By Howard Bilton – Chairman and Founder of The Sovereign Group

There are many commentators, and I would be one of those, who say that if there is no other reason whatsoever for placing assets into trust or a foundation other than to avoid probate then it is still a must do item. Probate is both expensive and time consuming. Even a simple estate can rarely be administered in less than a year. An estate comprising assets situated in different countries will normally take a minimum of 2 years and the procedures will typically cost 4-6% of the value of the estate.

In common law countries an individual has complete freedom to leave assets to whomever he wishes. In many civil law countries certain percentages of the estate must be left to designated beneficiaries. Typically, 1/3rd must go to a spouse, 1/3rd to the children and the remaining 1/3rd is free estate which can be left to anyone. Some would like persons other than their immediate family to benefit. Others may be estranged from their legal wives or their children Even if the home jurisdiction does not have estate duties or inheritance taxes, assets located abroad will often be subject to estate taxes in that country. It will always be necessary for a will or some kind of equivalent legal document to be registered in each country where there are assets to transfer those assets from the name of the deceased to the name of the heirs. This is an expensive and time consuming process and is public. All confidentiality is lost. That may not be convenient for any number of reasons.

This doesn’t seem to be standard practice at the moment but it seems highly likely that in the near future any country which is asked to transfer assets from the estate of a deceased to another person will contact the home country of the deceased informing them about the death so that they can collect any taxes due on the estate or any taxes which have not been paid on those assets during lifetime.

It is a little-known fact that all Swiss banks operate a suspense account. These are monies which were owned by people who are now deceased. Their relatives cannot claim those monies because to do so will highlight the fact that the account existed. Enormous problems can result if the correct amount of tax has not been paid on the monies in that account. The tax bill can be bigger than the capital sum in the account. For this reason many accounts remain unclaimed after death and will do so forever. It is the same with other assets. Many have assets abroad whether those assets be property, private companies, bank accounts, stocks and shares or anything else. Careful consideration should be given to what will happen to those assets upon death of the owner.

The simplest way of dealing with the problem is by preparing foreign wills in each of the countries where the assets are located. A better option is often to transfer the assets to a trust structure. This is common practice in for those that are familiar with trusts and understand how they work. To many residents or nationals of civil law countries the trust concept is alien. For them a guarantee company structure or foundation may be the solution. Companies are much more easily understood than trusts. An innovative and flexible solution which can give substantial tax advantages during life time and allow for a smooth succession on death is the guarantee company. This type of company has been around for hundreds of years but the use of these companies in estate planning is relatively new and innovative.

Most sporting and social clubs are companies limited by guarantee. Members of a club become a guarantee member of the company. Clubs have a committee who are responsible for granting new memberships and also have powers to expel members. This same structure can be used by private individuals for their private assets. The guarantee company is similar to a normal limited company but instead of issuing shares it issues memberships. As with any other club, the membership is not transferable on the death of the owner so on death the membership dies leaving the remaining members in control without the need for any sort of procedure or transfer. This creates interesting planning opportunities for families.

A typical structure might best be illustrated by a theoretical example. Let us assume that Mr X has a wife and three children and has substantial assets abroad. He has a property in the US, a property in London, a bank account in Switzerland, a bank account in Hong Kong and shares in several trading companies. The US property would be subject to US estate duty. The London property would be subject to UK inheritance tax. A separate will will be needed to deal with each of these assets or one will could be made covering them all but that would then need to be registered in each jurisdiction. The wills will have to be made in accordance with the laws of the home country of Mr X. In each jurisdiction the probate procedure required would be a public one. Instead of making a will Mr X decides to set up a guarantee company. He arranges a transfer of his assets to that guarantee company.

The guarantee membership can carry the same rights, privileges and obligations as a shareholding so can have a) votes, b) rights to dividends and c) rights to capital. Frequently there will be members with financial rights but no votes and others with votes only.

Mr X becomes the only Class A member with 100 votes, Mrs X becomes the Class B member with 10 votes and his 3 children become Class C members with one vote each. Mr X is appointed as the sole person on the Committee so has power to expel members and/or approve further applications for membership. During his lifetime he would have 100 votes out of a total of 113 and therefore total control. On his death, Mrs X would have 10 votes out of the remaining 13 and therefore have control. On her death the 3 children are left with one vote each so can argue it out between themselves.

In another construction Mr X holds a Class A membership which carries 100 votes. A professional trust company holds a Class B membership which carries 10 votes but no rights to capital or income. Mrs X and the children hold non-voting memberships. While Mr X is alive he will have total control. On his death control passes to the professionals who can manage the assets for the family but cannot benefit apart from by the agreed fees.

Mrs X could hold a Class C membership which carries 10 votes and all the rights to participate in income but limited rights to participate in capital. The three children could hold a Class D membership which carries no votes but rights to income when there is no Class C member left and rights to capital. Thus the professionals could not do anything without the agreement of Mrs X but she could not do anything without the agreement of them. This would guard against Mrs X remarrying and the new husband running off with the money. It would also prevent Mrs X spending all the money and leaving the children with nothing.

All sorts of different results can be obtained by altering the rights and obligations attaching to different classes of membership. The structure is extremely flexible and Mr X can rearrange everything whenever he likes by expelling members and granting new memberships to take account of new wishes which might apply if he gets divorced or if one of his children become estranged from him.

Many countries have anti-avoidance legislation which taxes trusts and normal companies limited by shares. Frequently the legislation works by attributing profits to the owners of a company pro-rata to their shareholdings. Most countries have not considered how to tax guarantee members so not only are these structures extremely effective on passing on wealth on death but can be used to obtain substantial tax advantages during lifetime. They also carry high degree of asset protection. If a member comes under attack and is threatened with having his assets seized then he can resign from membership and be re-elected when the threat has passed.

In short, forming an investment club based upon a company limited by guarantee can be a solution to many current and future tax and estate problems.

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