End of Year Panic or Procrastination

A few years ago I was advising a very wealthy family, who I will call Abdullah, about wealth structuring and succession. He was in good health as was his wife and children, and so he wanted to take his time to get his structure right. I told him to start with a simple structure and then amend it as circumstances changed. He procrastinated for several years as he explored and researched the ideal arrangement for himself and his family.

His wife’s uncle Mohammed treated Abdullah like a son and had brought him into his business together with his own two sons. In due course, Abdullah left his uncle in law’s business to set up on his own, because there was too much friction between Abdullah and his cousins in law. Having left his uncle in law’s business Mohammed went from strength to strength keeping in close touch with Mohammed as he continued to learn how to manage and run a business.

Much to everyone’s surprise, Mohammed had a surprise heart attack and died. Abdullah was upset, but did not have any expectations of an inheritance for himself, so after he had grieved and paid his respects went back to work.

Unbeknown to Abdullah however, his cousins in law, were very disappointed with the size of their father’s estate compared to what they perceived to be the extent of Abdullah’s estate and started to investigate. They soon came to believe that Abdullah had defrauded his uncle in law over many years and wanted their fair share of his estate. They made a claim for fraud in New York and then took the judgement to Cayman Islands where his world-wide assets were held. Here the court froze Abdullah’s assets and world-wide litigation –  began.  It took Abdullah just under three years to recover his assets, which were then subject to a relatively small payment to his cousins’ in law; dwarfed by huge legal costs, and a family divided forever.

Ironically, if Abdullah had put his Cayman holding companies into trust when I first advised him to do so, it is unlikely that his cousins in law would have been able to bring a claim against his assets.

By making a trust Abdullah would have made a gift of his assets to his trustee and therefore those assets would be and unavailable for creditors; outside his estate. Technically the assets would no longer be the assets of Abdullah. The trustee could be a company created by him to act as a trustee- a private trustee company, so he could stay, albeit indirectly, in control of his assets.

However, Cayman does not wish to attract unscrupulous credit dodgers and therefore has, like many other jurisdictions – such as the Bahamas, built in an intention provision to any person setting up a trust in Cayman. If Abdullah had set up a trust, what was his intention for doing so – was it to dodge his legitimate creditors? Within six years of setting up the trust, the gift could therefore be set aside and the assets returned to Abdullah and available for creditors if they could prove this intention. There are many other jurisdictions where the time limit is two years, rather than six.

As advisor to Mohammed I knew that in setting up a trust he was not be trying to dodge his creditors. He did not believe he had any legitimate creditors. He simply wanted to preserve and protect his assets for his children and against unwanted litigation either from within his close family following his death, or from unrelated third parties. It had never crossed his mind that a claim could come from his wife’s side of the family, and during his lifetime.

Setting up a trust to protect and preserve the family wealth must therefore be viewed in the way most people view insurance. Insurance is not a superstitious activity to ward off unexpected accidents, it is to provide protection should something bad happen which was not expected. However, setting up a trust is doing something much more than can be achieved through insurance. For insurance to be effective Abdullah’s claim had to be something which could have been anticipated; an insurable risk. However, Abdullah is unlikely to have included a claim made by his cousins in law as an insurable risk, because this possibility was not anticipated and therefore it unlikely be an insurable risk.

Setting up a trust, is therefore a sensible precaution to take if you have wealth likely to exceed the needs of your immediate family, but it needs to be done with care, and by a professional who has had experience of what could happen beyond that which may happen.

If you would like to book an appointment with Caroline or any of her team she can be contacted through svetlana@garnhamfos.com or call 020 374 7423