Last week I visited Albany; an impressive new development in the Bahamas for the wealthy looking to invest in their future. The team there is focused; with a ‘can do’ attitude! There is a real sense of community and belonging, which makes Albany different from many places in the sun.
For those feeling a twinge of envy, – the Bahamas is not immune from rain – it rained all day Sunday – horizontal rain, so driving in the golf cart gave me no protection from getting soaked! The other days were thankfully spent – under blue skies, on white sands, and in turquoise, aquamarine seas.
I wanted to see for myself how the Bahamas is bearing up under pressure from the OECD to ‘step in line’ with the other member countries.
Bahamas, keen to serve the best interests of its UHNW community, took a stand against the OECD with a bilateral approach to the automatic exchange of information – which means it will only exchange financial information with those countries with which it has an agreement. However, as brave as it was, it now recognises that it cannot afford to be black listed by EU countries and will capitulate to sign the multi-lateral agreement like the other OECD countries.
Ironically, the sooner it recognises its strengths and the reality of the world we are now living in, the better. The Bahamas not only offers a world class place to live for billionaires and multi-millionaires, it is also a favourable place to base the global assets and businesses of the UHNW community. It has excellent professionals, a robust judiciary and is remarkably save, however, its professional trustees also need to be alive to the dangers – and do something about them.
Cem’s adviser Dishang came to see me the day after I came back from Albany. Cem’s trust structure was set up with professional trustees in one of the lesser known offshore jurisdictions two years ago. Last year the trust successfully sold his energy company for many hundreds of millions of dollars.
I asked Dishang how the trustees had coped with the sale of his company. Dishang said ‘Only Cem knows every detail of his company; it is only Cem who could have gotten the best possible price for his company’. Dishang, was quite adamant ‘Cem, has always been in control of his business assets, he tolerates his trustees, but only if they do what he tells them’.
I explained to Dishang that Cem needed to think very carefully about changing his trust ownership structure. His trust was in serious danger of being attacked by the tax authorities in his home country as a sham. Regardless of what the trust documents actually say; it was clear from what Dishang described that Cem de facto had the control of ‘his’ business assets which were ostensibly owned by professional trustees.
To drive home exactly how serious the current situation was, I quoted to Dishang what STEP (Society of Trusts and Estates Practitioner’s) says about sham:
‘The consequences when a trust is construed as a sham are: the court declares that the trust does not exist and has never existed; the funds have always been held by the ‘trustees’ on a resulting trust for the benefit of the settlor, and after the settlor’s death for the benefit of his estate. The settlor, or his estate may become liable to back-tax claims and increased estate taxes. Any funds distributed to other parties (beneficiaries apart from the settlor) have to be clawed back and may have to be repaid by the ‘trustees’ out of their own pocket. Fees received by the ‘trustees’ have to be repaid; the trustees may be sued by those who would otherwise have benefited from the trust if it had not been set aside as a sham; the ‘trustees’ may have to pay their own legal costs and may alsobe ordered to pay the costs of any court action; the reputation of the ’trustees’ may suffer. ‘
The Bahamas, cannot hope to gain a tactical advantage by being out of step with the rest of the world, but it can use its trust knowledge and expertise to see the dangers which are coming and doing what it can now to ensure their trust structures withstands any claim against the settlor for sham. No professional trustee in their right mind would want to get caught in the cross fire between the settlor and its tax authorities with the very real risk of being put out of business. The time to act is now – analyse every trust and ask the question – does the settlor have de facto control – if the answer is yes – do something about it, before something is done about it for you.
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