It seems strange to write at a time of lockdown, but it is clear that over the last three decades, the wealthy have become far more internationally mobile.
This complicates matters when looking at their estate planning: individuals and their advisers are often attempting to find an acceptable compromise between the tax and legal requirements of two or more jurisdictions and an effective cross-border tax and succession plan can be very intricate.
Such plans rarely survive a divorce unscathed, but is it possible to construct a divorce for an internationally mobile client without disturbing them?
The answer is (in almost all cases) no, not entirely, but it is possible to take steps to minimise the impact with preparation before and during the marriage, and careful consideration and negotiation of the terms of the divorce, according to Irwin Mitchell partner Alex Ruffel and associate Kate Caldwell.
Damage limitation
The most obvious precaution is a pre-nuptial or post-nuptial agreement that takes into account the succession plans in place and sets out whether and how they should be changed in the event of divorce; for example, by stating that a trust should not be treated a resource of either of the parties.
In the absence of this, in many countries, subject to their statutory regimes, interests in trusts or similar entities can be considered as resources of the parties to the marriage.
This does not mean that the courts of one country can make enforceable orders against trusts in another jurisdiction but their existence may affect the size and nature of the financial awards made to each spouse.
Where a trust has previously been established for the long-term benefit of the descendants of the parties to the marriage, as opposed to a source of support for the parties themselves, the management of the trust, letters of wishes and behaviour of the parties during the marriage should be consistent with this to minimise the chances that the trust will be viewed as source of funds for husband or wife when their financial resources and needs are calculated.
Done right
Another key consideration for preserving family wealth in a divorce is taxation.
Where there are transfers of assets or income, there are likely to be tax consequences.
However, if transfers are made in the right way, at the right time and/or in the right order, this can reduce the tax significantly.
For example, in the UK:
· Remittance basis taxpayers should consider using unremitted non-UK income and capital gains to make payments on divorce. If their ex-spouse brings the payment to the UK after the decree absolute, there will be no taxable remittance (although funds for the maintenance of children will not be covered by this);
· Remittance basis taxpayers should consider using offshore income gains in preference to capital gains to make payments under the method described above as the potential UK tax-saving is greater;
· Transfers of assets made in the tax year of separation do not attract capital gains tax, but those made afterwards are taxable;
· Owners of UK or non-UK businesses may be able to use entrepreneur’s relief to mitigate capital gains tax on transfers of shares.
Clear calculations
Trusts that are included in the financial negotiations may be distributed to or divided into two or more funds for the different parties to the marriage.
Again, the tax implications need to be carefully considered and should be built into any divorce settlement.
Under UK tax-avoidance rules, for example, a UK resident who has contributed to a non-UK settlement in the past may still be liable to tax on that trust’s previous and future income and gains even if they do not benefit from them but their ex-spouse and children do.
If a distribution is made to a UK-resident ex-spouse from a trust, the trust’s historic income may be attributed to and taxed on them. This ‘cleans up’ the trust for subsequent beneficiaries, who may receive their distributions tax-free as there is no more income to attribute.
These potential tax liabilities must be calculated and taken into account when considering the source of capital payments, the amounts that should paid as part of the financial settlement and the drafting of any documents for the division of trusts.
Multi-generation succession
The final key area for consideration is looking at whether succession planning can be built into financial arrangements on divorce.
For example, instead of an outright transfer of assets to a spouse, if tax allows, one party may create a fresh trust from which an ex-spouse may only benefit during their lifetime to ensure that the bulk of the wealth is protected for their children.
Although a divorce is between spouses, the spouses’ parents should also review their own their succession plans to ensure that what they will be leaving to their children is appropriately protected.
Comprehensive advice and considered planning are vital to ensuring that cross-border tax and succession plans are not derailed on divorce.
This article was written for International Adviser by Alex Ruffel, partner at law firm Irwin Mitchell, along with associate Kate Caldwell.
