Celebrity death ‘spike’

Allegedly there has been a celebrity death spike; Ronnie Corbett, Prince and Bowie to name but three. After the unexpected death of a celebrity there is a period of mourning; a sense of remorse that the deceased, with whom they have become so familiar, will never be seen again.

As someone who has been in the death and taxes business for most of my working career, it never ceases to surprise me how little attention is paid to the inevitability of death. My mother lived through the war in Holland surrounded by death and starvation; I asked her what it was like. Her response was ‘one never sees people die, they disappear quietly into their own homes and are just not seen again’.

We have a strange attitude towards death in our Western world. As a child I was sometimes persuaded to engage in a game of cowboys and Indians which I did not enjoy ‘bang, bang your dead’ and you were then expected to die in a realistic manner, as seen on TV. Things have not much changed. We are all immune to death. It is on the news every day, bombing and natural disasters and we enjoy it as part of our entertainment, whether fictional or documentaries. We are so exposed to it we are not aware of it. And then little Ronnie dies and we are shocked. He is supposed to laugh and pop up again – but we know he won’t.

Just as nothing prepares us for being a parent, nothing prepares us for death. Religion is of little practical help. Hell and brimstone would appear to be a human ploy to fill our churches and pay for the clergy, but it does little to inform us how to live our everyday lives, how to bring up our children or how to prepare for death

What is death even? Seemingly our body becomes ‘lifeless’, like a musical instrument which has been discarded by the musician and not required in the orchestra. We fictionalise death just as we would prefer to caricature it so that we can ignore it – until someone we know dies – such as a celebrity, friend or family relative and then we are shocked and saddened – until we can forget about it again.

Beneath the everyday veneer of an acceptance of death, in reality we are scared of it; we put off making plans superstitious that the grim reaper will come once we are ‘ready for him’. So rather than make arrangements should death pop up sooner than expected most of us prefer to put our head in the sand hoping it will go away.

Succession is an art and planning a skill. It cannot be learned from a book and must be taken very seriously. Succession is the distribution of the fruits of a lifetime to nearest and dearest, at a time when you are not there to ensure things are done properly. Your estate planner should therefore be the best money can buy; it is not something to do on the cheap.

Last week John showed me a draft of his Will. He and his wife Janet had taken local advice, but he was not convinced it was what he wanted, but could not put his finger on why.

Under the drafts prepared for them each left their estate to the survivor in trust as executor and trustee to distribute as they considered best. This is a very commendable plan for a married couple who have not been married before and do not have children by a former partner. In the case of John and Janet however, they had both been married before and both had children from former relationships. If they had executed these Wills and John had died first, Janet his wife would be able to benefit her children to the exclusion of his children from John’s estate. He was furious, that was certainly not what he wanted.

Estate planning should also take care to minimize family disputes. Josh also came to see me last week; he has a trust in Guernsey which holds many millions of pounds. Under the trust deed all three of his children were mentioned, but he was adamant that he wanted only two of his three children to benefit. However there was not power in the trust deed to remove his third child, Ben, as a beneficiary. He was fearful that following his death Ben would litigate against the trustees for a share. After some considerable discussion Josh decided that he could minimize the risk of a claim from Ben at the same time as save tax if he terminated the trust, brought the assets onshore and under his control.

Josh was so pleased. ‘The last thing I thought I would do was to terminate the trust. It had been engrained into me that it was a good for tax reasons, but as soon as I realized I could plan in other ways and be certain that Ben would not benefit I was much happier,’ he said.

If you would like to meet with me or any one of our team, whether for tax or estate planning, dispute resolution, matrimonial or investment strategy simply email or call 0203 740 7423 to book an appointment.

Team players

I had a meeting last week with an old friend who works primarily in the Middle East, Lama. She has a client Farah who is the widow of a very wealthy businessman that died six months ago. Farah’s husband left a substantial family trust based in Jersey and five properties in London which he held in his own name. The Trustee was a professional who had been given a Letter of Wishes as to what it should do with the trust fund. It had been drafted by a reputable firm of lawyers and in it the trustees were expected to make ‘reasonable provision for the siblings’. Already the siblings were beginning to mutter between themselves and with the trustee as to what this could mean for them.

In addition to this trust he had left five substantial properties which he owned personally, having been encouraged to de-envelop last year to avoid ATED by his lawyer.

Farah was at a loss to know where to start. She had lost confidence in the trustees who seemed incapable of getting to grips with her siblings in law and were delaying in responding without an opinion from a QC.  With regard to the lawyers, which her husband had been using, she was also furious that they had encouraged him to de-envelope the five London properties to avoid paying the annual tax on enveloped dwellings without any consideration as to the Inheritance Tax consequences. She was now facing an inheritance tax bill of £3 million.

Farah asked Lama to fix a meeting with our Family Office, because she wanted to know what to do. She wanted to sue her lawyers and remove the trustee, but did not know how she should replace them.

After spending the first few hours getting to know her concerns, the family culture and background, I started by telling her that there was no easy solution. She needed to understand the law, her options and the consequences before choosing what and who she needed by way of professional guidance.

The most pressing need was to get a Grant of Probate for the five homes in London. Farah’s husband had not left a Will and as already mentioned he owned them personally. Under the Intestacy rules Farah was left with an outright gift of £250,000 and half of the remaining value (of around £8m) subject to inheritance tax.

I told her that she and her children could enter into a Deed of Variation and explained what was needed, including a probate lawyers to prepare the necessary forms and the Deed; I explained the process.

She then needed to put a halt to the dispute between the trustees and her siblings in law before it got out of control. I suggested she meet a member of our team who could advise her on what was needed to put a swift end to the dispute without incurring substantial professional fees and it made her feel delighted.

Next on our agenda was to address her right as Protector to remove the Trustee. I pointed out to her that her duty was fiduciary which meant that she could be made liable for any loss to the trust personally. Given that her siblings in law were beginning to show their appetite for a fight, she needed to address this exposure seriously.

I explained that she had the option of setting up a private trustee company which could be owned by a Bahamas Executive Entity and then put in place some good governance principles which a member of our team could guide her on the detail of this. She could continue to use her existing trustees to administer the trust, but they would not then make the decisions which could then be left to the board. She could possibly use the office as a director or member of the board to encourage one or more of her siblings in law to take a less aggressive stance and work with the trust not against it.

As we came to the end of a very interesting and fruitful discussion, she commented on how weary travel had become without a European passport. This of course is an area I advise on frequently and we are in the process of choosing a suitable EU country of which she can become citizen.

They say it is not what you know but who you know – which is true. However for many the difficulty is finding a Family Office at the hub of the wheel, that not only has the right connections but can  ensure that the correct contract is put in place to get the most out of them.

Get real

In this new era of data collection and automatic exchange of information UHNW individuals can no longer hide their assets in dark corners hoping they will not be found. However, not all wealthy families set up offshore structures driven by greed.

Alice lives in an apartment with her son Michael and his two children. The apartment was put into an offshore structure by Alice's late husband Giovanni, who as a Jew living in continental Europe remembers the atrocities of Nazi invasion and the importance of secrecy. If Giovanni's father had not squirreled the family's wealth into Switzerland during the war the family would have been left with nothing. As it was they had been able to keep some priceless art and a small fortune, which remained in Switzerland.

Giovanni bought the apartment in which his wife and son now live more than twenty years ago through a trust and company structure based in Jersey. Over the years the trust had been tweaked. Fifteen years ago Giovanni, anxious that the trustees had too much power over his loved ones and family wealth, restricted their powers, such that they could not dispose of the assets in the trust without the consent of a 'Protector'. He appointed a prominent lawyer (Alberto in Switzerland) as the trust Protector, but since his death twelve years ago Alice has not heard from Alberto and does not know where he was or how to contact him.

The trustees have not had to do much for their annual fee, and as far as Alice was concerned the trust was protection for her and her family, but dormant.

Alice like so many others was taught the value of privacy and for her husband it was paramount. He witnessed so much needless suffering due to religious ancestry and the loss of fortunes by those foolish enough to let information fall into the wrong hands.

For Giovanni his desire for privacy had little to do with not wanting to pay tax, he simply did not want his family wealth confiscated. Non-payment of tax was an added benefit of paying to keep wealth in an offshore trust and company structure. However Alice appreciates that tax laws have now changed and non-disclosure is not an option worth pursuing.

Over the last few years Alice has become increasingly distressed, not only does she have to pay the administration fee but in addition the Annual Tax on Enveloped Dwellings which is rising steeply year on year. She is aware that she needs to dismantle this structure, but was reticent to do so without an independent opinion.

For her, everyone has had their snout in her trough and she wants now to clearly understand her options and how to plan. Firstly I needed to talk to her about her concerns and priorities and allay any misunderstandings she has or expectations as to who was likely to do what. We settled on the following.

She needs to:

  • plan for her succession; Michael was a responsible father so it made sense for her to separate her apartment into two leases, one for her and one for her son and family
  • do things in the right order – two years ago one family were advised to continue to own their home through an offshore trust and company structure, but for the company to hold the UK home as a nominee. This family now faces an immediate and substantial inheritance tax charge because the trust now holds a UK situs asset.
  • understand that her offshore trustees could not dispose of any trust asset without the consent of the Protector, Alberto.
  • understand that her trustees would not go out of their way to track down Alberto. They may have grown fat on trust and company administration but this would not incentivize them to track down Alberto who would bring this structure and their fees to an end
  • decide how complicated she wants her structure to be, and has decided not to take out a mortgage or life insurance.

Once we had worked out a plan, Alice has decided that she wants to continue to use her advisers to implement it, confident that the plan is in her best interests.

There are many people like Alice. Over the years they have paid good money to advisers and professional administrators only to find that as the landscape changed, so this money has produced no value.

Alice was exhausted following advice blindly. With the explosion of information she wanted to clearly understand her options and anything she did not understand she wanted explained to her. This is why she had sought out independent, impartial advice from me.

With a plan Alice feels confident to instruct her existing advisers, knowing that she was in control of her wealth and circumstances. She also knows what is needed to done before 1 April, not least for her to track down Alberto immediately without whose consent nothing would get done.

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.