Taxlinked (TL): What are your top three tips to clients when it comes to protecting their assets?
Goran Studen (GS):
- Define the concrete goal of asset protection in each individual case: There is no “one size fits all” approach when it comes to protecting the clients’ interests and their assets. Therefore, the first step is always to examine the client’s needs and where potential risks (from creditors, authoritarian states, kidnapping situations, insolvency issues – to name just a few) lie.
- Define what assets need/allow for protection: Protecting movable assets (such as shares in a company or cash) is in many ways easier to achieve than proper protection of immovables. Similarly, art works will often need a specialized treatment in terms of asset protection and preservation. Therefore, a proper asset protection analysis must always consider the composition of the client’s assets. In complex cases, such analysis may lead to the liquidation of certain assets.
- Beware of too much retained control: Asset protection will often require clients to give up all or certain control (e.g., legal ownership) over their assets. However, many clients think that asset protection can also be achieved “on paper” only by using authorized (and instructed) representatives or proxies. In addition, the formal structure implemented is often supplemented by broad rights of instruction or a right of revocation reserved for the client. If the client also wants to benefit from earnings generated from such a structure, it should sound the alarm. The more control a client retains over his/her assets, the greater the legal risks associated with “piercing the veil” become apparent.
TL: During our most recent webinar on international estate planning, you briefly discussed Germany’s register of beneficial ownership and the many challenges it would pose to professionals in the sector. Could you please elaborate on how this regulation may affect the financial services industry if passed?
GS: Although details of the register remain to be seen “live and in action,” it is already foreseeable that financial institutions will play a pivotal role in terms of achieving greater transparency. For example, according to the current proposal, financial institutions shall have access to all information in the register when fulfilling their AML due diligence obligations. What remains unclear, however, is whether financial intermediaries shall also be under an obligation to report changes to the register, e.g., when becoming aware of changes in the ownership structure of a certain legal entity. My expectation is that financial obligations will in the foreseeable future be obliged to share such information with the register.
TL: Inheritance tax: Good or bad?
GS: Instead of an “either/or,” I prefer the Swiss model. In Switzerland, inheritance tax is not levied if the estate is transferred to the spouse and/or the next of kin (i.e., the children of the demised). Other transfers involve an inheritance tax that will depend on the degree of relationship between the deceased and the heir. In my opinion, this is a reasonable and pragmatic inheritance tax model that strikes the balance between generating income for the state and respecting close family bonds by refraining from punitive tax rates.
TL: Under what specific circumstances would you recommend a client to set up a foundation versus any other type of structure?
GS: A foundation can be established for distinct reasons, ranging from estate planning purposes to supplementing corporate structures. In many cases, foundations may also be used as a surrogate for trusts. I use foundations in cases where the distinct legal personality of the structure holding the client’s assets provides more legal certainty than the use of a trust. Especially with clients from a civil law background, a foundation may be a preferable device compared to a trust. In practice, however, the boundaries between trusts and foundations are breaking down. While some civil law jurisdictions either have introduced substantial trust laws (Liechtenstein and, more recently, Malta) or at least recognized foreign trusts (among others, Switzerland), certain common law jurisdictions have vice versa begun to pass foundation laws (Jersey and Guernsey).
TL: How have OECD-led initiatives like CRS and BEPS affected the international estate planning sector? Has it led to greater complications or will it be relatively simple to adapt to these changes?
GS: What we’re currently witnessing is the beginning of a major and worldwide shift in terms of taxation – both of individuals and corporations. In the long term, I believe that taxation will move away from the place of domicile/registration towards a model focusing more on where income is being generated. Consequently, estate planning will emancipate itself from its heavy reliance on tax optimization strategies and move towards tailor-made solutions.
TL: Any other thoughts you’d like to share with our community?
GS: Don’t be afraid to challenge “standard” models and to think outside the box. Form flexible teams with diverse backgrounds (legal, audit, taxes, etc.,) capable of providing your clients with the best practical solutions in each individual case. Finally, actively communicate with your clients. Estate planning is, after all, not a one-shot strategy, but requires all advisers to keep the big picture in mind – even after years or decades!