To say that someone is so rich that their grandchildren will be set for life rings true only if proper attention has been paid to how to transfer wealth from one generation to the next.
There aren’t that many options in Ukraine to do this simply because legislation doesn’t exist to regulate estate management or have trusts funds for descendents of rich people to tap once they turn 18 and decide to enroll in college.
So high net worth individuals are turning to offshore tax havens, where most of their wealth is registered anyway, to ensure their successors are financially secure by establishing trusts (in common law countries) or private foundations (in civil law countries).
Vadim Medvedev, an associate at Avellum Partners, said interest in succession planning “is rising, which is caused by the fact that Ukrainian businesses are getting older, the beneficiary owners of business structures are getting older and they’re starting to understand they won’t live forever and are starting to think what they’re going to do with their assets once they’re gone.”
Although Medvedev said the process is only beginning in Ukraine. “In Russia it started a little bit earlier, like a couple of years ago; now it’s very popular with Russian businessmen – in Ukraine this has started and is growing,” Medvedev told the Kyiv Post.
But Ukrainians and Russians are wary of giving up partial control over their assets, say to a trustee or another entity, and thus opt for specific instruments, the lawyer said.
Some choose structures that allow their children to replace them at the head of a company when the time is right via a direct share transfer, or a vehicle that doesn’t require a share transfer at all.
This can be done by setting up a private foundation in a dependable repository of riches, like the Isle of Man or the Channel Islands, where dividends and capital gains are exempted from income tax, to own a personal holding company. The foundation is a legal person that has no legal owners with the assets of the foundation owned by the foundation itself, and the individual is formally just a beneficial owner who is entitled to the benefits of assets held by the foundation.
“And when your son is 30, you appoint him to the board, and after that he is the sole person who is responsible for the company,” said Medvedev. “There’s no formal succession, you just change the person who controls the company … it’s very convenient because you don’t need wills.“
In addition to shares in companies earmarked for succession, Medvedev said cash and tradable securities are also placed in trusts for offspring.
Other times, wealthy individuals who are less sure what will happen to them in the near future will set up trusts, usually in an offshore financial center, for their children. Typically, these come with specific instructions so the offspring don’t waste all the money before turning 30 and receive a high-caliber education in the West.
But Ukrainian tax law doesn’t recognize inheritance or assets received from an estate located offshore, so recipients in Ukraine could end up paying 70 percent tax on what is treated as ordinary income.
Thus Medvedev says to remit cash from private foundations or estates abroad, it must be done through offshore companies and later distributed as dividends to children to be taxed only 5 percent.
Medvedev said insurance companies are also used because certain polices allow children who reach a certain age to access money for specific purposes like getting an education.
In Ukraine, the tax code doesn’t charge direct relatives like a spouse, child or parent for inheriting something like an apartment. The rate is 5 percent for non-relatives, and 15 percent if something is inherited from a non-Ukrainian resident.
The lawyer said he’s also noticed that upwardly mobile Ukrainians aged between 25 and 40 are also starting to think about their retirement and leaving something behind for future generations.
“Now they have a good salary, they have funds on which to live and they see the state pension is miserable,” said Medvedev.
Usually, such people start off with life insurance policies that mature at a certain age, and putting money in private retirement funds. “Next come bank deposits,” said Medvedev.
Some money received from insurance policies is tax exempt, while others in the best case scenario have a 5 percent rate on net profit for insurance policies.
But it’s difficult for Ukrainians who have only Ukrainian assets to invest abroad, which often requires a certificate from the central bank, and in some cases, a security service background check before permission is granted.
“If all your money is in Ukraine, it’s extremely difficult to get it abroad,” said Medvedev.
That’s why, according to the lawyer, people who can get money to Switzerland or elsewhere, even $10,000 or $50,000 onto an account, do so.
And for those who don’t, Medvedev advised to start thinking about retirement “because the Pension Fund is not comparable to what you’re contributing to it.“
Kyiv Post editor Mark Rachkevych can be reached at [email protected].
