• Family Offices
  • August 15, 2014 | Author: Juan Francisco Pardini
  • Law Firm: Pardini & Asociados - Panama Office
  • Introduction

    China and India might still look as the flag holders on top of the BRICS; yet it is these two emerging superpowers that initially gave Singapore its allure, but a change of tides, led by the resurgence of commodity markets, has placed the spotlight on Latin America.

    A number of economic factors have contributed to the increase in wealth in the region including:

    ·         Foreign acquisitions of local companies have produced new millionaires overnight.

    ·         Great family wealth created by land sales and other activities has led to an upsurge in family offices, which expect to see those assets professionally managed.

    ·         Across the region, venture capital, private equity, and the growing importance of IPOs have increased access to capital and created excess capital to be reinvestedCommodities sold globally are creating growing fortunes for landowners and cattle farmers.

    ·         Increased financial activity has been complemented by an upsurge of new producers in extractive industries, mainly oil and mining, in Argentina, Brazil, Chile, Peru, and even Colombia.

    There are at least 50 billionaires in Brazil, and more than 200 individuals worth more than $500 million. The lion’s share of the local assets of nearly $1 trillion is managed by domestic players like Banco do Brasil, Itau Unibanco and Bradesco; however:

    ·         The region is receiving increasing interest from the wealth management world, with some of the West’s biggest players such as UBS, Societe Generale, Citigroup, JP Morgan, Julius Baer, Goldman Sachs and Morgan Stanley all increasing their presence in the market, especially in Brazil, the continent’s largest economy.

    ·         JP Morgan, Credit Suisse, BNP Paribas, BlackRock and Legg Mason are cracking into the market. BNY Mellon, Santander and HSBC are some of the international big hitters in local asset management.

    Concept

    Many family offices (FO) started their business as so called single family offices, where the family owns the FO and serves only the owner family. Instead of covering the entire operative costs, many owners of single FO decided to offer its services to other families as well. This concept is called multi-family office (MFO) or multi-client family office. Only a few MFO have founded their business independently, without a large family backing it.

    In addition, the development of the MFO came as a result of the growing number of wealthy families, as well as the rapid developments in technology within the financial markets which required greater sophistication and skill in financial advisors in the 1980s and 1990s. The difficulty in attracting and retaining such talented employees became more difficult. These changes, combined with the consolidation of the financial services industry, significantly diminished the role of the private banks and bank trust departments that traditionally served the wealthy families. These trends resulted in an increased need and cost for FO services. To defray such costs many families opened their FO to non-family members, resulting in multi-family offices.

    A single family office (SFO) is a private company that manages investments, IBCs, foundations and trusts for a single wealthy family. The company's financial capital is the family's own wealth, often accumulated over many family generations. Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional FO include property management, day-to-day accounting and payroll activities, and management of legal affairs. FO often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. A family office can cost over $1 million per year to operate, so the family's net worth usually exceeds $100 million.

    The SFO itself either is, or operates just like, a corporation with a CEO, CFO, CIO, etc. and a support staff, or as a private trust company. The officers are compensated per their arrangement with the family, usually with overrides based on the profits or capital gains generated by the office. Often, family offices are built around core assets that are professionally managed. In addition, a more aggressive and well-capitalized office may be engaged in private equity placement, venture capital opportunities, and real estate development. Many family offices turn to hedge funds for alignment of interest based on risk and return assessment goals.

    Multi-family offices typically provide a variety of services including tax and estate planning, risk management, objective financial counsel, trusteeship, lifestyle management, coordination of professionals, investment advice, and foundation management. Some MFO are also known to offer personal services such as managing household staff and making travel arrangements. Because the customized services offered by a MFO can be costly, clients of a multi-family office typically have a net worth in excess of $50 million.

    A family office is normally set up as a privately owned company (or private trust company - PTC) and supports wealthy families with the organization and maintenance of their wealth. Although, a family office can be established all over the world, you find them primarily in Europe (mainly in Switzerland, Luxembourg, Liechtenstein and London), the United States of America and more recently in Latin America. In the past couple of years, the first SFO and MFO emerged in Hong Kong and Singapore to provide these services.

    Modern Family Offices

    Modern family offices are typically separated into three classes:

    Class A Family Offices provide estate and financial services and typically are operated by an independent company that receives direct oversight from a family trustee or administrator. A typical Class A family office:

    • Offers comprehensive financial oversight of all liquid financial assets.
    • Offers daily management of all illiquid assets, such as real estate.
    • Can administer and manage the entire estate with little to no supervision.
    • Charges a flat monthly fee for all family office services.
    • Offers advice free from conflicts of interest and will not sell products.
    • Offers a comprehensive monthly report of all estate activity for no additional fee.

    Class B Family Offices focus on providing financial services and are typically operated by a bank, law firm, or accountant firm. A typical Class B family office:

    • Offers investment advice for a fee.
    • Can offer products and services outside the scope of a family office.
    • Does not directly manage or administer illiquid assets in the estate.

    Class C Family Offices focus on providing estate services and are typically operated by the family with the assistance of a small support staff. A typical Class C family office:

    • Has a staff that will monitor the estate and report into the family trustee with any irregularities.
    • Provides basic administrative functions, such as bookkeeping and mail sorting.
    • May have an office inside a family member's home.

    Starting a Family Office

    The family office is a unique family business that is created to provide tailored wealth management solutions (from investments to philanthropy) in an integrated fashion while promoting and preserving the identity and values of the family. Some families start an office to provide economies of scale for the family by leveraging the investment buying power of the group; others want control over the process, a dedicated staff, and a way to keep family members connected. All look to the family office to provide professional, private, and conflict-free management of their affairs to increase their chances of sustaining their human and financial capital for the long term.

    Structure of the Family Office

    An SFO and MFO usually operate as a corporation or private trust company, but it can manage a large number of IBCs, foundations and trusts depending on the family business.

    Offshore IBCs

    A company used or described as an offshore company is normally an International Business Company established in a jurisdiction like Panama, the British Virgin Islands, Seychelles, Belize, etc. These jurisdictions are often described as tax havens or offshore jurisdictions. A family office can assist with acquiring or managing an offshore company.

    The main characteristic of an International Business Company is that income generated or kept outside the jurisdiction is not taxed in that specific jurisdiction. As a result of this, an offshore company is often used by a family office as the top holding for an international corporate structure when this is also tax beneficial from the perspective of the country of residency of the ultimate shareholder. That way the family can distribute profits generated by the active family business/es to a tax-exempt environment. In the offshore company the profits will accumulate until they are (partly) distributed to the family. This final distribution often triggers taxation in the country of residency of the family. It is due to this reason that a family office often advises that offshore companies are held by a family trust or foundation. Next to operational business being owned by an offshore company, also private airplanes, yachts and real estate are often owned via a structure including an offshore company.

    Also, privacy reasons can play a role to set up an offshore company. There are numerous jurisdictions in the world in which it is better that the ownership of a successful company is not known to the public as this could jeopardize the safety of the family (i.e. risks of kidnapping, extortion, political pressure, etc.). As most offshore companies are (still) not registered in a public register (i.e. chamber of commerce) they can be used as a layer of privacy between the active companies of the family and the ultimate owners.

    A good family office offers quite a few services related to offshore companies. It can support your family with tax advice with respect to a solid international holding structure. And the family office can often also organize and/or coordinate the establishment of an offshore company and act as board member or nominee shareholder of the company.

    Double tax treaty shopping is imperative as most family offices have investments in various countries applying different tax treatments.

    Family Foundation or Private Foundation

    Family foundations or private foundations can hold a wide range of assets. A foundation is a good instrument for asset protection and foundations are quite often used as an alternative for a last will or testament. Foundations are also used for charitable purposes.

    Foundations can be used for similar purposes as trusts but where originally only set up in civil law countries. Nowadays also some common law countries offer the possibility to establish a foundation (i.e. Panama). Contrary to a trust, a foundation is a legal entity. A family foundation or private foundation can hold all kind of assets and is a good instrument for asset protection and can act as an alternative for a last will or testament.

    Foundations fully own the assets contributed to them and are managed by a foundation board or council. The founder of the foundation (the person establishing the foundation) normally establishes the foundation for a particular purpose. The organs of the foundation are strictly bound to this purpose. The founder decides who the beneficiaries of the Foundation are and to which benefits the beneficiaries are entitled. All the intentions of the founder are written down in the bye-laws of the foundation. The foundation board is entitled to distribute assets to the beneficiaries of the Foundation, based on the bye-laws of the Foundation. The founder can also appoint an advisor or guardian in order to control the foundation board.

    Often only investable assets are brought into the structure, with the goal to safeguard these assets for the next generation. The foundation can deal with concerns about specific family members and provides secured resources for spouses and children.

    Foundations or trusts are not recognized in every jurisdiction. It is therefore important to seek professional advice before establishing this structure.

    Trusts

    All kind of assets can be held in a trust and trusts are therefore a great instrument for asset protection, protection of privacy and tax planning. For generations trusts have been used to protect wealthy family's assets from difficult economic & political conditions.

    Trusts are a very complex subject for a lot of us, but they can be an excellent planning tool, especially for international wealthy families. Trust structures are used by numerous wealthy and well known families around the world. A trust can be best described as an arrangement (a legal form) by which a trustee receives the legal ownership of assets in order to keep these assets for the benefits of others, the beneficiaries. The equitable ownership of the assets is therefore considered being held by the beneficiaries.

    Trusts are not recognized in every civil law jurisdiction. As a result of the lack of recognition by tax authorities in civil law countries, it is sometimes unclear how and if the assets being held by trusts are taxed. It can also be unclear how and if distributions by the trust are taxed once received by the beneficiaries. On the other hand, the family's wealth can sometimes stay for generations fully compliant and untaxed due to trust structures.

    Family Office Services

    Two of the most important services offered by a family office are asset management and (consolidated) reporting. A basic family office will only offer asset management to you. Such a family office is actually more an independent asset manager. A real family office will also offer other services. Other categories of services are i.e. wealth- and tax planning, trustee- and corporate services, support with real estate and family governance. There are also family offices which support you less on the financial side but more on the personal side, acting for example as private secretary and making travel arrangements.

    Some of the services include -

    1.     Asset management and investment

    2.     Monitoring and reporting

    3.     Budget and cash flow management

    4.     Wealth planning

    5.     Taxation / Double tax treaty planning

    6.     Estate planning

    7.     International relocation

    8.     Trust and corporate

    9.     Business development and investment banking

    10.  Real estate

    11.   Aircraft, yacht, art, horses, etc.

    12.  Administrative

    13.  Insurance

    14.  Charity and philanthropy

    15.  Family governance

    16.  Family support

    17.  Miscellaneous

    The New Switzerland

    An over-used comparison? Perhaps. Multiple countries all over the world have been deemed as the next safe haven for wealthy estates, yet is has never been closer to reality as it is now.

    Panama shines a bright light at the end of the tunnel. Already considered by many as the fulcrum of finance and the next family office playground in the upcoming future, here are a few of the reasons that make it the ideal substitute to a 400-year-old feudal banking system:

    • Geographically, no other country in the world can boast the strategic position held by this country of close to 4 million inhabitants. It lies between North and South America, making it the perfect stop for financial endeavors along with a complimentary visit to the New York Time’s 2012 #1 tourism destination in the world.
    • With an economy that grew more than 10% last year, a democratic political system admired by every country in the region, and a rating as investment grade by S&P and Moody’s, continued stability is a guarantee.
    • The legal framework in Panama sits in the top echelons of offshore structuring. International Business Company legislation was crafted to satisfy from the simplest to the most complex transactions.
    • Foundations and trusts are both accepted due to the country’s hybrid background. Foundations are highly recommended and heavily enforced as wealth management mechanisms. Clauses in the law are specifically directed towards asset preservation (i.e. forced heirship claims and third party attacks).
    • Panama’s financial center has been built to meet the needs of a landmass that stretches from North to South Pole, yet in recent years, changes in international laws and expat inflow have seen it modeled towards those which Hong Kong, Dubai and Singapore so proudly boast.
    • The latest arrivals to Panama’s financial center are Banca della Svizzera Italiana (BSI) and Julius Baer together with several Swiss asset management firms.

    Yet it is for this and many other reasons, that Panama has been able to maintain such a low profile while other business centers strive for the skies, attracting much attention.

    Smart family offices looking to cement the main pillars of wealth preservation and succession will not place management in places calling for attention but instead, will look for destinations, such as Panama, holding every element necessary to ensure such objectives while maintaining a profile worth of the New Switzerland.

    (This article is a summary of a conference paper delivered at the Offshore Investment Conference held in Panama City on March 2013).