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Estate Planning Using Companies

Introduction

One of the most popular means of planning an estate has always been the offshore discretionary trust. It combines flexibility with the ability to reduce taxes and transfer assets to succeeding generations with minimum formality.
 

Trusts are not universally popular however and three major disadvantages are often cited:

• In order to obtain the maximum benefit it is usually necessary to allow the trustee complete freedom to decide when distributions are to be made and to which beneficiaries.
   
• The trust only exists in countries with legal systems derived from English law and is often not well understood by residents of civil law countries.
   
• A modern trust cannot have perpetual life. It will eventually have to be wound up although it can usually exist for up to 150 years.

An alternative to a trust

The Guarantee or Hybrid Company

Another means of planning an estate is to use a corporate vehicle, usually a guarantee company or a hybrid company. Being a corporation, it is a legal structure, which is understood, and it can have an indefinite existence.

What is a guarantee company?

The company normally used for commercial activities is the company limited by shares. The principals contribute cash or other assets in consideration for shares and they own the business is proportion to their contributions. Once they have paid for their shares they are not liable for any of the debts of the company.

The law also makes provision for another type of company. In this case the principals also contribute the assets of the company and in addition they undertake, or guarantee that, in the event of the company becoming insolvent, they will contribute a limited amount towards its debts. The guarantee can be for a very nominal sum and $10 is quite normal. In exchange for taking on this obligation they are entitled to share in the assets and profits of the company and the manner in which they do so is set out in the company's Memorandum and Articles. This creates opportunities for planning.

....and a Hybrid company?

The law also permits a company both to issue shares and to have guarantee members, hence the term "hybrid". This introduces an additional level of flexibility because the rights of the shareholders can be different to those of the guarantee members. The shareholders might for example have the right only to dividends, or they may have no rights to share in any part of the assets or profits and be entitled only to nominate the directors.

The persons whom a guarantee company is ultimately intended to benefit are called the members. Whilst the rights of a member are broadly similar to those of a shareholder in a traditional company, their interests are not exactly the same.

Some examples of how membership rights and interests in a guarantee company may be dealt with,

• A member may transfer his interest to a third party but retain his membership. This will result in him remaining a member without entitlement to share in the profits or assets. The person who has acquired the rights will be entitled to the benefits originally held by the member, but as he will not be a member, he will not be able to control the company. The transfer can be on terms similar to those found in a trust and the beneficiary need not be given full immediate control.
  
  
• A member may transfer his interest and resign his membership following which the company effectively holds the interest in trust for the other parties.
   
• A member can provide that his nominated successor shall be elected a member on his death.
   
• Once the Guarantee Company has been set up and has received its Members' subscriptions, it can declare itself to be Trustee of the assets held by it in favour of those Members. If those Members were subsequently to resign and new members be elected, the company would be turned, in effect, into a Trust Company as it would be owned by third parties and hold assets in trust for beneficiaries, i.e. the former members

Membership can be obtained and lost without any form of payment, making it difficult to value. This puts the member in a similar position to that of a beneficiary of a trust and might be useful where possible liability to estate taxes might arise.

Using a hybrid company rather than a guarantee company alone creates more flexibility and introduces a further range of options. The shareholders of a hybrid company can be different persons to the members and shareholders need not have any entitlement to the profits or capital of the company. Further examples of what is possible,

• The shareholder can hold the voting and administrative powers. This would include power to appoint the Board and, if the shareholder were a Trust Company in a zero tax offshore jurisdiction, would put the company beyond the control of the authorities in the country in which the beneficiaries were resident.
  
  
• The shareholder could be a family member living in another country with the same benefits. There would be a risk that the company would be treated as resident in that country for tax purposes however.
   
• The founding guarantee members could resign their interests meaning that the company would, for the time being, have no beneficiaries. The retiring member could deposit a letter of wishes with the Board, to cover the appointment of beneficiaries and the extent of their interests, in the future. This might be a most important benefit as most tax regimes require a beneficiary of a company (or trust) to report his or her interest, but if he has not actually been appointed, he may be able to defer doing so.

The various options referred to above, in most cases, will operate in conjunction with a letter of wishes, to provide a means whereby the person establishing the company can ensure that it is operated in the manner and for the benefit of the persons he intends to benefit.

For more information about Offshore Companies please call +353 1 431 9663 or Click Here to contact us.