Instruments of Inheritance Planning  

Instruments of Inheritance Planning  

If you have something to leave to your heirs and if their number is considerable, you have to take good care of inheritance planning. If you don’t, some of your assets may be lost and some of your heirs may start fighting. To begin with, you should do the following things:

  1. Make a marriage contract. The right time to do it is before getting married but even if you are married already and you don’t have a marriage contract, you can fix the situation. Make an agreement with your spouse that would clearly define what property belongs to whom and what property goes to whom after your death, after your spouse’s death, and after you both die. Make sure you put the agreement on paper and have it notarized.
  2. Compile a register of your assets while delineating personal assets from business assets.
  3. Appraise the value of your assets and define possible and desirable ways of asset transfer.
  4. Identify hereditary risks, define the group of your heirs, set the compulsory inheritance amount, and analyze the fiscal consequences for yourself and your heirs.  
  5. Settle the relations with your business partners and make amendments to the corporate documents if necessary. You have to at least define how your share of company ownership is going to be handed down to your heirs and how your business partners can buy out their shares of ownership if they don’t wish to participate in the business.
  6. Develop an asset protection system for the period when your assets will be ‘frozen’ (temporarily inaccessible) for you heirs. 
  7. Discuss the possible hereditary instruments with the members of your family and the team that is helping you define your inheritance planning strategies (your attorneys, notaries, tax and financial consultants, business managers, and family office). You may want to leave a surprise for somebody but if all your heirs know what they are getting in advance, the probability of conflicts is going to be lower.

From this source, you can learn what other inheritance planning mechanisms HNWIs employ.

A Will

The traditional method of handing property down to your heirs is making a will. This document allows solving the following tasks:

  1. Appointing your heirs including those individuals who are not your heirs by law;
  2. Distributing the inherited property between the heirs;
  3. Avoiding splits of inherited assets and spontaneous succession;
  4. Solving the problem of undesirable heirs;
  5. Setting the compulsory inheritance amount for an underage or legally incapacitated heir in advance;
  6. Putting forward the conditions that your heirs have to meet to come into possession of the inherited property;
  7. Appointing a will executor and defining his/ her authority in managing the assets during the period of their transfer to the heirs. A will executor is also required if you have foreign property or underage heirs at the moment of your death. The executor is responsible for overseeing the process of asset transfer and he/ she is also entitled to ascertain that the heirs meet the conditions defined in the Will.

As a rule, a will is made for property that does not require active management and can be easily divided into parts. An important advantage of a will is the fact that it can be altered as often as you wish.

Alternatives to a Will

Instead of a will, you can use a deed of gift to transfer property to your heirs. However, such a deed normally comes into force at the moment when it is signed, not at the moment of your death. There are other options you can consider as well: 

  1. An inheritance agreement;
  2. An inheritance foundation;
  3. A trust.

An inheritance agreement between the testator and the heirs is signed during the testator’s lifetime. It comes into force after it has been notarized and it can describe the obligations of the heirs during the testator’s lifetime and after his/ her death. Certain risks are associated with an inheritance agreement. Difficulties may arise with the question how free the testator is in using the property that he/ she is leaving to his/ her heirs. Can the testator dispose of the property? How should he/ she compensate the heirs in this case? What happens if one of the heirs dies before the testator while fulfilling all his/ her obligations? These facts make an inheritance agreement a possible but imperfect instrument of inheritance planning.

An inheritance foundation, it its turn, allows achieving the following important goals:

  1. Protect the property from creditors and undesirable heirs by transferring it to a foundation that will manage the property and distribute the profits that it makes in accordance with the settlor’s instructions;
  2. Insure the start of professional business management right after the settlor’s death thus ensuring continuity of management and avoiding any transition periods;
  3. Prevent business division when distributing profits between the heirs;
  4. Define the procedures of transferring property to each heir;
  5. To soften the compulsory inheritance requirement.

The main risks associated with an inheritance foundation are related to the lack of real protection mechanisms against abuses by unscrupulous foundation management. The foundation structure, its By-laws, and other constitutive elements cannot be altered after the settlor’s death. To avoid lawsuits, you should choose the jurisdictions for your foundation that has efficient legislation governing the work of inheritance foundations.  

Both a foundation and a trust allow leaving your property to your heirs without paying too much in taxes, protecting the property from creditors, and avoiding the ‘inheritance chaos’. Besides, a trust or a foundation can perform the business management functions until the time when your heirs are old enough to take it over. Finally, they can provide financial cushions for the members of your family.

The table below shows the main differences between a foundation and a trust:

Inheritance foundationTrust
The concept of dividing the legal (the right to possess and manage) and the economic (the right for income) property
Is a legal entity; created posthumouslyIs not a legal entity but a fiduciary agreement; can be created during the settlor’s lifetime
Can be set up in Liechtenstein, Panama, and the NetherlandsCan be created in Cyprus, Malta, Great Britain, Bahamas, Caymans, the BVI, etc.
The settlor ceases to be the legal owner of the assets (any asset types can be transferred) but retains control over them
Minimum charter capital is requiredNo charter capital is required
Has to be registered as a legal entityNormally does not have to be registered; in some cases, a notification of trust creation is required

To conclude, a trust is probably the most efficient instrument of inheritance planning. It is flexible and highly secure. Please note however, that trusts created in different countries can offer different levels of security and information confidentiality. For this reason, you should seek professional advice if you would like to set up a trust for inheritance planning purposes.