Safe not sorry

When I was a child, my mother took me to the kerb on a quiet road and I was told to look right, then left and right again, listen, and only when certain that there were no cars to walk, not run, across the road. She seemed to be very serious about this exercise and so I accordingly took it seriously.

Two weeks ago I flew to Geneva, before the aircraft took off, the air hostess told us what to do with the oxygen mask should the cabin lose pressure and where to locate the life jacket if the aircraft landed on water. I sometimes wonder what people would do if such a catastrophe happened would they remember – or just panic?

Yesterday, my daughter phoned me – should she take travel insurance for her forthcoming ski holiday? Yes of course, and she should check whether it included helicopter rescue, medical treatment and return flight home in an emergency. But it costs £25 she wailed – nothing like the cost of emergency medical treatment.

In October 2016 Camden Wealth published a Personal Security Report on its research of UHNW people for Sec Tec, the leading personal security protection firm. A staggering 58% had never had a personal security review. This is alarming given that all the people interviewed were rich and therefore much more vulnerable to kidnap, extortion, and burglary.

Even for those of us who have less money to lose, most of us are blissfully ignorant of the dangers. If I were to go to a remote part of Tanzania on a safari with my family, how would I get out if I needed to, or what would I do if I needed urgent medical care miles away from the nearest doctor?

When I hired Christina a few months ago to be my housekeeper, what checks did I do before I happily gave her the keys to my home?

When the house burned down across the road firemen put in for me fire detectors as a free service, but I still do not know how to operate the fire extinguisher I bought.

I travelled recently to Cyprus and was met at the airport by a stranger holding a board with my name on it. I gave him my suitcase and he led me to a car. I did not give a second thought to my safety as he put my suitcase in the boot, and I got in. Did I check his name and ask him for personal identification?

When I went to the market last Saturday, I blissfully wore a fur gilet – it was cold, it did not cross my mind that in a market full of devout Muslim Arabs, that a white woman wearing a fur gilet would stand out from the crowd and could be a target for theft. 

We are led to believe that our world is low risk – but is it? The Sec Tech Report revealed that 27.8% of people interviewed globally have been burgled in the last five years. A further staggering 42.2% of people have had a mobile device taken – how many people keep their pin numbers, and other highly sensitive information about their personal and private lives on their mobile devise without installing a means of wiping such information should it be stolen?

It is true that residents of emerging or less secure countries are more aware of the dangers than we are, living in ‘civilised’ countries, but we should all be vigilant and know the dangers of what is going on – and do something about it before disaster strikes. 

A friend of mine was caught in a terrorist attack, he had no idea what he should do. Some people tried to run away – many were gunned down. He was lucky he stayed calm and still, and was not injured, but many others were killed.

The automatic exchange of personal financial information next year will be a threat to the personal safety of anyone who has a foreign bank account or an offshore trust. A client of ours who has had first-hand experience of the Italian mafia says ‘It is imperative that sensitive financial information is kept secure at any cost. You risk the safety of yourself and your loved ones to allow it to get into the wrong hands’

There are things which can be done. Just as SecTech can provide for you a personal security review, we can review your assets offshore and review what you could do to give you greater control, reduce the risk of wealth erosion, and improve the privacy of your offshore financial information. But time is of the essence. Privacy planning needs to be in place as from 1st January 2017 to be truly effective.

If you would like to comment please do so, or if you would like to book an appointment to see Caroline or any one of her team for a review, please contact Svetlana on 020 3740 7423 or write to her svetlana@garnhamfos.com

The hostile world from an Argentine perspective

Last week we looked at the hostile world of HNW families living in Russia, we now turn our attention to HNW families living in Argentina.

In 2001 Argentina defaulted on USD 82 billion sovereign debt, the largest-ever at the time. After that spectacle no one wanted to invest in Argentina. This resulted in restricted access to international credit markets. Furthermore, President Cristina Kirchner continued to default on its debts for a further 15 years. Then in December 2015 Mauricio Macri became President.

Macri immediately introduced market reforms to include settling payments with those creditors that previously had not agreed to exchange their defaulted debt for new securities, accepting a write-down. On top of that Macri removed currency controls and took a number of -yet not very sucessfull- measures to tamper the rampant inflation. Hence now Argentina is returning to be open for business.

In April 2016, Macri just four months later issued $16.5 billion in bonds in the largest emerging market debt deal on record. It was oversubscribed 3 times – Argentina was an attractive country in which to invest – it is recovering.

But all is not rosy in the Argentine garden.

According to the World Bank, the total tax on corporate profits (tax as a percentage over net realized profits) is 106% one of the highest in the world, as compared with Cyprus at only 24% one of the lowest. As any scholar of the Laffe curve (the higher the tax rate, the more inclined tax payers are to plan to avoid it) will expect, at this rate of tax asset protection and tax planning are foremost in the minds of Argentine residents, which is exactly what is the current state of affairs.

Although, traditionally not very sophisticated at planning using trusts, Argentines are increasingly turning to trust structures to protect their assets. There is no comprehensive trust tax regulation in Argentina, but it is clear from court cases and practice that (provided certain requirements are met) family trusts are not subject to tax in Argentina, both for the settlor and for the beneficiaries.

On 22nd July 2016 Macri still in strident mode, introduced a tax amnesty regime, such that if Argentines declared their taxable assets both onshore and offshore they would pay only a 10% penalty. As has been seen with other amnesties such as in Spain, the concern of the Argentines, is not the payment of tax, or the penalty of 10% for declaring the assets, but whether, if they declare their assets, at a later date, a future government will not demand more from them.

To trust or not to trust the Government is therefore the most hotly debated topic at the moment and the Argentines have only until the 31st March 2017 to decide what to do. To help make up the minds of wavering Argentines, the Argentine Government has made it very clear that anyone caught not declaring will be subject to very onerous measures; penalties and taxes.

A further difficulty for many is that even if they declared their assets and kept them offshore, what should they do if they wanted to use this money to invest in Argentina.The quandary is that even if all the monies are declared or in an offshore trust, they would prefer to invest back into Argentina anonymously again for fear that a future Government would come knocking on their door for more monies. There is much interest therefore in using an Argentine trust as an investment vehicle (the Fideicomiso), but then their preference is to have a professional regulated and established global trustee to act as trustee to ensure the safety of their assets and that all taxes are paid and that the Fideicomiso is fully compliant in Argentina.

What is even worse, is that most Argentines do not have the luxury of waiting until 31st March before deciding what to do, if they have monies offshore, they will need to do something before 31st December 2016, since after that day all assets held offshore in CRS compliant countries will be reported once the automatic exchange of information, under the Common Reporting Standard comes into force in September 2017.

GFOS has therefore been working on solutions for Argentines with Julian from a Family Office in Switzerland which achieves asset protection, privacy, control and succession planning on assets, using a tried and tested corporate and fiduciary structure, but if it is to be fully effective it will need to be in place before the end of the year.

If you would like to find out more write to svetlana@garnhamfos.com or call her on 020 3740 7423 to arrange with her an appointment to see Caroline. 

Is it a hostile world for UHNW families?

Last week I was invited to give the key note speech on wealth preservation in Montreux which over 170 guests attended, including a significant number of single and multi-family offices. At the end of my talk the chair asked the audience whether they thought the governments of the world were becoming more hostile to the UHNW community, the majority were of the opinion that they were and less than 10% were uncertain.

In my opinion the hostilities are very real and need to be taken seriously. Russia for example has in the last two years tightened its rules for all Russians who own companies offshore.  It wants to collect more tax from its wealthiest residents.

The simplest of structures I came across in my meetings in Montreux is called the ‘Russian Trust’, which is now beginning to cause serious and unwanted results. Sasha is a Russian resident who, to avoid the Controlled Foreign Company rules transferred shares in his Jersey investment co (Invest Co) to his driver. Unfortunately, his driver died unexpectedly and his widow is now claiming her rights to the shares in Invest Co! Sasha may have saved tax, but lost Invest Co.

A slightly more sophisticated structure was set up by Alexey and was described to me by his single family office CEO who attended the summit. Alexey transferred his shares in an offshore company (Profit Co) to a holding company in Guernsey, (Hold Co) in which professional directors were appointed to run Hold Co from ABC Trustee Company Ltd. The shares in Hold Co were also transferred to ABC Trustees Limited, but on ‘bare trust’ for Alexey which means that ABC Trustees Limited must do what Alexey tells them with the shares in Hold Co.

The Controlled Foreign Company (CFC) rules in Russia operate to tax all undistributed profits of both Profit Co and Hold Co to Alexey and Alexey is obliged to report these profits to the Russian tax authorities. The CFC rules apply if either Alexey controls Hold Co, or owns directly or indirectly more than 25% in Hold Co.

Alexey is not at all happy with the structure. The professional directors of Hold Co, operate the bank account and deliberately do not do what Alexey tells them, on the basis, so they tell him, that they need to have evidence that Alexey does not control Hold Co. However, given that ABC Trustee Company Ltd holds all the shares in Hold Co for Alexey under a bare trust arrangement, the structure will still need to be reported under the Common Reporting Standards by both ABC Trustees Ltd (assuming it is a Financial Institution) and by the bank with which it has an account to the Guernsey authorities which will then exchange this information to the Russian tax authorities.

Alexey clearly wants control, protection and privacy of Hold Co, but under his existing structure has none of these and could face prosecution in Russia as from next year.

I talked with the CEO of Alexey’s family office who was stuck as to finding the right way out of the current structure. I was able to propose a much better, more flexible and current solution which would account for the CFC rules, CRS reporting which was worrying the family and incorporated the Bahamas Executive Entity to own on the shares of Hold Co. This allows Alexey to have control and give him peace of mind.

The other rules which have been tightened in Russia, is where a profitable company situate in Russia pays out its profits to a jurisdiction with which it has a favourable double tax treaty such as Cyprus. Let’s take Ivan, he transferred the shares he had in a steel mill in Russia to a Cyprus holding company, Cyprus Co, which is owned by a trust and company offshore. Ivan and his family are beneficiaries of this offshore trust.

Ivan’s structure this year had to be adapted to fall outside the new rules. If his Cyprus Co was not to be treated as resident in Russia it needed to have a real presence in Cyprus. He needed to make sure that the Cyprus Co’s executive body did not operate in Russia, and its key officers did not perform their functions in Russia. He, therefore, took an office in Limassol, bought a holiday home in Paphos and engaged an account manager to work for Cyprus Co full time.

His concern has now turned to the profits accumulating in his offshore trust which owns a bank account in a CRS country. As from 2017 this trustee and bank will have to report the funds and any transactions to their Government, which will in turn report it to the Russian tax authorities. As a settlor Ivan like Alexi, will need to report the structure to the tax authorities if he has reserved to himself a benefit. He has no wish to benefit from the structure so is less concerned as to the tax consequences, but is very concerned by the exchange of this very private financial information, which may not be accurate, across the globe. He has seen families of wealthy Russian friends targeted by criminals once they obtain private financial information.  As one delegate said ‘CRS is a kidnappers’ charter’.

Most Russians aren’t trying to ignore the serious nature of these new rules but they do want to plan for privacy and safety of their assets in uncertain times. However, one of the professional delegates said that it was only a matter of time before the Russian tax authorities find a high profile tax dodger and drag him or her very publicly through the courts and into jail. It is not a good strategy to play Russian roulette!

If you have any comments, or would like to book a meeting with Caroline or one of her team to explore howbest to re structure foreign or domestic assets please contact svetlana@garnhamfos.com or phone her on 020 3740 7423.

Asset Protection

My mother was in Holland when the Nazis invaded. She used to tell us chilling stories of how the German soldiers would come looking for young Dutch men such as my uncles to conscript into building their roads, and how her aunt who lived next door was starving and would beg food from my grandmother who was eager to preserve every precious morsel for her children.

My grandparents were lucky. My grandfather was the mayor of Rotterdam and ran a successful Dutch Gin business, (the first to make flavoured spirits). His family was better off than most; they could buy meat and eggs on the black market in exchange for gin.

Like so many wealthy entrepreneurs he squirrelled his excess wealth in numbered Swiss bank accounts – if he had not done so his hard earned monies would have been confiscated by the Nazis. It was widely believed that Switzerland would remain un-invaded and that numbered bank accounts would protect his identity; on both counts he was right.

Protection of assets from invading governments, criminals, spendthrift family members or wronged spouses has long been big business. Swiss private banking grew fat on its famous numbered bank accounts – which have now long gone, only to be replaced by trusts in offshore financial centres.

Trusts – the brain child of the UK to protect assets for the families of Crusaders was a brilliant legal arrangement. The Crusader would transfer his wealth into the name of his trusted adviser with clear instructions that the monies were to be used only for the benefit of the Crusader’s wife and children. Unsurprisingly this legal arrangement came to be called the ‘Trust’.

The brilliant element of the Trust is to split Charles from his property which he transfers to John (in John’s own name) as ‘Trustee,’ but not for John to spend on himself, but to spend only for the benefit of Lucy, Frank and Leslie, the wife and children of Charles. The obvious benefit of this legal arrangement is that if Charles were to die while crusading, his property would still be owned by John for the benefit of Charles’s family, who may not be able to manage their own financial affairs without some assistance. Furthermore, Charles’s family would have avoided all the difficulties any family can face if death cannot be proved through the lack of a body. This splitting of property ownership has, over the years proved remarkably useful, not only for succession, succession without a body, wealth preservation and management, but also for asset protection.

Most assets can be protected. An entrepreneur will ring fence new businesses through ‘limited liability’ companies, and from natural disasters by insurance, but risks from unscrupulous individuals or greedy counter parties, spendthrift family members or litigious adversaries are not so easy to protect without a trust. In these circumstances the wealth owner may be wise to put his wealth in trust for his family.

There does however need to be a balance. Most States in the US do not recognise ‘Self Settlor’ Trusts. This means that a creditor of the settlor can pursue settled assets if the Settlor is a Beneficiary. These are called Domestic Asset Protection Trusts (DAPTs), and of course there are exceptions. The first State to see the commercial advantages of setting up DAPTs was Alaska, which was subsequently followed by Delaware, Nevada, South Dakota, and Nevis.

Offshore financial centres such as the Cayman Islands however, take a different approach. If the Settlor made the transfer to the Trustee with the intention of defrauding creditors, then the creditor can have the transfer set aside. In the Cayman Islands the time limit for a Creditor to bring a claim is six years. The Bahamas has a similar law, but the time limit is only two years, which is also true in the Cook Islands.

The moment jurisdictions have different laws; settlors have a choice. If asset protection is important to a settlor it is first important to know why. In all the cases in which I am an advisor the main reason why the Settlor wants privacy is to protect his family and wealth from criminal activity or exploitation. This right to privacy would appear to be recognised by the draftsman of the Data Protection Act, but is conveniently ignored when it comes to the collection of taxes.

If you agree, disagree or have any comment, or if you would like to book an appointment with Caroline or any one of her team, please contact svetlana@garnhamfos.com or call 020 3740 7423.

Should I continue as a Protector?

Last week, I received a number of e mails informing me that as a Protector of specific trusts, I would be included in a Register of Persons of Significant Influence (PSI). In each case the Trustees had taken legal advice and perceived themselves as being a ‘Financial Institution’ under the Common Reporting Standard (CRS) and a Protector of any trust to whom powers were reserved to remove and appoint a new trustee, was a PSI and needed to be reported as such.

It feels as if, like Alice in Wonderland, I have had a nasty fall, and nothing is as it was before! In one particular case, I was appointed as a Protector fifteen years ago, but have not seen the family for at least twelve. I do not charge an annual fee – maybe I should, or perhaps it is better just to resign.

At best being a Protector is a mug’s game. Legally the office carries fiduciary responsibilities to act in the best interests of the beneficiaries, but it is arguable that these responsibilities include failing to do something when clearly something needs to be done.

But, if as a Protector I do not know what is going on, because no one tells me, and I have no legal rights to demand information, I can have no idea as to when a situation or transaction is in the best interests of the beneficiaries or not. Let’s say that the trustees decide to liquidate a company holding a residential property in London for which no permission is required by me, the Protector, and in doing so the settlor becomes liable for £1.8 million capital gains tax bill.

Let us also assume that the settlor cannot afford this tax bill and looks around for someone to sue. The trustees are an obvious candidate, but they have access to funds in other trust assets they hold for the client and have a strong indemnity. The Protector, me, also has a strong indemnity, but no funds under management out of which to pay legal fees for taking advice and no right to information. To make matters worse, as a Person of Significant Influence the Government can also pursue me, the Protector, for being complicit in non-declaration of the taxes due. Furthermore, as a resident in the UK, I as a Protector am much more likely to be pursued than offshore trustees. Is it hardly surprising that I would wish to resign!

Clearly with people like me wanting to resign who were appointed to protect them – what can families do to protect themselves from unscrupulous professionals?

My advice is that in today’s hostile climate, a trust structure should not be reliant on a Protector, to provide the beneficiaries with protection from disruptive professionals holding an office.

Instead of appointing a Protector, the family should consider appointing a Private Trustee Company in place of the professional trustee, of which the Protector can be appointed a Director. In this way the Protector has limited liability, access to funds and is fully up to date with what is going on as well as having access to information as and when required.

Where the Private Trustee Company should be situate would however be dependent on a number of factors, including the need for privacy, personal connections, time zones, tax and availability of good STEP qualified professionals. If the assets of the trust are substantial – and the way of gauging this is to estimate how long the assets are likely to stay in trust following the death of the settlor – consideration should be given to putting in place Family Governance processes.

Just as a significant trading company has checks and balances at every level, so it should be with an offshore trust. There should be a way to limit the power of any one individual, provide for accountability, set out a clear understanding of what is expected, make sure notices and rules of meetings are adhered to and information is properly made available with clear enforceable rules as to when an officer can be removed and replaced. Such good governance rules enable disputes to be resolved before they can begin to damage the family wealth.

If you would like to find out more or arrange a time to meet with Caroline, please contact our business development manager Svetlana to arrange a meeting or write to her on svetlana@garnhamfos.com.