At the Marcus Evans’ Real Estate Investors Summit at the Chelsea Harbour Hotel recently I spent some time talking to Mark (not his real name). He is the son of a wealthy family tasked with investing in real estate for his family office. Mark expressed frustration ‘I struggle to find Family Offices to be co-owners for big investment deals; they are just so chaotic and disorganized’.
I asked why he thought this was, ‘Most family offices are owned by passive trustees offshore which do not give the family office any direction! They talk a lot about co-investing, but would prefer not to take any risk – so they do nothing!’
This does not come as a surprise.
As I mentioned last week in my blog ‘When the music stops’ most offshore structures were set up years ago and unless they are reviewed, are unlikely to survive an investigation from the world’s tax authorities. The Trust and Corporate Service providers which are currently holding the assets in trust, will get caught in the cross fire. Most however have recognised the danger and are reviewing the structures of clients most at risk to mitigate this threat.
High on their to do list, is to review the ‘non-interference’ and ‘total indemnity’ clauses.
Tax authorities are looking to undermine trust structures using information under the Automatic Exchange of Information introduced this year, so that they can tax the underlying assets as if they were still owned by the settlor. Last week, I referred to the case of Bartlett v Barclays Bank. Professional trustees have a high duty of care to monitor the investments they own – so they prefer to avoid this with extensive ‘non-interference’ and ‘indemnity’ clauses.
However, these trusts are now facing a risk of a different kind.
Tax authorities will use the presence of these clauses – to argue that the ‘trust’ arrangement was nothing more than a sham, or nominee arrangement. Clearly, with negligible risk adopted by the trustee, was there the necessary intention to form a trust.
In a structure, I put in place some months ago, I set up a ‘Special Purpose Trustee’ (SPT) managed and controlled (from a zero-tax jurisdiction) by the family and its advisers, to which we transferred the family trusts. The existing Trust and Company Service provider continued to administer the trustees, but under contract. In the documentation, I inserted a positive obligation on the Trustee, which was by now the SPT, to carry out regular asset audits and in particular in relation to the family office which managed the family trusts’ investments.
I was made a non-executive officer of the SPT, and appointed an experienced corporate finance professional, James, to review the performance of the family office and report back to the executive board of the SPT. The report made interesting reading. The return on investment of running the Family Office was negative.
The family were shocked. After a meeting held in Guernsey, I asked James, to devise an investment strategy in line with the family’s binding Family Constitution, and to put in place some goals and targets. James came back with a clear strategy, a list of investments which needed to be sold, and where further investment was required.
The CIO of their family office was then given a year to make the changes and to achieve the modest targets set by James, which if achieved, would more than compensate for the cost of James, the revised structure, and the report.
Excited by this success, the board then looked at the other asset classes held by the trust, including the art collection held in store, the property portfolio and the wine cellar. I was again tasked with appointing a professional to carry out an asset audit and to report back on what strategy to follow, where to take profits and where to reinvest. We are awaiting the outcomes of these reports.
In today’s digital age, with costs of compliance rising exponentially and the threat of litigation around the corner, many private banks and wealth managers are looking at ways to cut corners, rather than innovative ways to cut costs – which I will address next week.
In my opinion, we need to go back to basics to find solutions.
The Trust and Corporate Service providers (‘T&CSps’) with whom I am working are carrying out a thorough review of all structures most vulnerable to attack, and to impose a positive obligation to carry out an asset audit to make sure that suitable benefits are being derived from the costs incurred. This covers the two main areas in which the T&CSps are at most risk.
Offshore trusts and their assets are in the firing line, but now is not the time to throw in the towel. It is an opportunity to give the world’s wealthiest a world class service to make their assets work for them, rather than leaving them in danger of an investigation or worse.
If you would like to find out more, you can buy my book ‘When you are Super Rich who can you Trust?’ or ‘Uncovering Secrets; How to win Business from Private Clients’ from Amazon on www.garnhamfos.com or call me on 020 3740 7422 or on my mobile 0799 188 288.