What a nightmare

Everyone who has a trust offshore should seriously consider carrying out a full audit, not only for any breaches of tax reporting but also for who will be disclosing information in 2017 to the tax authorities. The person orchestrating or doing the audit should be independent so that an unbiased opinion is provided on which the family can decide what it should do.

Without a full audit and changes made, financial information could be flying across the globe with little or no protection from investigative journalists – or criminals who must be delighted to see that financial institutions must now disclose information about their clients without having to pay for it or steal it.

What started out as a sub section of obscure US legislation may turn into a nightmare for many international wealthy families. Within the US Hiring Incentive to Restore Employment Act was the US Foreign Account Tax Compliant Act, more commonly known as FATCA, which obliges reporting of financial information and the automatic exchange to all interested countries. This has been picked up and developed by the Organisation Economic Co-operation and Development with the G20 countries and shaped into the Standard Automatic Exchange of Financial Information in Tax Matters known as the Common Reporting Standard (CRS).

What does it all mean? Let’s take Alexander as an example. He is the settlor of a substantial trust in Jersey which holds his investments, properties and his ongoing exporting and importing business for himself, his wife and children. The trustee of the trust is the professional arm of a significant international trust company ‘XYP Trust Company’ and his solicitor James, resident in the UK, is the protector. Because XYP Trust Company is treated as a ‘Reporting Financial Institution’ (FI) under the new CRS rules it has an obligation to report to Jersey all people who have an interest in the trust and are resident of a Common Reporting Standard country. So XYP Trust Company will be obliged to disclose the interests of Alexander, his wife and any child who receives a benefit as well as details about James. These people are said to have a ‘Reporting Account’.

Mr Chang also has a trust in Jersey, but his trust is a company which he formed ‘MTC Trust Company’ to be the trustee of his investments and properties for his wife and children. The shares are owned by a Bahamas Executive Entity ‘MTC EE’ on which there is a board of three Martha, Alan and Geoff. Martha is resident in the UK, but Alan and Geoff are resident in Jersey.

MTC Trust Company is not treated as a Financial Institution so it does not have a reporting requirement other than to give the details of Mr Chang, his wife and any child which receives a benefit as well as the board members.

Mr Chang’s trust is better protected than that of Alexander because he has more control over it and the financial institutions with which it is contracted.

What needs to be reported to the local authority by the financial institutions are the name, address, tax identity, date and place of birth, amount of interest and any change in the interest over the previous year. Reports for the previous year will start in 2017, but some may date back to interests in 2015. This information is given no guarantee that it will not get into the wrong hands.

Then there is the added difficulty as to the value of the interest, taxing authorities will be keen to investigate any mismatch of information between what is reported under the reporting and what is in the tax returns.

The impact of this legislation on the lives of wealthy families has yet to be seen, but given the powers of HMRC and its determination to stamp out tax evasion and to bring monies in shady places into the light, I can only begin to imagine the nightmares of many families post 2017. If settlors and beneficiaries want to prepare for what I can see as dangerous waters ahead, they need to review their trust structure, with the following questions in mind:

  • Which financial institutions will have to report and where is this information likely to go?
  • Is there an up to date record of all the assets owned by the trusts?
  • Is there an up to date record of mortgages and debts of the trust?
  • Do contracts with financial institutions need to be changed so as to ensure they disclose to all interested parties what thy disclose to their local authority?
  • If the Protector is resident in a country such as the UK, will their controlling power make the trust resident in the UK?
  • Should the Protector have some form of limited liability protection?
  • What are the benefits being received by one or more parties?

Alexander may decide to replace James his Protector and WYP Trust Company with a Private Trustee Company owned by a Bahamas Executive Entity with a board of three or four. This will give the Protectors much greater protection and reduce the risk of the trust being treated as resident in the UK.

Never before has the record keeping of trusts been so important. From my experience some trusts are woefully lacking in their record keeping. I was acting for one family with substantial assets held in trust which they wanted to move to a different jurisdiction. It took two years to document properly all its assets, before the transfer could be made. Given that reporting is expected to be made in 2017 trustees should start the process now, because by 2017 it could be too late – financial institutions could then be facing penalties for breach of their obligation to report.

The impact of this life changing legislation is only now beginning to be understood and families need to be proactive, because being reactive is no longer the sensible option.