Last week I was invited to join an Esteemed group of professionals in Pennyhill Park Hotel deep in the Surry countryside. Unfortunately, I was unable to stay for the entire two days, due to an ongoing dispute resolution, which is sapping my time, but I was there to lead the discussion on Family Governance and Family Office.
Carlos De Serpa Pimentel from Appleby in the Cayman Islands was my co-leader. Because the topic is so broad, we decided to limit the discussion to the Pugachev case. Carlos took us through the case to set the scene.
Pugachev, from the outset, wanted to protect his assets from the creditors of the Mezhprom bank. He set up five trusts in New Zealand but it was clear that he did not want his Trustee, which was a Private Trustee Company, to have control.
The line of argument I wanted the group to focus on and discuss was how the Pugachev case should affect our structuring and running of trusts, if at all. In this case Mr Pugachev was Settlor, Protector and Beneficiary, and as Protector he had wide powers. In essence, the Trustee could do nothing without his consent. The Judge held that this made the trust a nominee for Mr Pugachev and that his powers were personal and not fiduciary.
Good corporate governance I proposed hinges on accountability. Trustees were originally accountable with their pocket, having to make good personally any loss to the trust fund. However as trusts offshore became more popular, stronger and stronger indemnity clauses were introduced until now Trustees have very little financial exposure. The role of the Protector is therefore to make Trustees accountable with their office. If a trustee is not performing in the best interests of the beneficiaries it should be removed and replaced.
However, the mere presence of a Protector, instead of being seen as an office of good governance, is now likely to be challenged in the hands of tax authorities with information delivered under CRS. I asked the group what should trustees and Protectors do to maintain good governance, but avoid investigation by tax authorities?
The first response was that a Protector should charge an annual fee for his/her fiduciary services, and the Trustees should keep the Protector fully informed of the assets and circumstances of the beneficiaries. It was admitted that this did not always happen, and there were good and bad Trustees as there were good and bad Protectors.
It was suggested that the role of the Protector should be given to a professional who was independent and neutral. However, this was challenged. On some occasions, the Protector is chosen for his/her special relationship with the beneficiaries and/or the trust assets and is expressly made to be personal and not fiduciary. It was agreed that this of itself would not render the trust a nominee arrangement – far from it.
The question then arose as to whether if the Protector did everything the Settlor wished, would it make him/her a nominee. It was pointed out that, the Settlor is often the best person to know what should/could be done with the trust assets and when and to whom to make distributions.
It was proposed that there should be on record a situation when the Protector deliberately refuses to do what the Settlor wants, but this was criticised. If a refusal was deliberately orchestrated, it would be seen as such, and ignored.
I pointed out that in the manual on trusts and CRS, tax inspectors are required first to check whether the settlor is alive, then to see how substantial the trust is and finally to see whether the trust has a Protector. Then they are told to approach the Trustee to review the manner in which the trust was set up and the powers reserved to the Protector. Finally to calculate how much tax the settlor would have to pay if he/she had not set up a trust and put in a claim with interest and penalties.
The assembled group were agreed that litigation was inevitable and the law in this area would be further defined in particular with regard to Protectors. Clearly having a fully functioning Protector with power to remove the Trustees is an important aspect of good governance, but if this exposes the trust to investigation, maybe the structure should be reviewed to determine what other structure could be put in place, which provides for good governance – without the need for a Protector.
Such a structure I propose should also include a strong constitution, so that any Family Office held in trust has clear guidelines as to what is expected of it and who needs to be appointed and for what purpose. This structure we call a Family Headquarters.
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