WEALTH PROTECTION & WEALTH TAXES
Book Your Free ConsultationA primary objective for most people is to preserve wealth and assets to ensure they continue to safeguard and provide advantages for future generations. Unfortunately, in this day and age with high personal, corporate and wealth taxes achieving this objective is becoming more and more difficult. However, with appropriate advice and planning it is often still possible to protect hard earned money.
WEALTH & ASSET PROTECTION
To a high degree what can be achieved will depend on personal circumstances and life objectives. However, unless one is lucky enough to live, earn and have all one’s assets in a tax-free jurisdiction (of which there are very few) some of the most common ways in which to protect wealth and assets include establishing a trust or private interest foundation (PIF). In both cases, the principle is the same in that wealth, and assets are strategically transferred away from personal ownership in favour of either trustees or a foundation council. The trustees or council members will hold funds, assets and/or investments for and on behalf of beneficiaries (specified or belonging to a class of persons) per the terms set-out in either a trust instrument or regulations. Once the designated wealth/assets have been properly transferred they are no longer considered to belong to the original owner/beneficiary and thus can control both tax exposure and protect assets. In the case of the latter this can afford significant protection if executed before, for example, marriage especially in countries that do not have properly enforceable pre-nuptial agreements such as the UK.
WILL TAXES APPLY WHEN ASSETS ARE TRANSFERRED TO A TRUST OR PIF?
This will very much depend on where a business or individuals are currently tax resident. However, as a general rule most tax authorities in developed/western countries do impose a tax at the point of transfer. Obviously, tax advice must be taken as careful calculations have to be made to ensure that the future tax benefits and asset protection benefits warrant the initial expenditure. Nonetheless, provided the assets are either sufficient to economically cover the trust or PIF maintenance fees or, as already inferred, all or part of the assets haven’t fully appreciated setting up a trust or PIF could prove extremely beneficial. Where, initial concept IP is transferred into a structure it generally can be done with little or no negative tax consequences and can, where the concept in question works, literally save millions of dollars in taxes.
A TRUST OR PRIVATE INTEREST FOUNDATION?
This will very much depend on whether one ordinarily resides in a civil (such as most of Continental Europe) or common law jurisdiction (such as the UK, Ireland, the USA, Canada, Australia and New Zealand). The reason is that whatever structure is chosen it is essential that it is legally recognised. For example, in most civil law jurisdictions trusts are not recognised save for a few exceptions such as Monaco, the Netherlands and Italy. Where a legal concept or structure is not recognised in a jurisdiction, it means that any assets held by it will almost always not be protected! However, notwithstanding that private interest foundations or Stiftung’s were originally a civil law concept emanating from Liechtenstein and Switzerland, they can now be formed in common law jurisdictions such as Jersey and Gibraltar. Even better, in England & Wales, case law (see: Karl Weiss Stiftung v. Rayner & Keeler Limited [1967] 1 AC 853) has established that PIF’s should be treated as equivalent to limited companies. This designation is important as it means that they are accepted as separate legal entities albeit self-owing ones unlike a limited company which of course has shareholders/ultimate beneficial owners. This logic is likely to be persuasive in other common law jurisdictions especially Ireland, Canada, Australia and New Zealand.
WEALTH TAXES AND TAXATION ON WORLWIDE INCOME
With more and more countries having and/or considering the introduction of wealth taxes (which may include the UK in the future) and generally imposing taxation on worldwide income once ordinarily tax resident, it is becoming increasingly prudent to look at options to protect wealth whilst moving from one jurisdiction to another. For example, despite its high taxation and the current UK Government, London still has a massive gravitational pull because of its stability, facilities, schools and universities for the world’s wealthy. However, its traditional distinction between those domiciled and non-domiciled (meaning in most cases those born outside of the UK) for tax purposes has long since been compromised meaning that most people* are now liable to pay taxes on their worldwide income whilst ordinarily resident in the UK. Another example would be Spain where both wealth taxes and taxes on worldwide income apply. In such a case, it may prove to be prudent to separate/reduce/distribute assets before becoming ordinarily resident in the country.