Not always good

Last weekend I was sitting having a cup of tea with Paul, in the weak Spring sun at the Lido café overlooking the Serpentine in Hyde Park. There is something chilling, but not unpleasant about being warm drinking a hot cup of tea, watching swimmers pound out their lengths in the freezing cold water.

Paul, before he retired was a top City capital markets lawyer and is therefore familiar with the law of trusts. More recently he has turned his skills to reviewing trusts for private clients and other related matters.

I asked, from his recent experience of private client trusts, whether they were as well drafted as trusts for commercial purposes. He said that standard forms of trust written by banks, on the whole, were well crafted, but this was not always the case for the more ‘tailored’ trusts.

This is not as surprising as it may seem. Banks do not allow Settlors to add or remove clauses. Their standard trust deeds are drafted by experts and approved by leading counsel.

However not all Settlors are prepared to accept a standard form when it comes to dealing with their world-wide wealth. Many Settlors want to set up trusts for their successors, but they do not want to lose control of their wealth, by giving their trustees too much power. They are used to getting their own way. They push their advisers into putting clauses into trusts which all but the very experienced trust professionals would find hard to resist.

The latest example, was for a family which I will call Gonzalez. They are based in South America, but have their liquid assets managed out of Switzerland. The structure was overly complex, but at the heart was a trust which reserved three powers to a ‘Protector’ which was Gonzalez, during his lifetime and thereafter his eldest child.

The first power was to decide on the investment strategy of the trust, the second was to remove and replace the trustee and the third was to determine when and to whom distributions were to be made.

I discussed these three powers with Paul. He agreed with me that to reserve powers of investment and choice of trustee is fine, but to reserve the right to decide on distributions was probably not.

Gonzalez has two sons and two daughters. His first child is a son and is the apple of his eye. He has followed his father into the family business, married well and has three beautiful children. However, his other son who is the youngest was not so well regarded by Gonzalez. He left school early to become a singer songwriter, but after a promising start had produced only a modicum of success and had slipped into a louche lifestyle of soft drugs, late night revelling and poor company. He had two children by two different mothers and Gonzalez feared he may be bisexual. His two daughters were fine, but feckless. They were both married, but to men who Gonzalez thought lazy.

On his death he wants his eldest son to step into his shoes, run the business, be the Protector of his trust and prevent his other children from inheriting any capital outright. However, it soon became clear that the three younger children would resist any arrangement whereby their older brother could decide how much or how little they were to inherit.

Under the trust document as drafted, it could be argued by the youngest three children that Gonzalez had not succeeded in creating a trust, but a nominee arrangement. If successful in this argument, his estate would pass under the laws of the country of his residence; one quarter to each child. However, it is not as simple as deciding which members of the family are right and which members are wrong. Family disputes only get resolved after months, if not years of arguing, and the longer the argument continues the more the family assets are eroded with legal fees.

Some advisers suggest to their clients that they leave the trust as drafted and set out how to resolve their concerns in a Letter of Wishes. In theory this is excellent. However, in practise, a Letter of Wishes or Family Constitution is for guidance only. Trustees keen on a quiet life are more likely to follow the path of least resistance than to ensure the Settlor’s wishes are followed.

Of course where neither party is ready or willing to compromise then the Trustee has no option but to get professionals involved. If the trust is well drafted differences can be resolved through skilled mediation, which is what we would recommend and do for a client wherever possible. Although more fees can be earned through litigation, we do not believe that litigation is the best way to resolve a family dispute. However, it is not always easy to get a family around a table and sometimes family members will only mediate if they are not made to sit in the same room as each other.

My preferred option to resolving disputes using third parties is to put in place a dynamic structure; trusts, private trustee companies and an Executive Entity where good governance principles resolve disputes rather than outside professionals. Structures which incorporate good governance principles can also meet most concerns of the Settlor without jeopardising the integrity of the structure or ignoring human nature.

If you have any comments on the above, would like Garnham FOS to review your trust structure or your family is in dispute over a trust, contact svetlana@garnhamfos.com or call 020 3740 7423 to arrange an appointment to see Caroline or any one of her team.

Toffs and prejudice

On a train to see my daughter in Edinburgh last week I was seated opposite a nanotechnology geek. As she opened the newspaper, she exclaimed ‘Good to see the right man win. We don’t want a toff as mayor of London!’

I was a little taken aback. I have had numerous brushes with the Goldsmith family over the years and her attitude was clearly prejudiced. For a woman of her education and background her strident attitude seemed odd.

I first came across the Goldsmith family through their Swiss adviser who asked me for my opinion on the removal of one of their advisers. The matter was resolved swiftly and amicably and I had no further involvement.

On this occasion I did not meet the family, but got an insight into how the wealth was structured.

I met the family many years later through my friend Tracy, the Marchioness of Worcester. Like the Goldsmiths Tracy is passionate about the environment and the quality of lives of animals bred for slaughter. She is a tireless campaigner for ‘Farms not Factories’.

Goldsmith fist became interested in wild life and our environment through the nature programmes of David Attenborough and the works of Gerald Durrell.  In 1997 he was appointed Reviews Editor of the Ecologist by Edward Goldsmith, his uncle, the magazine’s founding editor, owner and publisher. In 1998 he became Editor-in-Chief and Director of the Ecologist, but did not draw a salary.

In 2005, David Cameron approved Goldsmith’s appointment as Deputy Chairman under former Environment Secretary John Gummer of the Quality of Life Policy Group. The 600-page report prepared by himself and Gummer recommended increased taxes on short-haul flights and on highly polluting vehicles; rebates on Stamp Duty and Council Tax for people who improve the energy efficiency of their homes.

Goldsmith’s impeccable green credentials, his success as an editor and journalist are, however overlooked by many voters and journalists when reminded that he is one of the wealthiest MPs in Parliament. Sir James Goldsmith, his father,  died in 1997 with a £1.7billion fortune from which Goldsmith is estimated to have an income of £5million a year.

It is also public knowledge that Goldsmith, prior to becoming an MP had non-domiciled status and has been quoted in the Evening Standard as saying that non-dom status let individuals ‘make lifestyle choices to avoid paying tax’. Probably not a very wise thing to say, but it is true, legal and honest.

During his campaign to become mayor of London there was much criticism of Goldsmith for playing the ‘racist card’, but not a word of criticism against his opponents for playing the ‘toff’ card. No one seems to have a word of sympathy for Goldsmith who stands defenceless against the prejudice and envy for his privileged status.

Status and privilege would appear to make one ‘fair game’ for journalists who have quizzed Goldsmith about his expenses and donations. It is assumed, because of his wealth, that Goldsmith will behave in an underhand and mischievous manner. This is no less prejudice than hinting that Muslims are responsible for terrorist atrocities. It is true that some ‘toffs’ do behave in an underhand and mischievous manner, similarly some Muslims commit terrorist atrocities – but to take the example of a few and assume that all behave in such a manner is what makes prejudice so unpalatable.  

Needless to say the nanotechnology geek struck up a conversation declaring Goldsmith to be her bête noir. I moved the conversation onto nanotechnology – about which I know very little and in due course she asked me what I did.

I grasped the nettle firmly. I told her that I advised people like the Goldsmith family on estate, succession, offshore trust matters and family governance. Goldsmith I said could do little about his father’s wealth. It was in trust and the trustees have an obligation to do what his father wishes provided it is what they consider to be in the best interests of the beneficiaries. Therefore, if Goldsmith wanted to give the monies to a charity – he cannot. However, he has done what he can about his non-dom status by declaring that he is now UK domiciled.

I pointed out that in all the coverage of the Mayoral election there was little or no mention that Goldsmith had chosen to work. He was given no credit for deciding not to live a life of leisure, or for choosing to dedicate his life to make the world a better place. Goldsmith is rich; he has a choice, but this is overlooked. I do not think it is fair that the racist card is considered politically incorrect whereas it is ok to bash the rich. There needs to be much more information about what it is like to be rich; information was needed to put a stop to racial, sexual, and religious prejudice, the same is true about prejudice against the rich.

Much to my surprise, the nanotechnology geek confessed that she had never thought of rich folk as people, or that her attitude was prejudiced. I decided not ask whether our conversation had changed her opinion on Goldsmith, I did not want to get into a discussion on politics.

If you would like to comment or book an appointment with Caroline or one of her colleagues who deal with matrimonial, dispute resolution, family company issues or investment strategy please contact svetlana@garnhamfos.com or call her on 020 3740 7423.

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 svetlana@garnhamfos.com or call 0203 740 7423 to book an appointment.

When a kick is needed

One of the great things about engaging the services of a family office is to cut the crap. Some professionals paid by the hour are tempted to prevaricate, because they are then paid more. The family office sits alongside the family with the aim of saving them time and money.

Last week Robert phoned me he was really cross. Robert is the beneficiary of a trust in Jersey from which his former wife Jennifer had been the settlor and she and her two children had been beneficiaries.  As part of their divorce settlement Robert had paid Jennifer and their children a sum of money and they had been removed as beneficiaries in 2001. The purpose of the trust had therefore been satisfied and so understandably Robert wanted the assets in the trust paid to him.

The trustees had done nothing in fifteen years other than collect their yearly fee which was based on the value of the assets in the trusts – which was substantial. So a few weeks ago Robert came to see me to explore what could be done.

I phoned the trustees and explained to them that Robert wanted the assets ‘appointed’ to him, in other words transferred to him. They confirmed that they would engage lawyers and get a Deed drawn up. That was fine – the document needed could fit on one page, so would not take long to draft. I chased up a week later and was told that instructions had been given to the lawyers to proceed.

Two weeks later, nothing had happened. I telephoned again and was told that instructions had not been given to the lawyers, because their in-house team had said that under the terms of Jennifer’s removal she had been given an indemnity from the trustees, which was not restricted in time and so remained in place. The trustees therefore needed to hold onto the trust assets to protect them against this ongoing exposure!

I informed Robert of this and he hit the roof. I pointed out to him that this problem could easily be resolved if Jennifer gave the trustees a waiver of her rights, and if not he could cover the risk with insurance.

When Robert calmed down he explained that he was on good terms with Jennifer and could see no reason why she would not sign a waiver.

I wrote to Jennifer explaining to her the situation,  taking care to point out that she should take legal advice if she was uncertain as to what was being asked of her and telling her what she needed to say to the trustees. She responded by saying that she understood what was being asked of her and e mailed the trustees accordingly. I then hounded the trustees until a Deed was prepared and signed and the assets were transferred to Robert.

Last week we had a meeting of our team of experts; leaders in the fields of matrimonial, dispute resolution, family company issues, investment strategy, estate planning, succession and offshore trust structuring. Each of them gave shocking examples of professional prevarication to preserve fees.

Rhiannon our matrimonial expert said she had heard of couples, who had no jurisdictional issues, spending years in unnecessary litigation when both parties would have been able and willing to mediate. Not only had their joint assets been depleted but the pain been prolonged and their children had suffered, simply because neither party had been made aware of an alternative to court litigation.

Richard had had the same experience; families made to go through years of expensive litigation when the dispute could have easily have been resolved through inexpensive mediation.

It is hardly surprising therefore that family office services do not charge by the hour. We charge on a fixed fee basis with a success fee at the end; we want to encourage short letters, simple solutions and speedy outcomes. There are of course times when a solution is not immediately obvious, but then we proceed in stages – until a solution is in sight – and charge accordingly. 

Of course, there are many professionals who do not engage in prevarication crap, and if their clients come to us for a second opinion we tell them that they receiving a first class service, that they are not being overcharged and we can little to assist, however this is sadly not always the case.

If you would like to book an appointment with me please contact Svetlana on 020 3740 7423 or svetlana@garnhamfos.com

How the PM dodged Inheritance Tax!

How the PM dodged Inheritance Tax was a headline in the newspapers last week. No wonder the 5% who have sufficient wealth to be subject to inheritance tax are confused.

Firstly I am not at all sure that David’s father’s estate saved much tax despite the press coverage. In 2006 David’s father did a house swop with his eldest son Alexander and gave £1million to each of his daughters to buy a property in Kensington.  The paper went on to say ‘None of these gifts are believed to have incurred IHT’. Huh?

For a gift to be free of IHT, the donor must survive seven years. Ian Cameron died in 2010, which is only 3-4 years after the gift. Assuming my facts are correct the estate would have paid 32% IHT on these gifts. If he had died a year earlier – he would not have saved a penny in tax and could well have incurred capital gains tax which he could have avoided if he had left his estate to his wife on death. The IHT rate only starts coming down if the deceased survives more than three years.

As matters have turned out the Cameron family would have been better off if Ian had left everything to his wife Mary or in trust for Mary and she had made gifts to her children following her husband’s death. Given that she is still alive today six years following her husband’s death, the gifts would have attracted only 8% tax rather than 32%.

The newspaper blagged that Ian Cameron must have ‘known a thing or two about tax planning’ – obviously not!

The second error in the newspaper heading was that the PM ‘dodged inheritance tax’. The PM did nothing other than to receive a gift from his father on death and from his mother during her lifetime. This does not amount to ‘dodging’.

The newspapers went on to print more drivel. Inheritance tax the newspapers said raises ‘only’ £3.7 billion, or 0.25% of GDP ‘owing to the rich finding IHT relatively easy to avoid’. A survey conducted by Octopus revealed that 90% of people do not know what the inheritance tax threshold is and only one in three home owners have thought about tax planning to avoid this much disliked tax. On the contrary to what the newspapers have printed, I am surprised at how much tax is raised.

Polly Toynbee in The Guardian came out with the most risible statement ‘The time has come ’she writes ‘to abolish the tax’.  I am certainly in favour of reducing the rate to a level where the few who want to avoid giving the bulk of their estate to the Government cannot be bothered to avoid it. At 40% we have the fifth highest inheritance tax rate in the world. A family like the Cameron’s would have paid more money to the Government in tax than any one family member would have inherited.

Toynbee goes on to suggest that the Government should ‘introduce a new system in which all income is taxed in the same way, regardless of its source’ eh?

Inheritance tax is a tax on capital. A tax on the accumulation of hard earned income on which income tax has already been paid. What therefore is the link between abolishing inheritance tax and a new system of income tax?

And what does she mean by ‘taxed in the same way, regardless of source’? Income is divided and taxed according to its source; Schedule A land, B woodland, D business activity and E employment. We have a vast amount of legislation – the second largest in the world to prevent abuse of exemptions and reliefs. However, Toynbee in one dramatic sweep suggests we put a red line through years of intense work on income tax for the sake of abolishing a tax which affects only 5% of the population.

From my experience Inheritance Tax, which was first introduced in 1984 in place of Estate Duty, is a well thought out and carefully drafted tax as proved by the fact that it has not been tinkered with that much over the decades since. However what is needed is more education for our journalists which write this rubbish and to their editors who print it.

If you would like to arrange to meet with Caroline or any one of our team at GFOS for estate planning, dispute resolution, matrimonial (including family), family governance or investment strategy call Svetlana on 020 3740 7423 or e mail svetlana@garnhamfos.com