Flexible Family Investment Companies provide trusts alternative
Family Investment Companies (FICs) are becoming more widely acknowledged as an alternative to a trust in the international wealth environment. In this article Head of Wealth Structuring David Piesing looks at the structures available and why the flexibility of FICs makes them a welcome addition to the range of options.
The concept of FICs as holding structures for family wealth has been around for several years. With bespoke Articles and Shareholders Agreements governing a multitude of economic voting and other rights to control the management preservation and succession of family wealth and with expert drafting it is possible for an FIC to effectively replace many and indeed sometimes all of the well-known benefits of family trusts which have developed over many years.
Trusts are not suitable for everyone especially in the international private wealth environment. For settlors/grantors from jurisdictions where trusts are not recognised the whole concept of giving away substantial wealth to an independent trustee to be held on discretionary trusts is simply a step too far. For those settlors/grantors who for whatever reason still need a trust but find they are unable to cross the psychological threshold of absolute surrender of control or influence there are various mechanisms which can assist them to some degree.
While the use of Protectors Reserved Powers Trusts and Private Trust Companies have evolved to alleviate the concerns of those settlors who are unable to get comfortable with trusts especially if from a civil law jurisdiction where there is no familiarity with trusts a well-drafted foundation may be an appropriate alternative. However in non-civil law countries the tax treatment of a foundation is often uncertain which may cause adverse tax issues for beneficiaries of the foundation residing there.
While these various structures have clearly developed in response to the need to overcome some of the disadvantages of using trusts whether actual or perceived in many cases it may be better to avoid a trust (or foundation) altogether and instead use an FIC to hold the family wealth. Companies are globally recognised and the Articles set out clearly defined provisions for its operation usually in conjunction with a Shareholders' Agreement which can override the Articles. There is then no surrender of outright ownership or control of the wealth unlike with a trust.
The key to using an FIC successfully as a trust alternative is in the creation and issue of different classes of shares with different economic voting and management rights. These share classes are widely referred to as alphabet shares as each different share class may be an A Share B Share C Share etc to distinguish them from each other.
- A Shares may hold all economic rights to receive dividends and proceeds on a winding-up however no voting rights.
- B Shares may hold all voting rights but no economic rights and there is no need for the A and B Shares to be held by the same parties in the same proportions.
- C Shares might hold no economic or voting rights however may hold the rights to have and approve certain major decisions proposed by the directors of the FIC regarding the sale of specified assets (for example the sale of the family business) or regarding the issue or transfer of any A or B shares and the creation and issue of additional classes of shares.
- Then there is the possibility of D Shares to hold all future increase in capital value of the FIC with the A Shares only having the right to economic capital value up to a certain figure as a means of passing just future capital growth value to the next generation. There are many other elements which can be catered for through expert drafting to meet the family's needs.
The ownership of any of the different classes of shares in the FIC can of course be structured to meet the tax residency and domicile circumstances of the various family members as well as to avoid probate in the country of incorporation of the FIC. This could mean them using personal holding companies foundations or perhaps even trusts to passively hold their shares in the FIC.
There is a lot of detailed tax advice required when structuring an FIC to ensure all aspects of initially transferring the family wealth to the FIC are considered as well as the ongoing holding of the various share classes. Future anticipated scenarios should also be considered.
FICs can be established in any jurisdiction however for wealthy families with existing or anticipated multi-jurisdictional elements or for families resident in benign tax jurisdictions it is logical to establish the FIC in a nil-tax jurisdiction to achieve tax neutrality and minimise any risk of double layers of taxation.
The use of FICs operated in conjunction with Private Family Funds would provide additional flexibility regarding the consolidation of the family's underlying investment strategies and it seems likely that both these structuring tools will play a key role in the future of family offices.
PraxisIFM can assist with the establishment and administration of International FICs and Private Family Funds in multiple jurisdictions to meet the needs and preferences of wealthy families.
For further information please contact David.The PraxisIFM Group does not offer tax advice and before considering any of the options discussed in this article appropriate tax advice should be sought from a qualified tax adviser. This article constitutes neither professional advice nor a binding offer by us to provide professional services. Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence.