Crestbridge Fiduciary features in the STEP Journal

November 29, 2023

Families and their advisors increasingly (and properly) emphasize leading practices for family and entity governance, often focused on identifying and managing risk to the greater family structure, values, or framework. Nevertheless families, and especially multinational families, continue to generate unrecognized risk via long term wealth transfer plans and investments that could be mitigated by proper family and entity governance. This article explores recent trends in the evolution of governance standards for families – especially those with cross-border activities – and provides observations to frame risk identification and responsive governance themes.

Asa result of the COVID-19 pandemic and the accelerating rates of change to the global tax, legal, and regulatory compliance frameworks, families of wealth and their advisors are focused on questions of governance and compliance. The days of static wealth transfer planning are long gone; families and their advisors must now engage in continuous oversight and review of plans, strategies, and implementation to ensure protection against risks presented by wealth transfer structures. Families are often focused on financial risk and are typically well-advised on the topic. Too often, compliance and governance risk are addressed as an afterthought rather than as a primary planning consideration. Proactive governance begins with understanding the challenges of implementing plans and administering entities to avoid inefficient or burdensome administration, or worse, unanticipated tax or legal consequences. In the current global tax and regulatory environment, a dynamic, robust, efficient, and respected governance structure is necessary to identify and manage risk.

Family and entity governance are often two sides of the same coin. Families of wealth may take a proactive approach to family governance by:

- Adopting and adhering to a family constitution or charter;

- Involving and educating rising generations as to family history, values, and wealth transfer structures;

- Establishing long-term, high-trust relationships with sophisticated advisors; and,

- Developing and prioritizing family culture – that is, creating a stable set of systems and processes that are supported and respected by family members.

Proactive families similarly adopt practices with respect to wealth transfer plans, entities, and structures by:

- Prioritizing optionality when designing or updating wealth transfer plans;

- Appropriately introducing wealth transfer plans, strategies, and relationships to rising leaders;

- Planning proactively for succession of entity management and operations;

- Identifying fiduciary and management structures that align with the family’s values and risk tolerance;

- Emphasizing the importance of and benefits to strictly complying with governing documents and applicable law; and,

Creating and adhering to replicable, consistent, and efficient processes for addressing inevitable changes to plans and structures in response to the evolving tax, legal, and regulatory environment.

For United States situs planning, families of wealth primarily rely on three fiduciary solutions to address the highly-complex, technical, and evolving governance and compliance regime: institutional trustees, directed trusts, and private trust companies (PTCs). Institutional trustees offer families of wealth the benefits of size – in-house expertise and consolidated implementation – but specify the approach to risk management, compliance, and compensation policies. Therefore, many families choose to maintain relationships with institutional providers for asset management, custody, lending, and deposit relationships while transitioning to a more agile fiduciary solution.

Families that desire more flexibility from their fiduciary, especially in the areas of investment operations and risk management, often turn to a directed trust whereby an individual or committee of family members or trusted advisers makes decisions regarding investments. An experienced administrative trustee provides implementation and governance services. This structure provides more flexibility and often more efficient delivery of service compared to an institutional trustee but at the cost of shifting some of the fiduciary work, and therefore risk, to family members or trusted advisors. Although the trustee ultimately evaluates and implements governance and compliance activities, family and outside advisors play a much more active fiduciary role. The directed trust model provides a framework for the fiduciary to adopt and implement the family’s judgment as to risk management and compliance without incurring, or being compensated for, additional fiduciary risk.

Finally, families with a strong advisory network or family office may prefer a private trust company. By adding another layer of governance and compliance, however, PTCs create additional risks that must be properly managed. At the most basic, faithful adherence to operating documents, governance, and ensuring a culture of compliance are essential elements of effective PTC risk management. Nevertheless, a properly administered PTC is a powerful tool in furtherance of dynamic governance by providing a structured forum for ongoing dialogue between family members, trusted advisors, and service providers around family wealth transfer plans. PTC management determines its risk tolerance which, in turn, informs the PTC’s approach to risk management, including governance and regulatory compliance.

Moreover, the PTC creates additional opportunities for beneficiary education and engagement. And, increasingly, families are utilizing the PTC as a virtual family office to integrate family investment, fiduciary, and concierge staff under one operating entity. In sum, the PTC structure allows the family to own and operate a bespoke, private, flexible, and responsive corporate fiduciary managed and operated by family members, trusted advisors, key staff, and outside service providers.

Families and advisors are also revisiting risk management as to structural complexity and situs. For many multinational families, the sheer volume of jurisdictions, entities, and reporting requirements can become overwhelming, inefficient, and costly. Families are increasingly consolidating entities and seeking to limit activity to jurisdictions with favorable, robust, and sustainable planning environments. With thoughtful and proactive planning, families may manage jurisdictional exposure and simplify structures without sacrificing geographic diversification or optionality. Of course, the benefits of such reforms must be balanced against the costs of advisory fees and implementation as well as the opportunity costs to family time and focus.

Regardless of fiduciary structure, the delivery of advisory services in the cross-border context is a necessarily multidisciplinary and collaborative exercise. Skilled project management and implementation is critical to coordinating the implantation of a holistic strategy. Entity governance should be informed by a family constitution or charter articulates the values, goals, and priorities of the family and provides unity of purpose to the family and their advisors. Express statements of governance principals may increase the transparency as to where and how decisions are made and provide evidence of substance. And, given the potential risks associated with non-compliance, adherence to entity or corporate requirements and establishing shared expectations as to governance must remain a priority.

Finally, effective communication underlies and unifies the diverse set of advisory, family members, assets, and entities. Obtaining and communicating advice and services requires clear communication as to the division of labor among the involved parties. Clear channels of communication among family members, but also directly among advisors and service providers, is critical to ensuring the family achieves the best possible outcomes through strategic and proactive planning and careful implementation.

Families of wealth and their advisors face a future of ongoing change and increasing complexity in the global legal and regulatory framework. By embracing this fact and planning proactively with an emphasis on dynamic approaches to governance and compliance, families and their advisors will be well-prepared to navigate the future in what is an inherently multigenerational process. In turn, independent advisors to families of wealth must remain sensitive to the emotional impact of change, both as an abstract concept but also in terms of the time, focus, and financial costs. Structural simplification, effective communication and collaboration, and skilled advisors are essential to empowering families to embrace dynamic governance structures that not only inform when change is necessary, but how to implement changes within a durably constructed framework.

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