August 20, 2019
Do you have a single or multiple streams of income or investments? Do you earn income in the form of dividend, rent, interest etc. from your investments? Do you want to ensure that your investments are tax efficient and guarantee efficient wealth transfer to your future generations? Do you wish to have a level of privacy for your investments and assets? A properly managed and strategic investment structure would provide the needed solution.
High-net worth individuals (HNIs) usually have various investments in form of equity interest in private or public companies, real estates, portfolio of financial assets etc. In line with best practices, the interest of the HNI in the various investments may be warehoused or held using an investment vehicle rather than held directly. The investment vehicle will serve as a means of injecting the HNI’s funds into his current business operations and/or future projects. The investment vehicle will also serve as a tool for the transference of the HNIs wealth to his succeeding generations.
Investment vehicles generally take the form of a holding company or a private trust. Each method has its characteristics, benefits, drawbacks and tax implications. For the purpose of this article, we will focus on wealth planning and management through the use of trust arrangements and the tax implication of such arrangements.
A trust is a fiduciary relationship in which one party – the settlor, gives another party – the trustee, the right to hold title to property or assets for the benefit of a third party – the beneficiary. The settlor in a private trust arrangement is the person that creates the trust and transfers assets or other properties to the trustee to be held and managed for the benefit of the beneficiaries; the trustee is a person or entity that holds and administers property or assets of a trust for the benefit of the beneficiaries; while the beneficiary of a trust is the individual or group of individuals for whom a trust is created.
A trust is not a separate legal entity. When a trust is established, a trustee which could be an individual or corporate entity as earlier stated is appointed to manage the assets in the trust. The trustee can be a professional with financial knowledge, a corporation or a relative/ loyal friend of the settlor.
A trust that is created for the benefit of selected individuals is referred to as a private trust. A private trust may be set up locally or offshore to warehouse the current and future investments of the HNI. This will entail transferring the ownership/ legal title of HNI’s current investments to the trust and making future investments in the name of the trust.