined under national law; and
• the public, in the case of any trust that holds certain interests in a company outside the EU.

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 expanded 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 that is subject to the UK’s anti-money laundering regime. Such trusts were required to be registered by September 2022. As required by EU regulation, the register, which was previously available only to government institutions, is now available to the categories of persons described in the three bullet points above. EU Member States are now required to fully implement the 5AMLD requirements; as of June 2022, infringement proceedings are pending against 12 non-compliant EU Member States.

The EU has also indirectly imposed transparency obligations on offshore jurisdictions through the publication of a list of non-cooperative tax jurisdictions. In February 2023, the “blacklist” contained 16 non-cooperative 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 the 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 privacy implications, as well as 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. The forecasted global recession will likely 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 may also increase.

The issue of requisite capacity in the execution of documents such as wills and trusts has become a dominant consideration. With increasing frequency, lawyers are ensuring they have evidence of their clients' requisite capacity at the time of execution, as well as emphasising the importance of planning for a client's future incapacity, such as with powers of attorney and succession planning.

Whether representing fiduciaries or challengers, anticipating litigation can go far towards increasing the likelihood of obtaining a favourable result (whether through the courts or a 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 its substantive and procedural advantage.

Political Risk

Introductions to recent 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, a rise in nationalism and the continued consolidation of authoritarian regimes around the globe. The socio-economic fallout resulting from the COVID-19 pandemic and other societal forces has increased worldwide political turmoil and, in some cases, civil unrest.

The resulting substantial changes to legislation, policy and politics 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.

Artificial Intelligence

Rapid advances in artificial intelligence (AI) technology have dominated headlines over the past year. Such technology is quickly transforming the way people work and live. However, many commentators have also raised concerns about the impact of such rapid advancement and whether AI technology could also be harmful as it progresses.

The rise of AI technology raises potential issues in the legal sector as well. Questions remain as to whether AI will eventually be able to replicate certain skills of legal professionals. While AI may aid lawyers in the future, lawyers should evaluate the skills that may not easily be replaced, such as emotional intelligence and the personal relationships they have with their clients. With the inevitability of AI entering the legal sectors come ethical concerns regarding whether lawyers and wealth advisers can or should fulfil their responsibilities to their clients with the assistance of AI.

The Future

We are living in times of increased uncertainty as countries determine how to address economic volatility, international conflict and a lingering health crisis. 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, protecting family assets for both current and future generations, and preserving private property. These needs will also continue and grow.

New challenges that are emerging include 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.