Old rich, new tricks: Legacy building beyond borders

By Karen Andrea Torres-Bhatia

What is wealth building but the effective use of capital? Capital, in this sense, can mean money and assets for capitalists, time and effort for industrialists, or talent and soul for artists. For those who have already accumulated wealth, their sights may already have been shifted to establishing legacies — something that lasts beyond their lifetimes, be it for a bigger cause, family or both.

For ultra-high-net-worth (UHNW) Filipino families, when it comes to their wealth, most would consider estate planning, focusing on wealth preservation. Estate planning typically involves forming domestic family corporations to house the family assets, establishing irrevocable trusts, planning transfers inter vivos and securing insurance policies. These focus on managing wealth erosion caused by taxes imposed on transfers, whether by sale, donation or succession. This is accomplished by freezing the tax base to its historical value, when the inter vivos transfer is made, instead of the appreciated values as of time of death.

For the top 1 percent, they may also have in place family constitutions with administrators, which allow them to focus on asset and relationship management but rarely covers wealth growth strategies and systems.

As may be noted, the popular options explored above are typically in a domestic setting, driven by Philippine tax considerations and limited to the Philippine wealth ecosystem. The current reality, however, is that there are opportunities outside of the country’s shores. Tax considerations are but an aspect of wealth management and the Philippines’ wealth ecosystem is not as developed as in other jurisdictions. Clearly, with the goal of establishing legacies but with the typical means of estate planning, there seems to be a mismatch between the objective and the tools.

Instead of estate planning, rich Filipino families should weigh on creating a living legacy — a living and breathing legacy that sustains and grows itself now and in perpetuity, not limited by jurisdiction and with access to global opportunities. Moreover, to really serve their interests, it should be automated and professionally handled, with regard to the administrative work, while being discretionary and driven by family values for decisions that matter.

Currently in Asia, Singapore and Hong Kong are the main hubs and gateways to offshore opportunities. This is because these jurisdictions have developed ecosystems of laws, regulations, financial institutions and professionals and service providers that enable multigenerational wealth building and tax-neutral regimes for estate transfers.

In the Deloitte network, UHNW families from all over Asia have been guided in establishing their living legacies. These were done through family offices, variable capital companies (VCCs), and/or trusts to manage and grow the assets and transition the same to the next generations.

For ease of understanding, family offices may be akin to the family’s chief operating officer. The family, acting as the chief executive officer, will still set the vision and objectives, whether it is portfolio management, direct investments, administration and compliance duties, business operation support and next generation training, and philanthropy. The family office creates the dream team, by hiring and aligning existing financial, legal and tax advisors, and other professionals and market players toward the family’s vision and objectives. The family office runs the machinery of people, reporting, processes, legal or tax coordination, investment opportunities, etc.

On the other hand, a VCC is a legal fund structure in Singapore, wherein an existing one may create funds and further subfunds for the family under the VCC umbrella. The family benefits from the VCC’s licenses, tax incentives and pool of professionals. It may also increase capital to create a separately maintained and managed fund for the family and several subfunds, as needed, for different objectives, with legally separated assets and liabilities. The VCC is like an off the shelf but customizable legacy planning solution.

An offshore trust, in principle, functions the same way as domestic trusts. There would be a trustor, beneficiaries and trustees. Some Asian families prefer to establish their family trust offshore due to the accessibility of professional trustees and legal and tax advisors, tax being at the trustee level with a lower tax rate, and robust or legal system to protect the assets held in trust.

From Philippine and international tax perspectives, there is scope for planning such as:

• Freezing of historical values for Philippine estate tax purposes when contributed to the fund or the VCC.
• Leveraging of funds or assets under management, where assets are contributed by way of loan instead of equity, such that capital infusion should be nontaxable, other family members may invest in equity and growth of the investment and wealth belongs to all invested family members. Further, drawings may be managed.
• Managing investments in lower tax rate jurisdictions, etc.

For UHNW Filipino families exploring multijurisdictional legacy planning, particularly those with members living across different parts of the world, it is valuable to look beyond tax considerations. They may benefit from engaging with trusted professionals such as bankers, fund managers and administrators to help ensure that systems are thoughtfully in place to support evolving wealth needs. Ultimately, the broader goal is to create living legacies that adapt to new landscapes and extend across borders.

Karen Andrea Torres-Bhatia is a director with the tax and legal practice at Deloitte Philippines, a member firm of the Deloitte network.