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How to bequeath a factory, an airplane and a boat: combo of inheritance mechanisms

Having built a business or launched a charity project, many entrepreneurs wonder how to pass their legacy to their successors. Diana Kalyaeva and Anastasia Kiseleva (UFG Wealth Management) advise on the legal tools that may be used to ensure all wishes are fulfilled.

Who is the owner of assets? What can be bequeathed?

A will is the traditional and most affordable tool for transferring assets to heirs. A will can be used to distribute various assets as well as to impose certain duties on heirs.

The important things to remember include the following:

1. The testator can only dispose of property he owes.

Under Russian law, all assets acquired during a marriage is considered joint property of the spouses. The exception is personal belongings and property received as a gift, by inheritance or under other gratuitous transactions. This is the general rule. It applies regardless of in whose name the property is registered.

Here is an example. Spouses Sergey and Maria possess shares in a Russian LLC which owns an IT business. These shares are registered in the name of Sergey, so Sergey considers them to be his personal property and makes a will in their regard in favor of his son from his first marriage. In practice execution of such a will may be problematic, since the spouses did not divide the shares, and therefore such shares were joint property of the spouses.

A marriage agreement or agreement on division of joint property of the spouses can help avoid such problems with the execution of the will. These tools can provide legal certainty as to which spouse owns a particular asset. The existence of such agreements can also reduce the likelihood of disgruntled heirs and others contesting the will.

2. One cannot bequeath indirectly owned assets.

Let's explain with an example. Nikolay became the owner of a factory, winery and other assets before the marriage. He owns the assets through foreign companies in Cyprus, which, in turn, are owned by a foreign holding company. Nikolay is surprised to learn that he cannot distribute specific assets, i.e., the factory, the winery, among his heirs directly. He can only make a will in respect of the shares of the foreign holding company.

3. There are situations where business assets are shared with a partner.

In this case it is important to correctly describe these assets, so that the will could be executed and there would be no need to rewrite it many times later, since the share of ownership may change.

4. The testator can appoint an executor of the will.

The executor of the will acts as a trustee of the estate. The testator can, for example, instruct the executor to vote in a certain way at a general meeting of shareholders of the company whose shares form part of the estate. Such management will ensure the continued operation of the business while the probate process is underway at the notary. The executor of the will can be a business partner or a close friend who is not a legal heir and will not be interested in the assets. Some choose one of the heirs for this role, but such a choice often leads to a conflict of interest.

Bequeathing, but with disclaimer and testamentary delegation

If the testator does not want an asset to be passed to one of the heirs directly, he can use the mechanism of a bequest. A bequest requires the heir to fulfill certain obligation at the expense of the inheritance received: to transfer a thing or property to another person for ownership or use, to make regular payments for someone else's benefit.

There can be no bequest without a will. The heirs first enter into inheritance rights, and only then execute a bequest at the expense of the assets received.

Here is an example of a bequest. Roman personally owns shares in a Russian company. Given the complexity and peculiarities of the business, he leaves the shares to one heir, his son Alexei. In the same will, Roman can impose on his son the obligation to pay a portion of the market value of such shares to his daughter Catherine (Alexei's sister). In such a case, in order to enforce the will, Alexei must either sell the inherited shares or pay part of their market value using his own funds. Catherine can enforce the bequest through the court in the manner prescribed by law.

There is another mechanism that obliges an heir to transfer the property he received to a third party, which is a testamentary delegation. The testamentary delegation is aimed at achieving  a "good cause”. For example, a testamentary delegation can oblige an heir to donate money to charitable organizations.

100 mln rubles to the moneybox

Since March 2022 lifetime personal foundations may be created in Russia. Entrepreneurs demonstrate their interest to this structure as an alternative way of solving issues of succession and inheritance.

A personal foundation is a non-profit organization which has no shareholders, participants, or unit holders. By transferring assets to the personal foundation, the settlor loses ownership of the assets. The assets become the property of the personal foundation and are managed in accordance with the foundation documents.

Money or property worth at least 100 million roubles must be transferred to a personal foundation in order to establish it. Inheritance foundations (a type of personal foundations which are created by a notary after the death of the founder in accordance with the terms of the will) have no such limits.

The founder can transfer any assets to the personal foundation. However, in case of  transfer of shares in foreign companies and other foreign assets one must consider the limitations provided for by the currency legislation and other regulatory requirements, since the personal foundation is a Russian legal entity and, accordingly, a currency resident of the Russian Federation.

Personal foundations can be useful to a person having property in Russia or willing to participate in charitable projects. For example, a testator may transfer shares and participation interests in Russian companies to a personal foundation and entrust their management to a reliable team of top managers during his lifetime. The top managers will administer the foundation in the interests of, for example, his wife and children, and donate part of the income to socially beneficial purposes (as provided for by the foundation’s documents).

If for some reason the settlor of a personal foundation does not want to transfer a portion of the assets to the personal foundation during his lifetime, he can appoint an heir under a will.

The settlor of the personal foundation should consider what will be the order of payments to beneficiaries, how the management will be carried out, to what extent he will participate in the management. Particular attention should also be paid to the tax implications, which are affected by the tax status of the settlor and others in the structure, the composition of assets and their purpose, the activities of the foundation itself and other factors.

An overseas stash

Until recently, trusts and private foundations in European jurisdictions (e.g., Liechtenstein) were considered a common solution to succession and inheritance issues. However, due to the sanctions, Russians without EU citizenship and residence permits are practically unable to set them up in Europe, and already established structures must either be liquidated or transferred to a manager from another jurisdiction.

Foreign banks and regulators in Western countries often apply restrictions even more broadly than stipulated in the documents. This is why Russians have problems opening accounts in foreign banks, and foreign managers and administrators actually refuse to work with them. If the sanctions regime was applied to a person's assets, it will not be easy for the heirs to obtain them. It is likely to be a time-consuming process.

Of course, trusts and private foundations established in European jurisdictions have been considered the benchmark solution for succession and inheritance issues for such assets as shares in foreign companies, foreign investment portfolios, and in some cases real estate abroad. Quite often such mechanisms are also used for philanthropic purposes. In view of the Western restrictions, the establishment of similar structures in other jurisdictions can be considered, such as a private foundation in the UAE or a trust in Hong Kong.

As in Liechtenstein and in the Anglo-Saxon legal system, a private foundation in the UAE is a separate legal entity, which is administered in accordance with the foundation documents and the wishes of the settlor. However, the practice of establishing private foundations in the UAE is still at an early stage compared to the European one. Therefore, all the subtleties and practical nuances associated with the establishment of such a structure shall be examined and monitored.

A trust in Hong Kong may be an option for those who are familiar with Jersey and Guernsey structures (or have an established trust there, the functioning of which is not effective due to the trustee’s actions). In this case, one may consider replacing the current trustee with a trustee from Hong Kong or another jurisdiction whose law provides for such a possibility.

When comparing possible jurisdictions for establishing a foreign entity, along with local and Russian experts it is advisable to:

- Analyze the law;

- choose a professional manager (trustee);

- find out the procedure and terms of opening bank accounts, the regulatory requirements for their use, the rules of currency control;

- investigate other practical details of setting up a structure.

A comprehensive approach

Finally, here's an example of how the succession planning tools described in this article can be effectively combined.

For example, a testator’s assets include a house in Russia and shares in a foreign holding company. With respect to real estate, he can write a will; with respect to the shares he can transfer them to a private foundation, the terms of which will describe how the assets will be managed and how payments will be made to the beneficiaries.

These tools will help to avoid many problems related to the transfer of assets to successors. Inheritance is affected by many different factors - the composition of assets, the possible change of residence of the testator and related tax issues. In addition, it is nowadays, unfortunately, important to consider possible sanctions and the risk of asset freezing due to the change of ownership by virtue of inheritance or change of beneficiaries in a foreign structure. In this regard, it is better to approach succession planning in a comprehensive manner, moving from simple solutions to more complex ones.

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Nadezhda Ulyanova

Nadezhda Ulyanova

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