Estate planning for risk management
Potential risks may include personal (death or incapacity), family (marriage, divorce), or business (bankruptcy, malicious litigation, financial penalties). Should such an event happen, what do you do? Well, in normal circumstances, you would either make use of your personal/business assets or go to your lawyer and together explore the available choices.
A suitable option for protecting yourself against or avoiding these risks altogether is to use estate planning. What is estate planning? Traditionally, estate planning was used for the distribution of personal assets on death. Nowadays, estate planning is used to protect one's estate for life and as a tool for risk management. There are several estate planning techniques that vary according to the business' or individual's specific needs. In recent years, the use of trusts and foundations as estate planning tools has become something of a trend.
A trust is a legal act under which a person called the settlor transfers assets to a person called the trustee, who will manage or dispose of them for a beneficiary, who can be the settlor himself. The trustee is normally an entity engaged professionally and customarily in the business of managing properties, the investment of liquid assets, and transfer of assets which are legally under the ownership of the said trustee, but subject to the provisions of the trust document. The assets given in trust constitute a separate patrimony from that of the settlor; therefore, they cannot be seized by creditors unless they are able to prove that the transfer of assets to the trust was done to defraud them (in such cases, prescription terms apply).
When structuring a trust, the estate planning practicioner must be cautious. A well established trust can be effective and accomplish its purpose, whereas if not established correctly it can be declared a "sham" by the authorities, meaning that the trust has no real purpose and that the settlor exercises all control over it (which goes against the nature of the trust relationship).
A trust presents what could, in certain circumstances, be disadvantageous due to the fact that it lacks legal personality. The necessity or otherwise of using a vehicle with legal personality will depend on the purposes of a particular estate planning structure. Not having legal personality implies that the assets given in trust are registered under the name of the trustee and not under the name of the trust itself. In addition, the trust cannot represent itself before third parties.
Trust administrating entities are reliable private and financial institutions which are subject to controls, permits, and licenses in the countries where they operate. They often include well-known names such as: BNP Paribas, Bank of Nova Scotia, ABN Amro, Credit Suisse, among others.
A trust is a Common Law figure and it is regulated in the legislation of, among others, the following countries: United States of America, United Kingdom (as well as most British dependent territories), New Zealand, British Virgin Islands, Anguilla, Bahamas.
In contrast, a foundation is an entity with legal personality which can be used for testamentary arrangements, the management of assets in bank accounts, own real estate, as an investment vehicle, or as a holding company. The foundation cannot undertake commercial activities as a regular objective as it cannot be profit-oriented. However, it may execute commercial transactions and businesses necessary to carry on its objectives. Also, a foundation can exercise shareholders' rights as the owner of the shares of a corporation that may be part of its assets.
The foundation is composed of three key figures: the founder, the Foundation Council, and the beneficiaries. The founder is the person who establishes the foundation. The Foundation Council is the organism within the foundation in charge of its administration and the administration of the assets transferred to the foundation for the beneficiares.
A foundation allows the founder to have greater control over the administration of the assets and operation of the foundation, than that allowed to a settlor in a trust. The founder can retain control over the administration of the assets through the figure of the protector (additional/optional figure within a foundation) or simply by establishing special clauses in the Foundation Charter (document equivalent to the Articles of Association of a company).
In principle, a trust and a foundation are commonly used for the same purposes because the mechanism of their operations is very similar. Nevertheless, the two important differences between one figure and the other are: the previously discussed lack of legal personality of a trust and the greater control that the founder can exercise in the foundation.
Trusts and foundations are vehicles used to channel investments, accumulate, and organize the control of shares of subsidiary companies all with reduced tax liability, while at the same time protecting them from third party claims and distributing them to the beneficiaries in accordance with the wishes of the founder. Both vehicles are suitable means for asset protection and risk management.
Alma Jenkins-Konarski is a partner at Marek Zdanowicz & Partners in Warsaw (ajenkins@zdanowiczlegal.pl)
A suitable option for protecting yourself against or avoiding these risks altogether is to use estate planning. What is estate planning? Traditionally, estate planning was used for the distribution of personal assets on death. Nowadays, estate planning is used to protect one's estate for life and as a tool for risk management. There are several estate planning techniques that vary according to the business' or individual's specific needs. In recent years, the use of trusts and foundations as estate planning tools has become something of a trend.
A trust is a legal act under which a person called the settlor transfers assets to a person called the trustee, who will manage or dispose of them for a beneficiary, who can be the settlor himself. The trustee is normally an entity engaged professionally and customarily in the business of managing properties, the investment of liquid assets, and transfer of assets which are legally under the ownership of the said trustee, but subject to the provisions of the trust document. The assets given in trust constitute a separate patrimony from that of the settlor; therefore, they cannot be seized by creditors unless they are able to prove that the transfer of assets to the trust was done to defraud them (in such cases, prescription terms apply).
When structuring a trust, the estate planning practicioner must be cautious. A well established trust can be effective and accomplish its purpose, whereas if not established correctly it can be declared a "sham" by the authorities, meaning that the trust has no real purpose and that the settlor exercises all control over it (which goes against the nature of the trust relationship).
A trust presents what could, in certain circumstances, be disadvantageous due to the fact that it lacks legal personality. The necessity or otherwise of using a vehicle with legal personality will depend on the purposes of a particular estate planning structure. Not having legal personality implies that the assets given in trust are registered under the name of the trustee and not under the name of the trust itself. In addition, the trust cannot represent itself before third parties.
Trust administrating entities are reliable private and financial institutions which are subject to controls, permits, and licenses in the countries where they operate. They often include well-known names such as: BNP Paribas, Bank of Nova Scotia, ABN Amro, Credit Suisse, among others.
A trust is a Common Law figure and it is regulated in the legislation of, among others, the following countries: United States of America, United Kingdom (as well as most British dependent territories), New Zealand, British Virgin Islands, Anguilla, Bahamas.
In contrast, a foundation is an entity with legal personality which can be used for testamentary arrangements, the management of assets in bank accounts, own real estate, as an investment vehicle, or as a holding company. The foundation cannot undertake commercial activities as a regular objective as it cannot be profit-oriented. However, it may execute commercial transactions and businesses necessary to carry on its objectives. Also, a foundation can exercise shareholders' rights as the owner of the shares of a corporation that may be part of its assets.
The foundation is composed of three key figures: the founder, the Foundation Council, and the beneficiaries. The founder is the person who establishes the foundation. The Foundation Council is the organism within the foundation in charge of its administration and the administration of the assets transferred to the foundation for the beneficiares.
A foundation allows the founder to have greater control over the administration of the assets and operation of the foundation, than that allowed to a settlor in a trust. The founder can retain control over the administration of the assets through the figure of the protector (additional/optional figure within a foundation) or simply by establishing special clauses in the Foundation Charter (document equivalent to the Articles of Association of a company).
In principle, a trust and a foundation are commonly used for the same purposes because the mechanism of their operations is very similar. Nevertheless, the two important differences between one figure and the other are: the previously discussed lack of legal personality of a trust and the greater control that the founder can exercise in the foundation.
Trusts and foundations are vehicles used to channel investments, accumulate, and organize the control of shares of subsidiary companies all with reduced tax liability, while at the same time protecting them from third party claims and distributing them to the beneficiaries in accordance with the wishes of the founder. Both vehicles are suitable means for asset protection and risk management.
Alma Jenkins-Konarski is a partner at Marek Zdanowicz & Partners in Warsaw (ajenkins@zdanowiczlegal.pl)
