As families seek greater control over their financial affairs, the establishment of family offices has risen to play a vital part in the cohesive and efficient management of family business interests, along with the domestic and personal affairs of their members. The Bahamas is central to this development, says Linda Beidler-D'Aguilar
Despite differences as to the type of governance that family offices and their associated structures should have, there is no question that present political and regulatory conditions suggest that substance prevails over form. Anyone who wants to establish a family office must consider "permanent establishment" regulations (which govern fixed places of business that usually generate direct-tax liabilities in the jurisdictions where they are situated) and "controlled foreign company" (CFC) rules.
He or she must also contend with rules that relate to tax, residency and immigration while overseeing and managing things competently. The Bahamas' legislative and regulatory regime gives such people the opportunity to create effective and efficient structures for family offices that comply with financial regulations. Service providers (including financial institutions, lawyers and accountants), skilled professionals and staff are readily available.
The family may retain a measure of control over the strategic management of the assets without prejudicing the validity of the underlying trust or foundation. If the family establishes the structure with an unlimited life-span, subsequent generations can help to govern it."
The Bahamas' proximity and direct flights to major cities such as Miami, New York, Toronto and London, as well as the opportunity for families and their trusted advisors to take up residence and purchase property, are highly advantageous for long-term strategic planning. As persons seek safe harbour in a post covid-19 environment, The Bahamas should be top of mind.
This article examines the ways in which family offices can take a holistic approach to "succession planning" - the handing over of wealth from one generation to the next - while creating durable governing structures at the same time.
What is a family office?
A family office is a vehicle that can provide the family or families that it represents with a broad range of services, domestic administrative matters (e.g. travel arrangements, staffing and housekeeping), sophisticated support for long-range business, tax and estate planning. The supervision of trusts and the management of investments that may be outside the family's main operating businesses are two of the main functions of family offices operating in The Bahamas.
Reasons to establish a family office
When a family uses a single comprehensive structure, it can spot evolving opportunities and evaluate its overarching objectives with ease. When such a structure controls that family's various interests and keeps an eye on its obligations, its affairs are likely to be stable over a long period of time. A family office also helps the family evaluate the goods and services that firms offer it and can also keep information about relatives' lives confidential because it consolidates advisory services, wealth management, income distribution and other services for them inside a structure that they themselves own. This is the antithesis of a piecemeal review of disparate elements in isolation from one another.
A family office facilitates "generational planning," the means by which one rich generation plans the lives of a later one, and can avail itself of a broad variety of tools that help it do so. Wills are, of course, a common means of such planning, but are rarely good at helping people manage their dynastic interests from beyond the grave.
Trusts (stalwarts of common law practice) and foundations (structures originally established under civil law codes), on the other hand, have been developed with the explicit aim of helping people to plan the lives of others for decades and perhaps even centuries ahead.
The overseeing and management of family trusts or foundations can be placed in the hands of third parties who report to a family office. Alternatively, the family office may itself establish a Bahamian private trust company (PTC) for the express purpose of acting as the trustee of this-or-that trust or group of trusts; equally, it can act as the founder or supervisory party to a foundation. A PTC commonly takes the form of a limited liability company and its board of directors can include members of the family in question as well as trusted advisors and independent third parties.
Consequently, the family may retain a measure of control over the strategic management of the assets without prejudicing the validity of the underlying trust or foundation. If the family establishes the structure with an unlimited life-span, subsequent generations can help to govern it.
An increasing number of family offices are being established by patriarchs and matriarchs who have, through their own efforts, established the businesses and interests that those offices are destined to oversee. Their knowledge and expertise cannot, however, be the sole basis for current and future planning if those family offices are to prosper over long periods. They might require the following:
- The preparation of a family constitution or charter that may encompass such concepts as the family's overarching aspirations and goals, the things that it values, the missions of its businesses, the jobs and responsibilities of family members and various third parties (persons and entities) that work for it, and policies, procedures and processes that might resolve disputes that arise in crucial areas (business or otherwise).
- A regular evaluation of the executives (who may or may not be family members) who work at the office, along with a continual assessment of the jobs and responsibilities that people at the office shoulder.
- The development and augmentation of knowledge and skills through formal training, plus an encouragement of the flow of information between people in the office and between family members and their internal and external advisors.
- Plans of action to help the family live up to its social responsibilities and further its philanthropic interests.
Much of this planning depends on the amount of time that the members of this-or-that family wish to devote to their tasks, their willingness to deal with internal and external advisors and their attitudes towards the disclosure of information about themselves to people outside the office. A family that wants to derive the greatest benefits from its office ought to take corporate governance very seriously.
The family in question - and its advisers - ought to ensure that the people in its office have the right skills and expertise to do their jobs, even if those people come from its own ranks. Governance is not solely the province of directors and officers; people perform important functions at lower levels as well. The proper management of the family office's books and records is of the utmost importance, not least because adequate accounting records and the comprehensive compilation of information (internal and external) is necessary if the office is to meet its multitudinous reporting requirements.
In order to ensure compliance with local laws and regulations, more and more family offices are paying increasing attention to the hiring of qualified staff members and the use of third-party consultants with the right reporting skills who can review compliance and risk management procedures, the better to follow the increasingly sophisticated obligations that regulators are imposing on them.
Linda Beidler-D'Aguilar is a partner at Glinton Sweeting O'Brien, counsel and attorneys-at-law