Last week I met a client who I will call Tom, for a coffee, I had given him some tax advice some months ago, so I thought our meeting was a follow up on the work we had done but I was wrong.
‘I wanted to meet because I have been reading your notes and wondered whether you may be able to help on a domestic issue which is getting out of hand.' Intrigued, I asked him to continue, ‘As you know I have built a successful business and have 1,245 people working for me. Each employee reports to a manager and each manager reports to my board. Every month we go through the figures of each department and the board responds accordingly. Everyone knows what they need to do and they do it, if they feel they deserve a better deal, they can ask, we always listen, but they may or may not get what they want’.
‘Over the years, I have taken profits and invested them; a fine country home, farm, beautiful furniture, a number of boutique hotels, other hospitality businesses and an investment management company. I have a really good inner Ring of Confidence – as you describe it – a good team of advisers, which meet on a regular basis and update me on all my investments. I am lucky to be still married to my childhood sweetheart, have one fine boy who works with me, but my three daughters have been a disappointment. I have always been generous with my girls; I have provided them with homes, set up an education fund for their children, and financed their husbands in business ventures, but they are envious of their brother’s success working for me, and are feckless. The more I give them, the more they want and if I tell them they cannot have what they want, they complain, cause trouble and I am worried I have made mistakes in the way I brought them up.’
‘My youngest now wants me to take her husband into the business, when I know he is not qualified, my eldest wants me to set up a gallery for her husband to run, and the middle girl and her husband keep racking up fees buying horses to event telling me each year that the next new horse will make their fortune’
I explained to Tom that all families have their problems but for wealthy ones, the problems are magnified. The UK has centuries of experience in managing family fortunes, largely because, unlike civil law, it promotes primogeniture and the preservation of wealth for future generations. This is the reason why country estates have stayed intact (until such time as they had to be sold to pay tax).
Of course, leaving the bulk of the family fortune to only one child was not always well received by the others, in the same way as Tom’s daughters envy the good fortune of their brother. Maintaining family harmony, in the past, was left to trustees. If the family fortune was held in trust, investment decisions, distribution of wealth and succession was then not the responsibility of the head of the family, in the same way that salary increases is not in the sole discretion of the CEO of any business.
I told Tom about some of the families and the trusts I have had the privilege to work with. Numerous family member requests, I have seen turned down by a board of trustees or accepted with conditions, it is not the decision of the settlor along. If a family member wishes to start a business venture for example; the trustees need to see a business case and will decide whether or not to invest according to the viability of the proposition.
‘On what basis do the trustees make their decision?’ Tom asked. ‘In most cases,’ I told him, ‘the founder makes it clear what he wishes to achieve, which I prefer to set out in a binding – but flexible memorandum. Ideally I like to discuss this with all members of the family. In this way they then know what to expect and can adjust their lives accordingly. Many founders want to incentivise their family members, with matching payments for entrepreneurial endeavour, but I have seen this lead to unfair consequences such as for mothers with young children, or for those who work hard but for non-profit organisations, sporting activities or charities. This sort of approach would merely aggravate Tom’s domestic concerns.
‘Do I need to set up my trust abroad?’ Tom asked. ‘it depends’ was my reply’, ‘on how important tax mitigation and privacy is. Now that privacy is compromised by having structures offshore many founders of family fortunes are moving their structures onshore where possible’.
Tom confessed that he had only thought of trusts as being vehicles to avoid tax, and was somewhat confused as to how a trust could be used to give him and his team of advisers not only control, but family harmony.
I peered at Tom through my ByOcular glasses which I like to wear when I am being serious. ‘Trusts have been used by wealthy families to preserve wealth and family harmony for centuries. Tax was not until recently the main reason for setting up trusts, asset protection, control and family harmony were the main drivers. Tom was keen to explore further, so we agreed to work together to scope out his concerns to see whether a family trust could be a solution.
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