Wealth Structuring in Asia Today

Peter Triggs of The Citibank Private Bank looks at the rapid growth in the need for structured solutions for high net worth Asians.

Globality is something of a clichT these days. Every institution likes to consider itself global. To say you are "global" usually implies that you have offices in many countries; that you have products or services that are supplied to people in many countries; or that you can provide your clients with access to opportunities, advice, products and markets in many countries. Often the three go together. Sometimes they do not.

Asian investors need globality. As an Asian investor, exposure to global world markets and asset classes brings the opportunity and risk diversification that you are looking for. But this is usually accompanied by contact with foreign taxes and legal systems that you may not have been expecting, and which can be a big surprise.

One country may have capital gains tax when you sell your real estate investment. Another may not. Just that fact alone can mean the difference between a good and a mediocre investment decision, and that's without thinking about estate taxes, stamp duties, registration taxes and VAT.

Did your real estate adviser set it all out, or leave it up to you? Did you find out how to avoid the problems, or is it already too late?

And what about your stock portfolio? Did your investment adviser explain the withholding tax and estate tax issues? Did he offer a solution?

Many wealthy Asian families have some exposure to a second, third or fourth jurisdiction. Perhaps the children are studying in the US or Canada. Maybe it looks like a good time to buy property in Tokyo or San Francisco. Perhaps the parents have a plan to retire to Australia, or pick up an apartment in Singapore or New York for investment and vacation purposes. Then there are the passports: Canadian, Australian, US and UK. What of them?

Let's look first at a few of the problem areas with international wealth. Then we'll see what the solutions look like, and how to spot the good solutions from the bad and the merely ugly.

Tax considerations

The problem for many Asians in respect of tax planning is that they often do not have enough experience of being highly taxed. Several Asian countries have territorial taxation - a good and sensible approachá- that leaves you free to enjoy untaxed income provided that it is earned elsewhere, sometimes with the proviso (as with Singapore) that you do not remit that income back into your home country. Others have not yet chosen to develop their controlled foreign company legislation to the point where such corporate tax planning is impossible. Generally speaking, tax rates in Asia are low and, finally, jurisdictions still exist where the enforcement and collection machinery needs some tightening. The end result of all this is that the typical high net worth Asian entrepreneur has perhaps not focused on tax as one of the key drivers of his personal decision making. One can easily imagine the shock when jurisdictions are then encountered that seek to relieve you of 70% of your capital, or 50% of your income perhaps, and where (by the way) a false disclosure may mean jail. Time to look at that passport again. Where are those investments booked? How long were those vacations?

Let's look at where the tax problems come from. To begin with, it must be well understood that there is no substitute for good, up-to-date, professional tax advice. Tax laws change all the time, and even when they don't, there are exceptions. (Usually the exceptions have exceptions.) But let's get a flavour of the problems.

Firstly comes the passport. In most countries, the passport is actually irrelevant for tax purposes. The three big exceptions (last time I looked) were Libya, the Philippines and, oh yes, the US. That US passport, or green card for that matter, makes you a good customer of the IRS wherever you go. (The IRS is aáglobal tax business.) In other high tax countries like the UK, Australia, or Canada the passport is only of passing relevance such as in a domicile debate or a tax-treaty treatment discussion.

Residence is the main consideration in most countries for income tax purposes. Residence, that is, in a tax year. Take care, though, as the "tax year" is not always the calendar year, (6 April to 5 April in the UK; 1 July to 30 June in Australia and so on). And the definition of residence varies slightly from country to country. Most countries regard you as resident, however, if you are physically present for more than half the tax year (look also for tax treaty tiebreaker rules.)

The notion of domicile often comes up in common law countries. This can bring with it a liability to estate tax on worldwide assets (Singapore excludes foreign immovable property e.g. real estate) but can have a bearing on income tax and capital gains tax (as in the UK). Domicile is the notion of "real home" usually undefined in Statute but so important for tax that some very readable case law has resulted.

Then comes the location of assets. You can have US capital gains tax on your US property even if you have never been to the US. In the UK the same gain would be exempt (unless you were held to be trading in properties or carrying on a business in the UK).

After citizenship, residence, domicile and location of assets come "mind-and-management" issues (for companies), place of doing business (made interesting by the internet), and other factors that make international tax fascinating.

The beauty is that many such problem areas can be avoided with proper planning. The tragedy is that the need for planning is often felt most acutely after the relevant event and not before, when it is still possible.

Legal considerations

It is not just tax that makes the world of the international wealth manager so exciting but the various legal systems encountered. Your assets may be in a Common Law country. You may live in a Civil Law country and be subject to forced heirship. You may, furthermore, be a Muslim and wish to follow your Sharia religious law when it comes to distribution of wealth. Have you made a will in every country? What is the status of those wills if they conflict with the laws of your home country or religion? Is your family prepared for your assets to be frozen - perhaps for years - while the foreign legal processes are observed, claims made (creditors and tax authorities) and disputes decided (first family, second family, and friends).

What else can go wrong?

The third problem area can be categorised as "miscellaneous". These are all the things that you don't normally think about.

Example 1 - Incapacity: I like to control my assets but I've had a stroke or heart attack and no one will be getting any instructions for a while. I may be going senile, but no one wants to tell me and I'm starting to make some bad decisions.

Example 2 - Misfortune: I had my assets in joint names with my brother. His business has just folded and his creditors have seized "my" account.

Example 3 - Remarriage: My spouse will take everything after me, but I did not consider that he/she may remarry. The new spouse may waste my fortune or not wish to provide for my children.

Example 4 - Liquidity: Loan repayments or tax liabilities arising on death require liquid assets. Even if your accounts are not frozen, having sufficient liquid funds can be a problem if your wealth is in your business or real estate.

The list goes on...

When matters such as these threaten your wealth, it may suddenly seem very unimportant whether your investment return last year was 8% or 8.5%.

So, if wealth structuring is today truly at the heart of wealth management, why has this not always been so? Well, here we are considering Asia. Wealth structuring for major families in the West has been popular for many years. In Asia, however, the phenomenon is relatively recent. The reasons are many.

Some think Asians may be reluctant to plan for disability and demise fearing that the planning itself somehow attracts bad luck. Some would say that the extended family environment together with low tax have made informal arrangements effective enough historically.

Both of these may have been true, but the world is changing. Enormous wealth has been created in the last 50 years and the generation that created it is soon going to pass it on. The assets and family members of the wealthy Asians have touched many countries and find taxes, laws, litigation habits and customs that are very different. The family itself may be both larger and not as close as it was before. Legal process and tax enforcement are getting stronger all the time. Sadly, many children today are finding that "arrangements" made by their parents are not working. The spotlight falls on their advisers.

What then is "Wealth Structuring"? Does it hold the solution to all these problems? And how do I know if I've been well advised?

In a nutshell, wealth structuring is concerned not with "what" you plan to do, but "how" you plan to do it. An international business considers whether a branch, a subsidiary, a partnership or a joint venture is the best way to enter a new market. So it is with the international management of private wealth. How should I hold my investments or accounts? In my own name? Joint names? An offshore corporation? A foundation? A partnership? A limited liability company? A trust? A local company? There are many such vehicles.

Special circumstances often require special remedies. When you have an investment in the US you may be well advised to use a US corporation and/or a tax haven corporation depending on the circumstances. Your goal as a foreign investor is (at least partly) to avoid US estate taxes and minimise US income taxes. If you are resident in the Philippines and have charitable goals then it may be that a local foundation fits the bill. For the purchase of that Tokyo property, it could be that a local Japanese trustee acting as a nominee for your Singapore company optimises your position.

Special situations aside, however, it is clear today that the Common Law Trust and Companies are the chief building blocks for optimal wealth structuring, together with the careful use of certain insurance products. Today the tax havens, such as the Bahamas, the Cayman Islands, Jersey, Guernsey, the BVI and Bermuda, are used as jurisdictions of choice for Trust Law and Company incorporation. I believe that over the next ten years we shall see the emergence of other jurisdictions as more popular for planning purposes such as Singapore, Hong Kong, New Zealand and Switzerland.

A good structure for your wealth will probably include some kind of trust and some underlying corporations.

You benefit from tax efficiencies, administrative efficiencies and privacy, both for your asset ownership today and for your future plans. The trust brings you a private way of avoiding probate delays and expenses, asset freezing and any contention of a will. It also gives a way of ensuring that funds can be protected for several generations after your lifetime For example, income should go to my spouse with the capital to my children and grandchildren after my spouse's lifetime. The companies can give protection against foreign estate taxes and sometimes tax-treaty benefits.

So how can you tell the difference between good and bad advice? Here are some tests:

1. Does your structure rely for its effectiveness on "people not finding out"?

If so, it is probably best to think again. Of course you want your financial affairs to be private and your distribution plans to be completely confidential, but the effectiveness of your structure should not depend on it. A good wealth management structure is one that COULD be shown to all relevant parties and tax authorities, and it would still work.

2. Does your structure seem very cheap and easy?

No one wants to incur unnecessary costs but, like most things in life, if it seems too good to be true it probably is.

Undated letters, signed blank forms, bearer shares put in desk drawers etc...such things are dangerous, often ineffective for the desired purposes, and just not a good way of safeguarding significant wealth and your family.

3. Are you working with appropriate jurisdictions?

Are you using jurisdictions that have a good reputation as financial centres with regulatory controls, good standards of business and an infrastructure of competent lawyers and accountants? Or does your chosen jurisdiction compete on price and 'confidentiality'?

4. Which institutions are you working with?

Are you working with an institution with many years' experience in the wealth structuring business, thousands of clients and a global network to draw on? Or are you speaking with a new entrant to the business who is competing on price and is sketchy on the technical information.

5. Are you being offered a solution or a product?

Are your needs being listened to and properly understood? Is someone really trying to tailor something to fit your precise family situations and concerns - or is the discussion centred on aá'product' which you can buy?

Finally, remember that taxes and laws change from time to time. Ask you adviser how they will continue to advise you over time if circumstances change.

In conclusion then, there is no doubt that the importance of private wealth structuring is coming to be accepted now in Asia. It is an enormous growth business. Wealthy Asians need it, but the skills to provide the right advice in multi-jurisdictional situations are relatively scarce. The organisations that position themselves to do this properly will be doing themselves and the high net worth market in Asia a great service.

Peter Triggs is managing director of The Citibank Private Bank Global Wealth Structuring Group in Asia.