Within the next 10 years, 25,000 high-net-worth individuals are expected to transfer $15 trillion to a younger generation. Trevor Norman looks at how trusts, foundations and similar legal structures can help to ensure an orderly transition of wealth between generations.
Within the next 10 years, 25,000 high-net-worth individuals are expected to transfer $15 trillion to a younger generation. It is hardly surprising that questions around efficient wealth transfer are high on the agenda of many wealthy families. Yet, a recent study prepared by Jersey Finance found that 92% of high-net-worth clients surveyed in the Gulf region were poorly prepared and inadequately structured for the transition of their wealth across generations. The study also estimated that only 6% of family businesses will survive to the third generation if current structures are not made more efficient.
As a result, trusts, foundations and similar legal structures that are designed specifically to ensure an orderly transition of wealth between generations are receiving more attention in the Islamic world.
What is the purpose of a trust structure and how does it work?
A trust is a legal obligation that is created when someone known as a ‘settlor’ transfers legal ownership of assets to another person, or persons, who are known as ‘trustees’ for the benefit of ‘beneficiaries’. The beneficiaries can be themselves or another trust, a charity, an institution, or a ‘class of beneficiaries’, which can be a defined group such as individuals or family members of the settlor.
There are many reasons for establishing a trust. For succession planning or inheritance, trusts can be used to defer or avoid liability to pay income tax and capital taxes that arise from the ownership of assets located in other jurisdictions. They can also be used to ensure continuity of ownership and of management of a family’s property during the lifetime of the settlor and after his or her death.
For protecting assets against political risk, assets can be taken out of unstable or uncertain legal environments and put into a legal environment that is transparent and predictable. They can be used to avoid inheritance laws or probate formalities; some countries in the Middle East prescribe that assets are divided in a particular way when they are inherited, and those rules might not be consistent with the Settlors desires. Trusts can also be used for charitable purposes – ensuring that the assets will always be used for the purposes intended by the settlor.
Why are there different types of trust, and what is the difference between them?
In its simplest form, a trust is often managed by a professional third-party trustee, who manages the trust’s assets in the best interests of the beneficiaries, which may have been determined and communicated through the Trust Instrument, a Letter of Wishes or use of a Protector. There are many types of trust; it is this fexibility and its ability to adapt to changes in the circumstances or the needs of beneficiaries make it a useful vehicle for the ownership and management of assets and for succession planning.
For example, a Private Trust Company (PTC) is an alternative structure that gives more control to family members. A PTC’s sole purpose is to act as trustee in relation to a specific trust or trusts, and can be established such that its activities are restricted to the assets of a specific family; and members of that family can be designated directors of the PTC, alongside a professional trustee. This is particularly suitable when there is an intention that a family trust concentrate its investments substantially, or even exclusively, in a closely held family business.
A Jersey Foundation is a useful structure for families that do not want to transfer control of their assets to a trustee. The Foundation is managed by a Council that must include a Qualified Member (who must be a regulated person or service provider), or a Guardian, who can be the founder, to oversee the decisions of the Council. Other Council members can be members of the family. Another advantage of a Jersey Foundation is that it can have underlying companies that handle specific tasks, such as wealth management, succession planning and charitable giving. Although Foundations are commonly used for charitable and philanthropic purposes, we at VG have also established Foundations to own art and also to own ‘wasting assets’ such as luxury yachts: ‘wasting assets’ cannot be owned by a traditional trust because such trusts are required to ensure that the value of its assets are enhanced over time for the benefit of the beneficiaries.
Can a Jersey Trust be Shari’ah compliant?
Yes, it can. The flexibility of the structure, together with the ability to classify the specific requirements of the settlor by documenting investment policies, distributions, and zakat into the trust instrument, mean that it is possible to establish a Shari’ah-compliant trust. By way of practical example, when a Shariah-compliant trust has a large portfolio of investments, stocks and shares the trustee will usually employ a specialist investment manager to manage the portfolio in a Shariah-compliant manner or invest in a Shari’ah-compliant investment fund. Similarly, any loans or bank accounts have to be free of interest receipts or payments.
How is the trust sector likely to develop in the years ahead?
Jersey was one of the first jurisdictions to codify the common law of trust through the Trusts (Jersey) Law of 1984. That law was subsequently used by other jurisdictions, including Bahrain, as a template for their own laws. There are now more than 30,000 trusts administered in Jersey, with a total value exceeding £600 bn.
The evolving legal and regulatory landscape around trusts, combined with the greater co-operation that we are seeing between other jurisdictions and Jersey, will offer increasing opportunities for Islamic families and individuals to work with firms such as VG, who have decades of experience in Islamic finance. Together, we can take advantage of the evolving laws and rules to protect wealth for a wide variety of clients, all with their own particular circumstances and their individual objectives.