Wealth advisors

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.

Next year could be the beginning of the end

First things first, I wish you all have a Happy Christmas and an enjoyable New Year.

Here in London it has been unseasonably mild; we are seeing the first bulb shoots peeking above ground, snowbells in full bloom and yet some of the leaves on the London Planes have not yet fallen; a very odd autumn indeed.

This last year, 2015 in retrospect, I fear, will also be seen as very odd. From the outside nothing has changed. The private client industry remains extremely busy flying around the world going to meetings, money still flows into its coffers and the UHNW families continue to hold their monies in complex and convoluted structures.

However, we are beginning to see new shoots of change and unlike the bulbs and snowdrops I do not like what I see.

At the IBC conference where I was speaking a few weeks ago, I was talking to a professional trustee who was expressing concerns as to how to maintain the privacy and anonymity of her clients given the forthcoming automatic exchange of information across the globe with the introduction of the Common Reporting Standard.

This was the concern of a client of mine as well who has arranged to see me early in January. He was weighing up the advantage of maintaining privacy and anonymity by keeping his homes in the UK in an offshore structure and paying the tax or transferring them into his own name. The truth of the matter is that Governments across the globe are determined to stamp out what they see as tax evasion through the use of offshore structures and care very little about the concerns of UHNW families to preserve anonymity and privacy. These Governments demand transparency and are determined to get it. They want to see for themselves whether tax is payable!

As from 2017 highly sensitive information, which financial institutions across the globe have been at pains to protect, will now have to be freely and automatically exchanged. The identity and address of the settlor and beneficiaries, the value held on their behalf and all transfers made will be obliged to be reported. The private client industry will, in short, no longer be private. There is no hiding and any professional who assists a UHNW family in preserving their anonymity may find themselves being fined along with their clients.

A totally different approach is required and some change of habits. Each UHNW family from whatever part of the world will need to analyse their fears and address them in a different way; do they fear for their physical safety, theft or a mismatch of information as to what is being exchanged and what is disclosed to the local taxing authorities?

I live around the corner from Tony Blair, a public figure who cannot be anonymous. There are four policemen which permanently guard his home twenty four hours a day, whether he and his family are in or not. He cannot remain anonymous so he increases his personal protection.

I also live a stone’s throw from a Saudi princess, not to say I have ever seen her or even know her name, but it is obvious when she is in town. There are at least four cars parked outside her house, most of them bodyguards and chauffeurs in armour plated cars with dark windows. It is also obvious when she is about to leave or arrive, two large white vans are parked outside which are then filled with enormous suitcases. How she ever finds what she wants to wear with so much choice is a mystery.

The issue of theft is also of concern to many. I suspect that many families under the new regime will wish to reduce the number of financial institutions with which they deal, while retaining diversification and will need to review their contracts. They may also want to put in place systems to capture all financial information to ensure that there is little or no slippage. If theft is occurring it needs to be spotted immediately and the financial institution which permits it made liable for it. Similarly every family needs to know precisely what information is being exchanged so that they can declare the same amount in their tax returns.   

Financial institutions looking after the wealth of UHNW families will also need to gear up for the new regime, not only to comply with their reporting obligations but also to avoid being sued by their clients. We have long seen the intention of Governments to make financial institutions to UHNW families their unpaid whistle blowing policemen; reporting on suspicious transactions, carrying out anti-money laundering checks and checking on the identity of their clients. At the same time we have seen little or no increase of terrorists caught or criminals detained. Some may suspect that the real motive behind the anti-money laundering was to obtain information which could lead to an increase of revenue from tax evasion. Whether the case or not, information gathering has now been taken to a new level.

There is no doubt in my mind that the private client industry is set to change and like all changes there are winners and losers. For those ready to embrace the change, I believe there are rich rewards - UHNW families will be looking to renew their contracts with financial institutions that understand their concerns and to restructure their offshore structures to put themselves in the best possible position to combat automatic exchange of information. However, for those insisting on rearranging the deckchairs as the ship goes down, they could face a cruel fate from both the Government as well as clients - which could be very expensive indeed.