Social Capital – the ‘human side of wealth’: It’s not just about the money

Family structures are complex and dynamic by nature. Andrew Law, CEO of the Bahamas-based International Protector Group (IPG), discusses how new ground breaking legislation, the Bahamas Executive Entity (BEE) Act can simplify the complexities in wealth management structures and enable families to manage lasting client relationships across generations.

Recent research by the Family Office Exchange (FOX) revealed that ultra-high-net-worth individuals rank qualitative issues such as family legacy, family relationships and family dynamics that are related to the business and a family’s reputation, among their top concerns. And while most professional trust advisers are skilled and comfortable in dealing with the immediate family circumstances and aims at the outset of the trust relationships, they can over time find increasing difficulties in reconciling financial and fiduciary decisions with the changing family dynamics.

The changing nature of families can see conflicts emerge from marriages and divorce that many advisers find difficult to reconcile. In addition, many families now insist their children have prenuptial agreements when they marry, agreements that need careful handling in a diplomatic but open and professional way. Add to this that many families today face the problem of their various members living around the world in different countries and the issue of managing the human side of wealth starts to become an issue in itself.

A new option only just now available is the Bahamas Executive Entity (BEE) that can give the trust settlor increased control and provide trustees with important input from the family on an on-going basis. The BEE is unique and ground breaking. It is a new piece of legislation that has been designed specifically to resolve complex governance issues in fiduciary and wealth management structures and is especially useful when those involved in trusts face a greater likelihood of family disputes or litigation. The BEE can hold the role, responsibility and powers over certain functions through a legal entity rather than by individuals.

Complex structures mean challenges in operation, ownership and control 
Often first-generation entrepreneurs find it difficult to relinquish control, fearing that their children might be unable to run the family business and so private trust companies (PTCs) have served traditionally as a useful starting point for introducing heirs to the diverse range of the family’s interests and investments. However, they must have a shareholder, usually either a purpose trust or a foundation and most offshore financial centres with purpose trust legislation have imposed restrictions on who can act as trustee. In addition, they have introduced the concept of an “authorised applicant,” or enforcer whose duty is to see to the proper administration of the trust by the trustees.

This can provide anxieties and difficulties for both sides. In the short term, settlors wishing to retain some level of control can find themselves placing their trust, literally, in professional trustees and thereby effectively eliminating any control they may have over a PTC, as the professional trustees can remove its directors.

In the longer term, when faced with decisions arising both from the increasing complexity of the family’s finances and from the evolving dynamics of the family relationships, professional trustees can find it difficult to ensure they adequately take into account the true intentions of the settlor when making their decisions. The problems become increasingly acute as trusts reach their third generation.

Family problems can also cause conflict between the beneficiaries and the trustees, or when the trustees are based in a remote jurisdiction, too far away to be involved closely in complex family matters. For these reasons, family members can often become reluctant to take on a role acting in their personal capacity within a PTC.

Bahamas Executive Entity eases complexities in wealth management with greater transparency
The new Bahamas Executive Entity (BEE) which came into force earlier this year, can give the settlor increased control and provide trustees with important input from the family on an on-going basis. This unique piece of legislation helps resolve complex governance issues and is proving to be particularly attractive to those involved with trusts, either professionally or personally. The BEE can hold the role, responsibility and powers over certain functions through a legal entity rather than by individuals.

International Protector Group (IPG) has already secured a series of significant BEE contracts within the five months since we announced our BEE service with client trusts across a spread of geographical locations including the US, Latin America and the UK.

A BEE is similar to a foundation in that it is entirely standalone in nature with no shareholders. However, there are no beneficiaries either, but it is a legal entity in its own right and is tax exempt with only a nominal registration and annual fees to pay. Establishing a BEE as shareholder of a PTC for instance, allows the settlor to appoint trusted advisors to the BEE council and ensures that the family can maintain a voice in the on-going administration of the trusts in a very cost effective way.

Social capital is just as important to manage as the actual wealth itself. The complicated nature of families and family dynamics have a real impact on the complexities in wealth management structures and add to the challenges involved in managing trusts and foundations. The BEE can be used to remove unnecessary layers of ownership and administration within these structures, easing their inherent complexities and providing greater transparency. It also facilitates the application of best practice and family and corporate governance principles in order to protect against both internal and external conflicts.

Crucially, the new BEE legislation allows the settlor to maintain influence over the entire structure and for the family to maintain that control over the following generations.