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.

Jerry Hall and Rupert Murdoch

Jerry Hall 59, and Rupert Murdoch 84, have announced their engagement after a four month whirlwind romance.

The couple got engaged in Los Angeles where they were attending the Golden Globe awards. If their history of long marriages continues, Ms Hall is likely to be the last Mrs Murdoch. The empire and his colourful life have all the ‘hall’ marks of a drama waiting to happen.

Ms Hall the former supermodel has four children with her former partner Sir Mick Jaggar and Mr Murdoch has six.

For Mr Murdoch this is his fourth marriage. His first marriage was to Australian Patricia Booker with whom he had one daughter Prudence who is now 57. Their marriage lasted for eleven years and ended in divorce in 1967. She walked away with a settlement of $1.2 billion.

He then married Glasgow-born journalist Anna Tory with whom he had three children, Elisabeth 47, Lachlan 44 and James 43. Lachlan was reinstated into the business empire after ten years and is now co-executive chairman of 21st Century Fox.  His brother is CEO of 21st Century Fox. He was Chairman of the group’s holding company News Group Newspapers when the news of the phone hacking scandal broke. All three children have the business acumen of their father, but only James and Lachlan work in his empire, News Corporation which owns The Sun, the Wall Street Journal and Fox Entertainment Group. He was married to Ms Tory for 32 years who walked away with a settlement worth $1.7 billion when the couple divorced in 1999. Elisabeth and James are not close following her public criticism of her brother about the phone hacking scandal.

His third wife Wendi Deng, a Chinese business woman, was divorced by Mr Murdoch after a fourteen year relationship amid rumours of her infatuation with the former Prime Minister Tony Blair. They have two children Grace 14 and Chloe 12. They were included with the other children as beneficiaries to the stock pool to which his other children are entitled.

Ms Deng was given a settlement to include a $44million apartment in New York a $20 million apartment in Beijing in addition to the assets under their pre-nuptial agreement.

Each of the six children of Mr Murdoch share in a stock pool which was valued in 2006 at $2billion – so are likely to inherit at least $300 million.

For Ms Hall this will be her first proper wedding. Her marriage to Jagger was declared invalid when the pair split after their 23 year relationship ended in 1999.

Mr Murdoch is rumoured to have a net worth of $18 billion so there is plenty left for Ms Hall. If the couple follow the example of his third marriage they will most likely have a pre-nuptial which will no doubt be reflected in any settlement the couple decide on his death.

Although all six children benefit from the stock pool, only two work in the business so their influence will be the greatest. Although we know of the disagreement between Elisabeth and her brother James, other family disharmony will only come to light on the death of their father and then for the sake of his empire I hope he has given more than a cursory thought on how to avoid family disputes turning to full scale litigation through effective Family Governance checks and balances.

With an empire the size of Mr Murdoch’s and with each child being independently wealthy there is plenty of scope for conflict and litigation – and now a further complication has been added in the form of a new and beautiful wife Ms Hall.

UHNW families are looking to family offices for independent, neutral advice

There is a misconception that people who have a lot of money have excellent advisers who look after all their problems.

This is of course true for families with family offices, but for those who do not, or their family office only looks after their investments, the industry is confusing. It is made up of specialists and until recently there were very few general practitioners to whom they could turn for guidance. This has been recognised and family offices are now being set up to provide independent, neutral and general advice.

In the medical profession there are numerous independent and unbiased general practitioners. If you have a pain you go to your doctor who may refer you to a specialist having diagnosed what the problem is likely to be. If it does not get fixed you go back to your doctor to discuss with them any ongoing concerns.

Imagine a medical profession without a doctor and then you will get some idea the frustration the UHNW community experiences in finding a good advisor for a variety of concerns. Without a general practitioner they need first to recognise their problem – without the early warning sign of pain, analyse who best to serve them, instruct them, monitor progress and at the same time stop fees running out of control. UHNW families are not always loyal because they have found an adviser they trust, but because there has not until recently been a general practitioner to turn to for an independent neutral opinion.

David came to see me Monday afternoon; he has a home in the UK which he owns through a company in Jersey. He lives in Switzerland and is anxious about the Annual Tax on Enveloped Dwellings which is approaching; this year it will cost him in excess of £100,000. His trustees in Jersey have told him that it will take between six to eight weeks to de-envelope. He sought advice from his lawyer as soon as George Osborne said his house would be subject to inheritance tax as from 2017, but was told to wait until the Government paper on ATED is published. It was promised to be forthcoming after the summer recess, but there is still no sign of it and his lawyer is away for the next few weeks abroad.

David is cynical. ‘The Government only wants another round of ATED collection. The tax on homes owned through offshore companies has been a ‘windfall’. I suspect we won’t have the consultation paper until it is too late to get our properties out of offshore companies. If I want to de-envelope by the 1st April, I need to start the process at the latest in early February which is in two weeks or I face another year’s tax. My lawyer seems to think that paying another year’s tax excess of £100,000 is somehow fine – well it is not!’

Of course I was unable to comment, but told him that ATED and IHT on UK real estate was not going away and there were a number of options. Which option was best for him was dependent on his life expectancy, circumstances and priorities. It became clear after some discussion that David was planning to sell his home as soon as his wife and children no longer wanted to come to London together. His children were now in their early twenties and would soon want homes of their own.  His intention was therefore to sell in four years.

David easily made up his mind as to what he wanted to do. I said I could introduce him to an advisor who would quickly and inexpensively provide a tax audit of his offshore structure and then I would make sure the protector gave the necessary instructions to liquidate the Jersey Company.

David would then own his home directly with his wife as joint tenants.

David was delighted; he was able to get on with what he was convinced was the right thing to do, save many thousands of pounds of tax, and feel in control of his planning.

In David’s opinion his advisers had become complacent. Their holidays and international travel seemed to be of greater importance than the concerns of their clients. Although he had known his advisers for many years David felt they only ever responded when prodded and had never once picked up the phone to warn him of any dangers or to show real interest in his concerns.

If David is not alone in his frustrations, the industry which serves the UHNW community may not only face increased dangers of litigation from clients and HMRC– as I noted last week, but as the number of family offices which provide independent estate and succession planning advice grows so may the dissatisfaction with existing advisers become evident by business going elsewhere.

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.