Paolo Panico: Today’s trusts and corporate services have a promising future

Paolo Panico, Chairman of STEP Europe, examines the impact of regulatory, economic and geopolitical challenges on the trust landscape and talks about the evolving role of Trust and Estate Practitioners.

The EU’s pursuit of transparency involves introducing new regulations at a breakneck pace. How does this pursuit create bottlenecks for trust and estate planning professionals, and what adaptations are they making to comply with the evolving regulatory landscape?

An ever-increasing amount of regulatory requirements and the associated costs of compliance are some of the most relevant challenges to the professionals in our industry. To be sure, we are all in favour of a robust system for effectively fighting money laundering, terrorist financing and tax evasion. Nevertheless, in some cases the overlapping layers of regulation cause such an increase in the workload that it becomes very difficult to offer high-quality services at competitive prices. This has led to some degree of consolidation in the industry and means that small boutique firms are struggling. Anybody who has tried to open a bank account in the name of a trust or its underlying company knows well what I am alluding to! STEP is fully aware of this problem and attempts to advocate meaningful, proportionate actions in the forums where it interacts with the relevant EU and international authorities.

According to the OCED International Migration Database, the latest available data indicates a steady increase in the cross-border movement of people in the past decade. What complexities and opportunities does this create for the industry?

Families, and particularly high-net-worth ones, are increasingly mobile. The main consequence is an increased degree of complexity in their estate planning endeavours. A professional advising a multi-jurisdictional family must be conversant with the legislation of various jurisdictions and, more significantly, able to rely on a network of trusted advisors in all the relevant countries and territories. Membership of STEP, a worldwide association with more than 21,000 members in 96 countries, can be an opportunity to develop relationships with like-minded and equally competent professionals all over the world.

At the same time, modern families are often characterised by complexity. The so-called blended families include a variety of dynamics, from non-biological relationships to same-sex couples. What are the key complexities and constraints that modern families and their advisors face when it comes to succession planning, and how do trusts address these challenges?

Modern families are treated differently in different jurisdictions, depending on the prevailing cultural, social and religious values. For example, within the EU, some countries do not allow same-sex couples to adopt children and the rules on assisted conception vary across jurisdictions. Beyond these cases, many families may result from subsequent marriages and divorces. An additional element of complexity concerns the forced heirship rules, which prevail in most civil law jurisdictions. Trusts can be a very useful tool with which to arrange one’s estate in the context of a complex family arrangement. In some jurisdictions, such as Cyprus, as far as the International Trust Law is concerned, “firewall provisions” exist, effectively protecting the settlor’s wishes from claims that may be brought by his “forced heirs” after his death.

The realm of technology has also given birth to a new asset class – digital assets – which brings both opportunities and risks in wealth transfer and preservation. What happens to digital assets when someone passes or is incapacitated and how should practitioners handle these assets in estate planning and administration?

Everybody owns digital assets, from the pictures on our smartphones to our PayPal accounts or, for some of us, our wallets of cryptocurrencies. A new area of law is developing concerning the treatment of these new assets and particularly the inclusion of such assets in a deceased’s estate. STEP has decided to take a proactive role in thought leadership in this area, in the form of a special interest group that includes world leaders in the topic and has produced publications and a short video as part of its “Protect Your Digital Memories” campaign, for which STEP received the Association Excellence gold award on November 3, 2023.

Europe is currently experiencing record levels of inflation, coupled with geopolitical uncertainty due to ongoing conflicts. What are the main effects of this turbulent environment on the industry?

Uncertainty is the main element characterising our times, from both an economic and a geopolitical perspective. On the one hand, we are facing rising inflation and declining industrial production in Europe. On the other hand, worrying conflicts are escalating between Russia and Ukraine as well as between Israel and Hamas, with potential repercussions across the Middle East. These are, incidentally, two of the main markets for Cyprus’ private client industry. As became apparent during COVID-19, in times of uncertainty people seek legal solutions that can guarantee increased security. Trusts are certainly a good example as they allow settlors to determine what will happen to their assets if something unexpected suddenly happens to them.

Following the above how does the maxim “In the midst of every crisis lies great opportunity” apply to these challenging times?

Russia’s military action in Ukraine has caused a significant change to one of the traditional markets for Cyprus professionals. Some activities and clients have become “off-limits” because of the sanctions meted out by the EU as well as by the UK and the US (even though these should not be directly applicable in EU member states). That does not mean that all business with a Russian connection has disappeared. On the contrary, new business opportunities have arisen, mainly with new resident individuals. At the same time, Cyprus appears to be exercising increased attractiveness for clients in the Middle East, from both Israel and Lebanon. In the book Trust Laws in Cyprus: An International Perspective, which I edited with the support of STEP Cyprus, I suggest that a Cyprus international trust might be structured in such a way as to meet the conditions of a Wakf, i.e. a trust complying with the principles of sharia law and potentially appealing to Muslim families. Of course, I am not recommending that Cyprus should aim to become an Islamic finance hub but this might be a niche market worth considering to diversify the island’s international client base.

With the ever-changing landscape in the trust and estate planning industry, how do you envision the role of professionals evolving in the coming years? What new skills, knowledge or competencies will become increasingly important for practitioners?

Our society and, as a result, our market is becoming increasingly complex. There are at least three degrees of complexity that appear to be growing over time. First, regulatory complexity due to almost unstoppable legislative and regulatory activity, mainly in the fields of transparency and AML. Then, geopolitical complexity, as a result of the increased mobility of high-net-worth families and, finally, tax complexity, emanating from increasingly complex international tax rules that aim at reducing the scope for aggressive tax planning but, in fact, have created an overly complex framework even in countries that traditionally had reasonably simple tax systems – this degree of complexity is more likely to increase than to go down over time.

To cope with this environment, private client professionals must have very solid foundations in at least one area of practice, be it tax, trust and corporate law, or even digital assets. It is an inevitable starting point for a successful professional career. Moreover, since nobody can be expected to master with equal confidence all the elements that are relevant to a present-day estate planning exercise, they have to be connected with a reliable network of colleagues both domestically and internationally. To this effect, Cyprus appears to be well-positioned because of its geographic location, its legal system and its natural tendency towards internationalisation.

Looking ahead, what trends and developments do you foresee for the trust and estate-planning environment in the future?

One business model that has definitively disappeared – and is unlikely to come back – often took the form of low-quality arrangements for clients seeking ways to keep their assets beyond the reach of any third parties. That model did not require particularly sophisticated skills, as clients would mainly look for standard and cheap solutions. Today’s trusts and corporate services have a promising future but the current framework appears to indicate that the key to success is quality, which in our industry means very high standards of professionalism and integrity. STEP, with its ambition to represent the “golden label” of private client professionals, should be the first port of call for both clients and professionals. Clients should be able to rely on STEP professionals because the Association consists of the best practitioners in their fields. Young professionals may find in STEP an amazing educational offer, both in common law, which has become a consolidated point of strength of the Association, and, as of late, in civil law. An educational programme has been developed in partnership with the International University of Monaco and is an alternative to the traditional STEP Diploma for young professionals who seek a larger exposure to civil legal systems. I am proud to be a director of this course, which also relies also on the support of STEP Cyprus in the person of its Chairwoman, Stella Kammitsi, who is one of the lecturers.

This interview first appeared in the November edition of GOLD magazine. Click here to view it.