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Planning Ahead: Thoughts About NextGen Tax, Estate Planning

Tom Burroughes, Group Editor , 25 April 2019

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Now a familiar theme, "NextGen" wealth planning might seem as necessary and obvious as air and exercise, but mistakes, arguments and failings suggest there remains a communications problem. This article is a reminder of what's at stake.

“Next-generation wealth transfer” has become a familiar topic and sometimes it appears difficult to think of anything new that can be said about it. But the regular conflicts and mistakes that those transferring and inheriting wealth and business make suggest that repetition is useful. 

The author of this article, Natalie Quail, who is an associate in the private wealth, trusts and tax area of Winckworth Sherwood, takes a rapid walk through next-generation wealth and business transfer. While some of the material is now well-trodden territory, Quail gives a succinct outline of important topics. This news service is grateful for these insights and invites responses. To respond, email the editor at tom.burroughes@wealthbriefing.com

Advising a younger generation of globally successful and self-made entrepreneurs presents exciting opportunities, particularly as these types of clients still have many of life’s major milestones to look forward to. Though there are good opportunities for asset protection and tax planning for the next generation of wealth, advising how to grow, share and preserve their wealth can present numerous challenges.  

Some of the issues that need to be discussed with NextGens, and which we discuss in this article, include consideration of international asset holding and protection structures prior to marriage; how to free up capital for the next business venture, and how to preserve wealth for their future family. Reputation management is also a key factor where individuals and their families have to adapt to dealing with media scrutiny and interest.

It is fundamental that NextGen advisors work together, to provide a cohesive approach that works on a cross-border basis, which takes into account that NextGens are not only personally internationally mobile but are often operating scalable businesses with a global presence. 

Lifetime gifting to family and friends
A recent RBC survey of high net worth Millennials published in their Wealth Transfer Report showed that 41 per cent plan to give money away while they’re alive. As such, considering early on tax efficient ways to make gifts during the lifetime of NextGen clients is fundamental. When individuals generate wealth at such an early age, it is also important to consider asset protection vehicles that will align with their investment strategy and wealth creation plans for the future.

Many NextGen clients are “serial entrepreneurs” and, as such, need capital available to plan for future business ventures. A balance needs to be struck between ring-fencing amounts to be gifted to family, friends and philanthropic initiatives, while remaining segregated from amounts for future investment. Discretionary trust vehicles can still be efficient for succession planning purposes, and can effectively ring-fence allocated amounts out of the entrepreneur’s estate. Many jurisdictions have lifetime exemptions for inheritance/gift tax purposes so consideration should be given to utilising structures that do not use up a client’s lifetime exemption before an entrepreneur has their own family). 

Protecting privacy from the public
It’s a fact – the world is becoming increasingly transparent. Registers of beneficial ownership are becoming a norm amongst international standards, together with mounting international pressure for countries to share information.

The UK has been a leading proponent in the international drive for transparency. All British Overseas Territories will introduce public registers for companies as a result of UK legislation requesting them to do so (by the end of 2023 instead of the original 2020 deadline). 

The UK has registers of beneficial ownership for three different types of assets: companies, properties/land, and trusts. Information on the beneficial ownership of companies is publicly available. For properties owned by overseas companies and legal entities, the government plans to launch a public beneficial ownership register in 2021. The register for trusts is not currently public. However, the EU’s new Fifth Anti-Money Laundering Directive will require a vast number of existing express trusts to register information on the beneficial ownership of those express trusts in a publically accessible central national register. 

There will be circumstances where access will be granted to journalists and the general public, if they have a legitimate interest. The UK government has confirmed that it will implement this legislation, even though it is in the process of leaving the EU. The deadline for implementation is January 2020. 

NextGens have grown up in a world where sharing information has become commonplace, particularly with social media and e-commerce platforms acting as one of the key drivers of their economic success. Many individuals are aware and accept that tax authorities and law enforcement agencies have access to their private information. However, rules that require public access to their private information, such as their home address, is a distressing prospect, as it increases the risk of financial crime as well as kidnapping and extortion. 

To comply with the registration obligation when the new rules come into force, trustees and other businesses that are based in the UK or the EU face a significant challenge in identifying existing agreements that create a trust or similar arrangement. Advisors will need to undertake an expansive documentary review, which could result in registering swathes of existing trusts and other arrangements. 

In respect of creating future trusts after the rules come into force, businesses will need to establish robust compliance systems to satisfy the new rules. Trustees and businesses outside the EU will also have to comply with these obligations if they enter into business relationships or acquire real estate in the EU. 

Succession planning preparation
When advising NextGens who often have their entire lives to look forward to, the topic of post-death planning can be a difficult one. It is important to note that estate planning is an evolving process that will develop during the life of an individual and as family circumstances change. However, starting to plan how wealth will be managed and distributed is important whatever stage of life an individual is at in order to prepare for unforeseen circumstances.

In many jurisdictions, a will is an essential starting point to ensure that assets pass to an individual’s loved ones in a tax-efficient way. With the decrease in marriage rates amongst NextGens, advisors and clients should be aware that unmarried partners have no right to inherit under English law. As such, a will is a fundamental tool to protect next of kin. 

In other jurisdictions, advisors should be aware of forced heirship rules which could restrict the individual’s freedom to choose how their assets are divided on their death. Such rules can apply irrespective of the terms of the deceased’s will. It is common in some civil law and Islamic jurisdictions (under Sharia law) for there to be restrictions on testamentary freedom. It is therefore fundamental to determine where assets are located and which beneficiaries will receive certain assets. The use of lifetime gifts may be important to mitigate the application of rules which restrict testamentary freedom. 

About the author

Natalie Quail is an associate in Winckworth Sherwood LLP’s Private Wealth, Trusts and Tax team, specialising in international tax and wealth planning. She specialises in personal and corporate tax. She advises clients on all of their assets, including those owned directly, through trusts or offshore company structures. Her client base is predominantly high and ultra-high net worth individuals with assets in multiple jurisdictions. She also advises a number of trustees, private banks, family offices, Russian and Middle Eastern-based businesses as well as US-based multinationals.

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