Trust trends and the future of planning during the ‘Great Wealth Transfer’

Date: 21 Jun 2023

Citywealth Mag

As we enter the era the media has termed the ‘Great Wealth Transfer’, understanding trends and arising issues with succession planning is essential. Citywealth speaks to industry experts to expose the current state of trusts and what UHNW individuals and their advisers need to know to navigate this ever-complex topic.

Trusts have been a long-popular staple when it comes to succession planning, but are not immune to the highs and lows influencing the private wealth industry. As we see an increasing number of families in dispute, the subsequent splitting up of trusts, the look and nature of trust companies and jurisdictions changing, valuations going down and businesses underperforming alongside the pressure of big wage bills to be paid, what does the future of trusts look like?

State of disequilibrium

Steve Sokić, Chairman at Crestbridge, described the trust sector as currently being in a “state of disequilibrium”. He said: “From my perspective & background, any private client global trust sector update is best framed by considering the major shifts in both demand and supply over the last number of years, i.e. what wealthy clients & their family offices demand, and what trust companies & trust jurisdictions choose to supply them, all driven in most part by the regulatory, legal, tax, social, political & economic environments in which they all choose to live and operate. These shifts have resulted in what I would refer to as a current general state of ‘disequilibrium’ in the private client trust sector globally.”

More diverse asset class investments

On demand, Sokić noted a number of interrelated and clear trends on the client side from the last decade, including and not limited to: increased regulator and compliance rules; more sophisticated tax laws in clients’ home countries; tax information sharing and company public registers; increased costs relating to having a trust structure; significant increase in the global wealth of the UHNW segment and the related increase of ‘in-sourcing’ of wealth stewardship via family offices; more diverse asset class investments; and the increasing involvement of younger generations becoming more interested in the structuring, impact and governance of their wealth. “Much of the affluent global trust clients have either collapsed or repatriated their foreign trust structures, leaving the main demand coming from UHNWs and their family offices (smaller number but larger size) driven by attributes like cross-border considerations, overall complexity, broader risk exposure, and sheer level and nature of wealth.”

Significant increase in regulation and oversight trust

On supply, he highlighted the significant increase in regulation and oversight trust companies are subject to; high profile public e-theft and public disclosure of private client information; complete exit or significant ‘de-risking’ by banks of their private client trust businesses; entry of private equity firms in the ownership and consolidation of trust company businesses; the broad but clear shift in focus and resources by trust companies into faster growing, lower margin and (perceived) lower risk outsourced fund administration; loss of most of its lesser value but high number of legacy affluent clientele; and a stubborn attachment to the (often manual) legacy ways of operating, as just a few of the interrelated trends (re)shaping supply but not necessarily in line with the shifting of demand.

Trust company providers have outdated operating platforms

Sokić said: “Simply put, there is currently excess supply for both the new type(s) and level of (now mainly UHNW) demand in the global private client trust sector, so consolidation and the ‘trimming of fat’ will continue in [this] sector. Linking those demand and supply trends together … brings the sector to a current state of ‘disequilibrium’ which will sort itself out in the coming years. Market pressures will push trust companies to continue to shift their service focus and resources towards outsourced fund administration for professional asset managers, leaving many private client trust divisions to continue to flatten, gradually shrink or be sold, which will address the excess supply noted above in part. That said, there may be no better time [than] now for another way to sort out the excess and type of supply, that is, for someone to shake up and modernise the outdated nature and model of the supply…i.e. trust company providers generally have outdated operating platforms and type of client experience, and as such are in dire need for enhanced automation, digitisation and so are ‘ripe’ for disruption in this regard by someone, both in terms of operating model AND client experience (probably a topic for another article).”

Better choice of trustees to choose from

“Finally, in-housing of various functions by family offices will increase in pace, including historic elements of trust structure roles (e.g. PTC board directors, trust protectors etc) and administrative functions (e.g. repetitive lower value services like bookkeeping, but also high value needs like consolidated & real time reporting), either directly in-house in the family office itself and/or via third party independent professionals. Clients will have [a] lesser number, but hopefully, better choice of trustees to choose from for such outsourcing when needed, but in the meantime [it] is difficult for many clients to tell the difference.”

Increasing complexity

Paul Weir, Managing Director for Jersey and European Head of Private Clients for JTC Group, commented on the increasing complexity surrounding trusts – particularly regarding the current political environment and shifting family dynamics. On the effect of the political environment, he said: “Right now there is a particular sensitivity to the political environment and the uncertainty that policy shifts and changes in ideology can cause, particularly because of the increasing polarisation that now seems to be embedded into politics. We are seeing that with UK-centric clients tying to work out where they and their structures might stand in the event of a change of government [and] US-centric clients weighing up the possibility of another Trump presidency.”

Need for joined up, multi-jurisdictional advice and structuring

Weir discussed family complexity and adapting to manage it. He said: “We see much more complexity around our clients and their families. Part of this complexity is self-generated – this applies to the internal family dynamic as younger generations increasingly take a more active role but that complexity also applies to the universe outside the family – the geographies they are connected to, the nature, value and location of the assets they have and the resulting need for joined up, multi-jurisdictional advice and structuring. Part of that complexity is externally imposed – for example the ever-changing and tightening legal, regulatory, fiscal, economic, political environment that our clients and their structures have to factor in. This includes, by way of illustration, the transparency agenda and an individual’s perfectly understandable desire not to put their lives or wealth out there for everyone to see.”

Wealth transfer can be positive or create friction

He continued: “I touched on younger generations taking a more active role in the family and unsurprisingly this is accompanied by the transfer of wealth to the next generation. This can be a watershed moment for some families – an incredibly positive thing if handled properly or something which can create incredible friction if not handled properly – and to avoid it becoming a negative event it is important to plan ahead for this, to bring the next generation up to speed and help acclimatise them. Although there are clearly challenges, there are also positives that come from these. Typically these themes will be a catalyst for closer engagement with the professional network supporting the client, including the trustees. It is at times like these that the contribution we make to our clients and the value of what we do becomes more evident. It is very rewarding.”

Director of Trust Corporation of the Channel Islands Andréa Daley Taylor comments on the effect of the Covid-19 pandemic on family decisions: “Post Covid we have been frequently presented with opportunities to replace a trustee. These arise in a number of situations but very often where families are in dispute. It is not unusual  for families to resolve their disputes by agreeing to a termination of the trust and distribution of the assets impart to avoid what is seen as the excessive cost of maintaining the trust fund. Not all consequences of such reflection (during the Covid period) were negative. Many families are now looking to revisit their family charters and re-examine the underlying principals behind managing the family’s wealth, to better reflect their current values.”

Splitting of trusts

As globalisation continues and family structures thus become increasingly complicated, the splitting up of trusts is becoming more common. On this, Sokić further added: “The UHNW families I referred to earlier are getting larger and more disperse and diverse globally, which perhaps inevitably has brought new ways of thinking and resulting tensions, some healthy and some not so, into UHNW families which has been an important factor driving the increase in the ‘splitting up’ of trust structures. The other factor is the succession of UHNW-owned private businesses, ownership of which often is (re)crafted to enable same which often results in a similar splitting up of trust structures. Finally, younger generations now are far more ready to challenge legacy trust structures, often with a positive intent (but not always), set up by their parents than any generation before. I don’t think the splitting up of trusts is, per se, a bad thing at all, it simply shows how the trust ‘tool’ is by far the most flexible instrument for wealth preservation through generations”.

Purpose of trust and choice of partner

So trusts don’t seem to be going anywhere and, going forward, Weir emphasises the importance of understanding the purpose of one’s trust and the selection of an appropriate partner to manage it. He said: “For new trusts, I think it is important to recognise that a trust is a long-term planning solution that should be able to deliver a client’s objectives for generations to come. With that in mind two things become important: genuinely understanding and articulating what those objectives are and the choice of partner (trustee) to manage the trust. In relation to the first point, a client has to understand what they want to achieve from the creation of the trust. It sounds like an obvious starting point but even now we see clients creating trust structures because of a vague sense of benefit or because their friend has done it or their advisor has recommended it. As a trustee (or prospective trustee) part of our role is to help the client define and articulate the purpose, through appropriate questions.  It’s so much easier for the trustee to achieve the objectives when we know what they actually are!”

Compatibility with the trustee is still highly relevant

“In relation to the second point, the choice of the right trustee is probably more important than most clients believe. From their perspective trustees can appear homogenous and interchangeable but the importance of choosing the right partner can’t be overstated. The relationship between the settlor and their beneficiaries and the trustee can last a very long time and of course there has to be technical competence and the ability to do the job but at least as important is the compatibility with the trustee – are they one your wavelength, do they care enough, do they share the same values? All of these softer factors are highly relevant.”

Weir added: “In the context of an existing trust, when difficulties or challenges arise it is precisely these softer factors that will make the difference. The relationship with the trustee is critical and if it isn’t in the right place the communication can be constrained or unclear and that can only be an obstacle to overcoming the challenge.”

The future of trusts

Weir concluded: “[Trusts] are an inherently flexible, versatile planning option and I believe that as a result, trusts come into their own in times of turmoil or uncertainty. They can be adapted for changing circumstances, be reshaped or moulded in response to events in a way unlike any other structuring option. I think we are seeing a shift in the character of trusts. By that I mean that it is increasingly common that trusts are being created for good, old fashioned reasons – to protect and provide for a family for the long term. We are seeing less in the way of transactional, ‘commercial’-oriented trust structuring. My sense is that the families we are involved with genuinely understand the trust concept and the role a trust can play in their lives and the lives of their family.”

Emergence of mid-shore jurisdictions

Sokić said: “Trust jurisdictions have also been affected; the relative decline or flat lining of offshore private client trust jurisdictions we have seen in recent years will likely stabilise in coming years in line with the supply shifts I talked about, but this has and will continue to be somewhat offset or balanced with the fast emergence of so-called ‘mid-shore’ trust jurisdictions and of course domestic/onshore trust jurisdictions, but that’s also likely a topic for another article!”