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Wills, Estate and Succession Planning in a COVID-19 and Post-COVID-19 World
A Presentation given to the Cayman Islands Chamber of Commerce
Presented By: Robert Mack Head of Private Client & Trusts at HSM 29 April 2020
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Overview
The presentation will cover a number of key topics: • The importance of having a Will. • The implications of not having a Will. • COVID-19 challenges and responses for the trust and private client industry in the Cayman Islands. • Family & business succession planning using Cayman Islands trusts & Foundation Companies. • 5 tips for COVID-19 estate planning.
The Importance of Having a (Valid) Will • Freedom of Disposition - Your personal assets should pass to family, friends or such charities as you wish, subject to any debts or claims made against your estate, so long as the Will is valid. • You get to select guardians for your minor children. • You can deal with your digital assets and online presence. • You can deal with assets in multiple jurisdictions. • You can defer gifts to heirs using trust provisions. • Lack of mental capacity, one’s domicile, or failure to follow execution formalities can invalidate a Will. • Powers of Attorney – Limitations. • Joint Assets/Bank Accounts – Typically fall outside of the estate.
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The Implications of Not Having a Will • Your personal assets will pass according to a formula set by the law. As such, family and friends may not benefit in the manner you wish. • The guardianship of minor children will be left to the court to decide. • There is no scope to defer vesting of your assets with a trust, unless minors (under 18’s) are involved. • Business assets such as company shares will be split according to the formula set by the law which may fraction the ownership and control of the business and may cause the business to fail. • Items of sentimental value such as jewelry, art, family homes, or vehicles may have to be sold rather than retained by the family. • Digital assets may remain unknown and therefore lost. • Your online presence may continue to ‘haunt’ the internet.
The Drawbacks of Having a Will • A Will can be challenged on a number of fronts such as mental incapacity, duress, forgery, or failure to observe execution formalities. • A Will becomes a public document once probated, thus privacy cannot be preserved. The value of the estate and the identity of your beneficiaries will be made public. • Assets may pass to persons who are unsuited or ill-prepared to receive them. A Will-Trust can often remedy this problem. • The probate procedure can be lengthy, expensive (especially if it becomes contentious) and may be complicated by the fact that your personal assets will be managed by individuals who may not have full knowledge of your financial and personal affairs.
• Wills must be updated regularly to take into account changes in personal and financial circumstances. The vast majority of people do not update their Wills regularly. Most people do not realize for example that marriage can automatically revoke an otherwise valid Will.
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Solutions the Cayman Islands can offer to overcome the limitations imposed by Wills – The Trust • A trust is not a legal entity but rather an arrangement whereby a trustee takes legal title to assets which are gifted by an individual (known as a “Settlor”) and the trustee holds these assets upon the terms and conditions set out in a trust instrument, for the beneficiaries of the trust. Some trusts can also arise automatically as a matter of law. • The trust concept is an ancient and highly tested legal arrangement. • Cayman Islands trusts are highly flexible and are capable of holding a wide range of assets, including the shares of a private company, bank accounts, land/reality, investments, and valuable assets such as art, vehicles, aircraft, and vessels. • Once an asset is held on trust, it no longer forms part of the estate of the Settlor so it is possible to reduce an estate to zero value with careful planning. As such, the risk of estate litigation is greatly reduced and sometimes it can be entirely eliminated.
Solutions the Cayman Islands can offer to overcome the limitations imposed by Wills – Trusts and Foundation Companies • The Settlor may retain a wide range of powers in the trust instrument which they (or any person or persons nominated by the Settlor) can exercise during their lifetime, including a power to revoke, amend or vary the trust instrument, a power to appoint the income or capital of the trust fund, a power to act as a director or office of any company the shares of which form part of the trust fund, a power to direct how the trust fund is invested, a power to appoint or remove trustees or beneficiaries, and power to require the trustees to seek approval before they exercise one or more of the powers vested in them under the trust instrument, otherwise known as veto powers. • There are no Cayman Islands tax implications of establishing a trust, nor are there any government fees payable. Foreign tax is often a factor with the creation of Cayman Islands trust with foreign settlors or beneficiaries and this must be explored prior to the creation of the trust. • It is possible to use a corporate vehicle such as a Foundation Company if a trust is not preferred. • Foundation Companies can act as corporate substitutes for trusts and are often better suited to persons who have experience running companies. • Foundation Companies are in essence, a hybrid between a trust & a company.
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COVID-19 Challenges for the Trust and Private Client Industry • The primary challenge is the uncertainty COVID-19 has introduced into the market, and the resulting decease in wealth felt at all levels of society. • Practical problems with respect to the collection and verification of client due diligence and the execution/notarisation of documents, particularly Wills which require two witnesses to be present at the time of execution to be formally valid as a matter of Cayman Islands Law. This has been partially addressed though recent legislation, but execution of Wills remains a problem with social distancing restrictions in place. • Face-to-face meetings with clients have ceased and have been replaced with virtual methods. This may be difficult for elderly clients who are not familiar with the technology and also poses issues for wealth managers to access degrees of mental capacity. • Clients who are hospitalized for COVID-19 or who are in care facilities or hospitals presents a particular challenge and would require private client practitioners to exercise extreme caution when taking instructions as well as arranging witnesses (if/when required).
How Has Cayman Responded to These Challenges? • As a result of COVID-19, the Cayman Islands Government has extended the 2019 FATCA reporting deadline to 16 November 2020 in response to the US Government relaxing its deadlines. • The Cayman Islands Government has also extended the 2019 CRS reporting deadline to 18 September 2020. • The Cayman Islands Monetary Authority (CIMA) have been in regular dialogue with the local branch of the Society of Trust and Estate Practitioners (“STEP”), and CIMA is in separate dialogue with the Cayman Islands Government. It is possible the Cayman Islands will follow other jurisdictions to allow virtual witnessing of Wills however, that is not yet confirmed. • CIMA continues to function well despite staff working from home. There are several reports from practitioners that CIMA has been highly responsive during this period, which is reassuring.
• The Court continues to function well and has implemented several new polices such as video-link hearings to enable its business to carry on. • The General Registry remains open and is fully functional.
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Family Succession Planning Using the Cayman Islands • Lifetime planning may be achieved with a Cayman Islands trust or a Foundation Company. • An individual can impart benefit upon family, friends, and charities in such shares and proportions as they wish.
• An individual can maintain a high degree of control with either a trust or a Foundation Company, or little to no control at all. • Property of any description may be settled onto a Cayman Islands trust or Foundation Company.
• Trusts and Foundation Companies can achieve succession planning as well as providing a stable ownership platform for family assets, even when incapacity or death strikes.
Business Succession Planning Using the Cayman Islands • Shares of a private company may be held on a trust or a Foundation Company upon such terms and conditions as the shareholder wishes. • The management of a business can remain under the control of the individual despite divesting their equity stake, and ongoing control can be pre-planned in cases of incapacity or death of the manager(s) of the business. • A Cayman Islands professional trustee can provide professional trust administration services for any Cayman Islands trust for any duration of time – this can have the added benefit of making the business more attractive to creditors and external investors since the primary shareholder is no longer vulnerable to incapacity or death which could paralyze the business. • An individual can design a plan regarding his or her business and personal affairs which may carry on for several generations after his or her death. • It is possible to “have your cake and eat it” – meaning a business owner may retain control and management over the business while divorcing oneself from the ownership, while still enjoying the fruits/profits of the business.
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5 Tips for COVID-19 Estate Planning To help craft an effective estate plan in the era of COVID-19, we will explore the following areas that should be considered: 1. What’s the plan? 2. Where are your assets located? 3. How much are your assets worth? 4. Who are you?
5. Be kind, be charitable
1. What’s The Plan? • A Will is a key part of any estate plan. Failure to have a valid Will means the law decides who gets your property and in what shares after you die (known as an “intestacy”). Intestacy Formula • This can work well as the law seeks to distribute your assets equitably to the persons most closely related by blood or marriage. • However, in many cases the intestacy formula does not produce the result one would have wanted and intestacy does not deal with the issue of guardianship of minor children.
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1. What’s The Plan? (Cont.) A Will is a vital tool to ensure your wishes are respected. Though there are alternatives to Wills, including: Alternatives to a Will • Placing assets/property into joint names so they pass outside of your estate automatically on death. • Life insurance, trusts, and foundation companies are also powerful tools which can allow you to implement more complex estate plans so you can be confident your loved ones will benefit precisely as you wish them to.
Mental Capacity Whatever your plan is, review it periodically. Illness, whether caused by COVID-19 or otherwise, can sometimes impair your mental faculties, which can prevent you from taking the necessary steps to put your affairs in order so it’s best not to delay.
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2. Where Are Your Assets Located? • Often it is necessary to have multiple Wills in each country as assets located in each country will have its own rules and regulations on succession. • If you have valuable assets located outside of the Cayman Islands, then its best to speak to an estate practitioner in that place, in addition to a Cayman-based attorney to ensure your foreign assets pass the way you want them to. • If you’re unsure of how to find a foreign estate lawyer, a good place to start is the Society of Trust and Estate Practitioners website. • Your local Cayman trust and estates attorney should also be able to recommend a suitable foreign estate attorney to assist and both attorneys should work in tandem to ensure your global estate passes in line with your expectations.
3. How Much Are Your Assets Worth? • Global personal wealth has taken a collective nosedive across the entire spectrum. As a result, the value of estates will inevitably suffer. • Therefore, it’s a good idea to review your Will (if you have one) to see whether any gifts to loved ones are now in need of adjustment, as gifts that were highly valuable just a few months ago (eg, quoted shares) may be less valuable now. This is important in order to achieve a sense of balance and fairness with loved ones, and to stave off any estate disputes from those who feel they were not treated fairly, which is one of the primary causes of estate litigation. • Those who do not yet have a succession plan should take this into consideration when initiating their plan.
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4. Who Are You? • It is important to understand what sort of connections you may have with other countries as this could affect taxes payable (outside of the Cayman Islands only), and claims on your estate. • Also, your estates attorney will need to ascertain your ‘domicile’ status, which is a technical legal test which requires your advisor to identify connections to other countries (including but not limited to citizenship) to ascertain whether (or not) the laws of that country may affect your estate. • In addition, many countries such as the United States seek to tax noncitizens if they spend a certain number of days within the country. It is therefore possible for a non-US taxpayer to inadvertently fall into the US tax net if they happen to be stranded in the US due to travel restrictions imposed by COVID-19.
5. Be Kind, Be Charitable • For those fortunate enough to have preserved their wealth throughout this crisis, there is a great opportunity to make a positive social impact by making a gift to worthy causes for those impacted by COVID-19. • A charitable legacy is one of the noblest gestures an individual can make, and the world needs such selfless gestures at this moment to remain hopeful and optimistic in these most challenging of times. You can craft your estate plan to benefit both family, friends and charities. • Charitable legacies have been growing in popularity, especially amongst prominent high net worth individuals.
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Questions? Robert Mack Head of Private Client and Trusts E: rmack@hsmoffice.com T: 345 815 7356 C: 345 938 7356
Thank you for attending this presentation on Wills and Succession Planning in a COVID-19 World. Tel: 345 949 4766 www.hsmoffice.com info@hsmoffice.com
Disclaimer This presentation is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this presentation without first obtaining specific professional advice. Alternative solutions also exist which may better suit the requirements of a particular individual or entity.
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