As high-net-worth and ultra-high-net-worth (UHNW) families increasingly become “global citizens,” the family offices that support them have had to expand their focus from efficient investment and tax management to now encompass the legal and non-legal aspects of protecting the wealth and reputation of their families across a global set of complex and ever-changing compliance regimes as family members acquire spouses and families, as well as assets, in multiple jurisdictions. Issues such as privacy, security and personnel require as much focus as rate of return and tax rates.
Along with the first part of this article published earlier this year,1 the aim of this piece is to provide insight into advising clients and their family offices on managing tax implications as family members move globally, navigating both the challenges posed by existing structures in place at the time of the move and pre-migration planning that may be advantageous to adopt. The first part of the article addressed trust planning and structuring for multi-jurisdictional families. I’ll now address: (1) cross-border prenuptial agreements (prenups) and marital property regimes; (2) planning for the acquisition of residences across jurisdictions and the tax residency considerations in relation to those residences; (3) privacy and security issues for high profile clients, while complying with public registry requirements across jurisdictions; and (4) considerations for personnel and employment issues for families with international staff. Underlying all of the issues discussed is the absolute need to partner with expert tax, legal and, where appropriate, immigration counsel and other advisors in each jurisdiction where a family has assets, family members or other exposures to minimize both the tax cost of unexpected characterization and the reputational risk of improper reporting or structuring that’s locally viewed as improper.
Cross-Border Prenups
Marriage inevitably comes to an end, for some couples as a result of death and for a substantial number of others as a result of dissolution.2
Both endpoints have implications for the preservation of family wealth. The impact of the end of a marriage on family wealth will depend in part on the planning engaged in by the couple and in part on the laws of the jurisdictions with an interest in the marriage and the marital property. A good deal of attention is paid to ensuring that a prenup is in place before marriage; however, often too little attention is paid to whether the prenup addresses family assets that may be outside of the jurisdiction where the parties intend to reside and how trusts may be implicated when a couple’s marriage comes to an end. Even less attention is paid to whether an existing prenup will continue to provide the intended protection if the couple moves to another jurisdiction during their marriage.
The family office and legal advisors should ensure that there’s a clear understanding of the marital property regime of the jurisdiction where the couple intends to reside and the way in which family assets will be treated under that marital property regime. For example, California, Texas, France and Switzerland have as their default a community property regime under which property acquired during marriage, but not through gift or inheritance, is the property of the spouses;3 however, each of these jurisdictions allows a couple to depart from the default regime through a valid agreement or contract.4 By contrast, under English law, there’s no statutory basis for the enforceability of prenups. However, the 2010 English Supreme Court decision in Radmacher v. Granatino5 sets out a basis for respecting the parties’ wishes as set out in a prenup, provided that it doesn’t impair the interests of minor children and that the agreement is fair both at the time that it’s entered into and at the time of the dissolution of marriage.6 In addition, give thought to which jurisdictions might be venues for a divorce proceeding and whether it would be advantageous to take steps to avoid creating sufficient contacts to allow certain jurisdictions to become a venue in the event of divorce.7
The focus of this article is on cross-border planning, but equal care needs to be taken when a couple’s marriage or marital property involves multiple jurisdictions within the United States. For example, California, like 27 other states8 within the United States, has adopted the Uniform Premarital Agreement Act,9 which fairly clearly provides for the matters that can be contracted for in a prenup10 as well as sets out the conditions that must be met for the prenup to be enforceable under California law.11 Other states, such as New York and Massachusetts, have statutes allowing for the general enforceability of prenups but have relied on case law to more particularly define the matters that may be contracted for and the specific conditions under which a prenup will be enforceable.12 Under the Uniform Premarital Agreement Act, it’s important that the prenup not be unconscionable at the time that it’s entered into.13 By contrast, jurisdictions such as Massachusetts and England look at whether the agreement is fair both at the time that it’s entered into and at the time that it’s sought to be enforced.14
Even when there’s an appropriately structured marital property agreement that takes into account the jurisdictions where the couple may live and hold property, consider how the assets of irrevocable trusts will be treated, whether the marriage ends as a result of a dissolution or death and whether there are succession laws that would produce an unanticipated result if the marriage ends as a result of death. In California, irrevocable trusts with respect to which a divorcing spouse is only a beneficiary, and not a settlor, can be considered in determining the beneficiary’s ability to provide spousal support and reached to satisfy child support obligations, but may not be divided as a part of the property settlement between spouses as the trust assets are clearly the separate property of the beneficiary spouse.15 In other jurisdictions, the courts will look at whether the beneficiary’s interest in the trust is a pure expectancy, which won’t be included in the determination of the marital estate, or is sufficiently certain to be characterized as a property interest, which would be subject to division as a part of the marital estate.16 That the assets of an irrevocable trust created by a spouse’s grandparents could be divided as part of the marital estate may be surprising to the beneficiary and the beneficiary’s advisors. That it may be possible for a spouse’s children by a prior marriage to defeat a gift of property in a civil law jurisdiction to the surviving spouse and defeat the U.S. estate tax marital deduction may be even more of a surprise.17 Therefore, when property is owned or will be acquired outside of the United States, plan to create an ownership structure that will be appropriate under local law, consistent with the family’s intent and tax efficient both in the United States and in the jurisdiction where the property is being acquired.
Acquisition of Residences
In addition to the succession and dissolution issues mentioned above, acquiring a residential property requires giving thought to the proper structuring of ownership. The ownership structure will have to balance the family’s desires for privacy against income tax issues on disposition, property tax or stamp duty, wealth tax issues, estate or inheritance tax issues and restrictions on foreign ownership of real property. While beyond the scope of this article, consider how ownership of a significant residence could impact the other facts and circumstances that could give rise to tax residency in the country where the residence is acquired.
In England, for example, no structure is the best structure. Historically, residences in England acquired by individuals not domiciled in England for inheritance tax purposes were purchased through companies. That became prohibitively expensive with the introduction of the Annual Tax on Enveloped Dwellings (ATED) in 2013, which requires a return and the payment of an annual tax if the value of the “enveloped” dwelling exceeds £500,000.18 This was an expensive change often leaving no good solution for U.S tax residents whose “enveloped” home was highly appreciated. There’s no credit in the United States for the ATED paid each year in England and, because the English company was most often taxed as a corporation for U.S. tax purposes, any attempt to unwind the structure in any year prior to a sale of the property would result in significant tax in the United States, with no corresponding credit or basis adjustment in England. Trusts are similarly tax inefficient in England, with a 20% inheritance tax charge on contributions, a 6% tax charge every 10 years and a 40% tax charge at death.19 Instead, outright ownership and an English will disposing of the property is the most tax-efficient solution. Even if a client were willing to pay the ATED charges, outright ownership is no less private than ownership of property through an entity given the English public beneficial ownership registries for entities, including a new registry that came into force in 2023 for overseas entities owning real property in England.20 Trusts became subject to registration in England under The Money Laundering and Terrorist Financing (Amendment) Regulations in 2019 to comply with the Fifth EU Money Laundering Directive,21 with registration required by Sept. 1, 2022. Unlike the English company registers, the English trust register isn’t fully public. However, information from the trust register will be available to third parties able to establish a legitimate interest in the trust in connection with money laundering or, more broadly, if the trust holds a controlling interest in a non-EU company.
Not surprisingly, in France, a civil law country, common law trusts aren’t a good solution for property ownership. Trusts are looked at as mechanisms for tax avoidance, if not evasion, and their tax treatment in France is inconsistent with their tax treatment in the United States.22 However, unlike in England, ownership of a French residence through an entity is the most common solution. The preferred ownership structure is a Société Civile Immobilière (SCI), which would be characterized as a partnership for U.S. tax purposes, unless a check-the-box election were made to tax it as a corporation. The asset subject to both French wealth tax and French inheritance tax is the value of the SCI interest, taking into account any debt on the property owned by the SCI. Thus, commercial loans are frequently used to reduce or eliminate the wealth tax as well as reduce the inheritance tax due on the value of the SCI interest. France, like England, has enacted legislation creating beneficial ownership registries to comply with the Fifth EU Money Laundering Directive. Whether these registries will remain public is unclear given both the European Court of Justice’s judgment that the public nature of the beneficial ownership registries is disproportionate to individual privacy rights23 and the 2016 decision by the French Constitutional Court that the public nature of France’s earlier trust registry has “a clearly disproportionate effect on the right to respect for private life with regard to the objectives sought.”24
Property ownership in Canada and Mexico, the United States’ closest neighbors, is even more fraught. Canada has adopted legislation prohibiting non-Canadians from directly or indirectly purchasing residential property for the 2-year period from Jan. 1, 2023 through Dec. 31, 2024.25 Property ownership by non-Mexicans isn’t entirely prohibited in Mexico. However,coastal and borderland in Mexico can only be directly owned by Mexican citizens and certain Mexican entities, and, therefore, Mexican properties are most commonly acquired by non-Mexicans through a fideicomiso.26 “Fideicomiso” is commonly translated as a “land trust,” but it’s not directly comparable to common law trusts, particularly regarding the succession of beneficial owners on death. The Mexican tax system’s treatment of successive interests in the fideicomiso is complex, and involving a U.S. domestic trust as an owner or beneficiary of the fideicomiso only makes it more so.
Privacy and Security Issues
As discussed above in connection with structuring for the acquisition of residences, the United Kingdom and Europe have extensive beneficial ownership registries for entities and trusts. The United States is behind much of the rest of the world, but, with the enactment of the Corporate Transparency Act, is taking a first step with a non-public registry of business entities, but not trusts. In 2020, 81 countries27 had some form of beneficial ownership registry laws, while 52 countries28 (including the United States at that time) didn’t. While there’s a growing global recognition of the need to gather and share information to reduce money laundering and other illicit flows of funds, as the European Court of Justice and the French Constitutional Court found, there should be some balancing of personal privacy rights against the desire for greater transparency.
High profile families have real security concerns. Beneficial ownership registries may make addressing those security concerns impractical, or even impossible, through more traditional privacy structures depending on where the family spends time and owns assets. Even when traditional privacy structures remain possible, families and their advisors need to think carefully about how the public would perceive the privacy structure, especially if the structure and the family’s association with it were revealed as a part of a data leak, like the Panama Papers or the Pandora Papers, in which the family’s name may sit, without explanation or context, next to someone with very different reasons for having a similar structure in place.
In addition to traditional privacy structuring, family offices should consider how and when to use non-disclosure agreements. A single non-disclosure agreement must not be used in all circumstances and, like all legal documents, must be reviewed by local counsel in each jurisdiction where it may be used. Family offices should also understand the family’s cybersecurity risks and that those risks aren’t simply financial, but as our cars, phones and watches are creating a digital map of our habits, those risks are personal for the family. An appropriate family protocol for device and social media use should go along with the protocol for funds transfers and investments.
Personnel and Employment Issues
Household personnel can be a family’s greatest security tool but can also be a significant source of liability and risk. Whether the family office directly manages household personnel, or simply engages with an estate manager who has that responsibility, the family office should ensure that employment counsel regularly reviews and provides advice on the proper classification of household staff members, appropriate offer letters, employee handbooks and non-disclosure agreements as employment laws, like tax laws, are always changing and aren’t always intuitive. Because household personnel have access to the family members and their daily lives, it’s especially important that appropriate hiring procedures with rigorous background checks are in place and that all family members understand the working hours of household employees and the tasks that are appropriate for household employees to take on. Once a family finds a trusted and loved household staff member, the family will likely want that staff member to accompany them anywhere in the world the family plans to be. Often, but not always, for shorter trips, the staff member can travel with and work for the family on a tourist visa. For longer stays, however, the family should consult immigration and employment law counsel well ahead of the time the family intends to travel to ensure that any needed visas can be arranged and to understand any needed tax reporting that needs to be complied with.
Endnotes
1. Stefanie J. Lipson and Laura A. Zwicker, “Navigating International Legal Considerations for Advisors Serving Multi-National Families,” Trusts & Estates (July/August 2023).
2. See Centers for Disease Control and Prevention National Marriage and Divorce Rate Trends, www.cdc.gov/nchs/data/dvs/marriage-divorce/national-marriage-divorce-rates-00-21.pdf (2021 data, which excludes California, Hawaii, Indiana, Minnesota and New Mexico, shows a divorce rate of 2.5 per 1,000 of total population); Yerís Mayol-García, Benjamin Gurrentz and Rose M. Kreider, U.S. Census Bureau, “Number, Timing, and Duration of Marriages and Divorces: 2016,” www.census.gov/compendia/statab/2012/tables/12s0057.pdf, shows a divorce rate of approximately 33% in both men and women. For European Union statistics, see European Commission Marriage and Divorce Statistics, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Marriage_and_divorce_statistics#Fewer_marriages.2C_fewer_divorces. For Organisation for Economic Cooperation and Development countries, see SF3:1 Marriage and Divorce Rates, www.oecd.org/els/family/SF_3_1_Marriage_and_divorce_rates.pdf. For global divorce statistics, see United Nations Demographic Yearbook, 72nd Issue, https://unstats.un.org/unsd/demographic-social/products/dyb/documents/dyb2021/table25.pdf.
3. California Family Code Sections 760 et seq.; Texas Family Code Sections 3.001 et seq.; Civil Code of France Article 1401 et seq.; Swiss Civil Code Arts. 196-220.
4. California Family Code Sections 1600 et seq.; Texas Family Code Sections 4.001 et seq.; Civil Code of France Article 212 et seq., Article 1394 and Article 1395; Swiss Civil Code Art. 184.
5. Radmacher v. Granatino, [2010] UKSC 42, at p. 30 (“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.”)
6. Ibid., at p. 31.
7. For example, England is often seen as a jurisdiction favorable to the unpropertied spouse given the court’s powers to reallocate assets between the spouses and may take jurisdiction under the Matrimonial Causes Act of 1973 when the applicant is a domiciliary or has been habitually resident for at least one year or if the respondent is resident in England at the time of the application. Matrimonial Causes Act of 1973, Section 27.
8. The U.S. jurisdictions that have enacted the Uniform Premarital Agreement Act or its successor, the Uniform Premarital and Marital Agreements Act, are: District of Columbia, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oregon, Rhode Island, South Dakota, Texas, Utah, Virginia and Wisconsin.
9. California Family Code Sections 1600 et seq.; see also www.uniformlaws.org/committees/community-home?CommunityKey=2e456584-938e-4008-ba0c-bb6a1a544400.
10. California Family Code Section 1612.
11. Ibid., Section 1615.
12. New York General Obligations Law Section 3-303, Massachusetts General Laws Part II, Title III, Chapter 209, Section 25. Colello v. Colello, 780 N.Y.S.2d 450 (N.Y. App. Div. 4th Dept. 2004); David P. Osborne, Jr. v. Barbara M. Osborne, 384 Mass. 591 (1981); Rebecca Kelcourse v. Lawrence Kelcourse, 87 Mass. App. Ct. 33 (2015).
13. California Family Code Section 1615(a)(2); Uniform Premarital and Marital Agreements Act Section 9.
14. DeMatteo v. DeMatteo, 436 Mass. 18 (2002), Rudnick v. Rudnick, 102 Mass. App. Ct. 467 (2023); Radmacher, supra note 5.
15. California Family Code Section 4320(e); California Family Code Sections 770 et seq.; California Probate Code Section 15305; Pratt v. Ferguson, 3 Cal. App. 5th 102 (2016).
16. Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105 (2016); Jones v. Jones, No. 21-P-655, 2023 WL 5729650 (Mass. App. Ct. Sept. 6, 2023).
17. Civil Code of France Article 913.
18. Finance Act 2013 of the United Kingdom.
21. www.legislation.gov.uk/uksi/2019/1511/contents/made?utm_source=a26d07a0-4e61-46cd-9d99-d199a74df0e5&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate; (EU) 2018/843, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843.
22. Article 792-0 bis of the French Tax Code.
23. ECJ Joined Cases C-37/20 Luxembourg Business Registers and C-601/20 Sovim.
24. Decision no. 2016-591 QPC (Oct. 21, 2016).
25. Prohibition on the Purchase of Residential Property by Non-Canadians Act, S.C. 2022, c. 10, s. 235; Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2022-250, as amended by Regulations Amending the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (March 10, 2023).
26. Mexican Federal Constitution Art. 27 Section I.
27. Andorra, Antigua and Barbuda, Argentina, Austria, Bahamas, Bahrain, Belgium, Bermuda, Botswana, Brazil, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czechia, Denmark, Dominican Republic, Ecuador, Egypt, Estonia, Finland, France, Germany, Ghana, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Jersey, Jordan, Kazakhstan, Kenya, Kuwait, Latvia, Lebanon, Liechtenstein, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Monaco, Nauru, Netherlands, North Macedonia, Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, Samoa, San Marino, Saudi Arabia, Seychelles, Slovakia, Slovenia, Spain, St. Lucia, Sweden, Trinidad and Tobago, Tunisia, Turks and Caicos Islands, Ukraine, United Arab Emirates, United Kingdom, Uruguay and Vanuatu; seehttps://taxjustice.net/reports/the-state-of-play-of-beneficial-ownership-registration-in-2020/.
28. Algeria, Angola, Anguilla, Aruba, Australia, Bangladesh, Barbados, Belize, Bolivia, Brunei, Cameroon, Canada, Chile, China, Cook Islands, Dominica, El Salvador, Gambia, Grenada, Guatemala, Hong Kong, Israel, Japan, Liberia, Macao, Maldives, Marshall Islands, Mexico, Montenegro, Montserrat, Morocco, New Zealand, Nigeria, Pakistan, Puerto Rico, Russia, Rwanda, Singapore, South Africa, South Korea, Sri Lanka, St. Kitts and Nevis, St. Vincent and the Grenadines, Switzerland, Taiwan, Tanzania, Thailand, Turkey, United States, U.S. Virgin Islands, Venezuela and Vietnam; seehttps://taxjustice.net/reports/the-state-of-play-of-beneficial-ownership-registration-in-2020/.