One of the topics on the Big Questions last Sunday on which I was invited to speak, was death. Most of us are ,however, so busy living that we give scant regard to death. Only when it happens to someone else, like a parent, friend or child, or a doctor gives you a health scare that we give it any thought and to plan then, maybe too late!
One gentleman in the audience spoke of inheriting sufficient monies to be able to retire, and that he had made gifts to his children to buy their first homes. For him giving large chunks of money to the next generation was not of concern, he just wanted to survive a further seven years so that his kids could inherit tax free.
The majority of inheritance tax payable in the UK is on estates where the deceased did not anticipate dying until it was too late or resented making gifts to their children while they were still alive and able to enjoy it.
For those with significant wealth the prospect of deciding to whom and how to leave it is a complex puzzle. At what age should a child inherit without conditions? Should they put monies aside in trust for the education of the grandchildren? How, if a child has more than enough wealth never to work, can a father motivate his children to be enterprising? If one child is in business and another running a charity for victims of sex slavery, is it fair that the child in business gets more? Is it right for one child to inherit the business and farm to keep it intact and the others get nothing?
In civil law countries, Napoleon resented the build-up of wealth and power in the hands of the eldest child, and decreed that all children should inherit equally as their right. In many cases this resulted in the selling of family companies and the division of agricultural land into small parcels which proved effective in dissipating the wealth in less than three generations. For founders of businesses keen to benefit more than just the first few generations and to keep the business or farm intact, a trust vehicle was a perfect solution.
However, not all founders of fortunes want to use trusts to create a dynasty. A client of mine from one of the wealthiest families in India, Razak, took the decision that his children should inherit outright and equally the moment he and his wife died. The fact that two of his four children were passionate about horse racing and would no doubt squander their inheritance – was of little or no concern to him.
He nevertheless set up a trust during his lifetime, and he gave the following reasons:
‘I want to protect my wealth from opportunistic creditors and greedy governments during my lifetime for which the trust is a perfect instrument, but on my death I do not want my assets run by professionals and I do not want to give reasons for my children to fight and fall out.’
Razak then set up a trust to hold his business interests for his children under which all the siblings could benefit, but only from the income, not the capital. One of his sons, Asim, worked in the business, but his brother and two sisters did not. They resented their brother getting a big salary from ‘their’ business and started litigation to break the trust. The trust deed was not well worded and gave ample opportunity for his siblings to attack it. The dispute lasted nearly ten years and was hugely expensive in time and professional fees. The irony was that as the family fought the value of the business declined until it was sufficiently low for Asim to buy it with the assistance of a third party investor.
Asim has been working extremely hard ever since to build it to its former glory of his father's day. This led to even greater resentment among his siblings and they severed all connections.
A trust, whether to protect assets or to create a dynasty is an excellent tool, but it must be worded well and include strong, robust family governance processes. In this new era of automatic exchange of financial information, a trust now needs more than a Protector, Reserved Powers and a Letter of Wishes if it is to survive.
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