Static wealth transfer planning is a thing of the past –the focus now for families and their advisors is on engaging in continuous oversight and review of plans, strategies, and implementation to ensure protection against risks presented by wealth transfer structures.
In the current environment, there’s no doubt that a dynamic, robust, efficient, and respected governance structure is necessary to identify and manage risk. That sort of approach begins with understanding the challenges of implementing plans and administering entities to avoid inefficient or burdensome administration, or worse, unanticipated tax or legal consequences.
There are a number of steps families of wealth can take in adopting a proactive approach to family governance:
· Adopting and adhering to a family constitution or charter
· Educating rising generations around family history, values, and wealth transfer structures
· Establishing long-term, high-trust relationships with sophisticated advisors; and
· Prioritizing family culture – creating a stable set of systems and processes that are supported and respected by family members.
In tandem, proactive families adopt practices with respect to wealth transfer plans, such as:
· Prioritizing optionality when designing or updating wealth transfer plans
· Appropriately introducing wealth transfer plans and strategies 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 strictly complying with governing documents and applicable law; and
· Creating replicable and efficient processes for addressing inevitable changes to plans in response to the evolving tax, legal, and regulatory environment
Families of wealth with a US touchpoint tend to rely primarily on three fiduciary solutions to address the evolving governance and compliance environment - 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.
For families that desire more flexibility, a directed trust whereby an individual or committee of family members or trusted advisers makes decisions regarding investments if often an attractive proposition. 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.
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 around family wealth transfer plans.
Separate to these specific structural options is the trend towards revisiting complexity surrounding jurisdictional exposure For many multinational families, the sheer volume of jurisdictions, entities, and reporting requirements can become overwhelming and costly. Consolidating to limit activity to jurisdictions with favorable, robust, and sustainable planning environments can be an appealing prospect.
In this new era of dynamic governance, 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 which articulates the values, goals, and priorities of the family and provides unity of purpose to the family and their advisors. Further, express statements of governance principals may increase the transparency as to where and how decisions are made and provide evidence of substance.
Finally, effective communication is vital. 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.
The indications are clear - 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.