Is your trust a sham?

Last week I visited Albany; an impressive new development in the Bahamas for the wealthy looking to invest in their future. The team there is focused; with a ‘can do’ attitude! There is a real sense of community and belonging, which makes Albany different from many places in the sun. 

For those feeling a twinge of envy, – the Bahamas is not immune from rain – it rained all day Sunday – horizontal rain, so driving in the golf cart gave me no protection from getting soaked! The other days were thankfully spent – under blue skies, on white sands, and in turquoise, aquamarine seas.

I wanted to see for myself how the Bahamas is bearing up under pressure from the OECD to ‘step in line’ with the other member countries.

Bahamas, keen to serve the best interests of its UHNW community, took a stand against the OECD with a bilateral approach to the automatic exchange of information – which means it will only exchange financial information with those countries with which it has an agreement. However, as brave as it was, it now recognises that it cannot afford to be black listed by EU countries and will capitulate to sign the multi-lateral agreement like the other OECD countries.

Ironically, the sooner it recognises its strengths and the reality of the world we are now living in, the better.  The Bahamas not only offers a world class place to live for billionaires and multi-millionaires, it is also a favourable place to base the global assets and businesses of the UHNW community. It has excellent professionals, a robust judiciary and is remarkably save, however, its professional trustees also need to be alive to the dangers – and do something about them.

Cem’s adviser Dishang came to see me the day after I came back from Albany. Cem’s trust structure was set up with professional trustees in one of the lesser known offshore jurisdictions two years ago. Last year the trust successfully sold his energy company for many hundreds of millions of dollars.

I asked Dishang how the trustees had coped with the sale of his company. Dishang said ‘Only Cem knows every detail of his company; it is only Cem who could have gotten the best possible price for his company’. Dishang, was quite adamant ‘Cem, has always been in control of his business assets, he tolerates his trustees, but only if they do what he tells them’.

I explained to Dishang that Cem needed to think very carefully about changing his trust ownership structure. His trust was in serious danger of being attacked by the tax authorities in his home country as a sham. Regardless of what the trust documents actually say; it was clear from what Dishang described that Cem de facto had the control of ‘his’ business assets which were ostensibly owned by professional trustees.

To drive home exactly how serious the current situation was, I quoted to Dishang what STEP (Society of Trusts and Estates Practitioner’s) says about sham:

‘The consequences when a trust is construed as a sham are: the court declares that the trust does not exist and has never existed; the funds have always been held by the ‘trustees’ on a resulting trust for the benefit of the settlor, and after the settlor’s death for the benefit of his estate. The settlor, or his estate may become liable to back-tax claims and increased estate taxes. Any funds distributed to other parties (beneficiaries apart from the settlor) have to be clawed back and may have to be repaid by the ‘trustees’ out of their own pocket. Fees received by the ‘trustees’ have to be repaid; the trustees may be sued by those who would otherwise have benefited from the trust if it had not been set aside as a sham; the ‘trustees’ may have to pay their own legal costs and may alsobe ordered to pay the costs of any court action; the reputation of the ’trustees’ may suffer. ‘

The Bahamas, cannot hope to gain a tactical advantage by being out of step with the rest of the world, but it can use its trust knowledge and expertise to see the dangers which are coming and doing what it can now to ensure their trust structures withstands any claim against the settlor for sham. No professional trustee in their right mind would want to get caught in the cross fire between the settlor and its tax authorities with the very real risk of being put out of business. The time to act is now – analyse every trust and ask the question – does the settlor have de facto control – if the answer is yes – do something about it, before something is done about it for you.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be bought on Amazon  and her book ‘Winning Business from Private Clients’ can be bought direct from the website or from Svetlana.

More about Albany

A word of warning from Lou

Lou, a former client of mine, called last week, he insisted on a meeting.

‘I want to warn your readers about the terrors of a tax investigation’.

Lou has three trusts in Jersey, which I set up for him in 2004. He had appointed Jeff as his accountant four years ago when his former accountant Giles retired. He was pleased, Jeff was much cheaper than Giles.

As a former client, I had written to him on several occasions suggesting he review his trust structure; but he ignored my suggestion. As far as he was concerned Jeff was doing a good job.  

One trust held his business interests, one his financial assets and another owned three properties through three Jersey companies in which he, and each of his two children lived.

Unbeknown to Lou, several years ago, a client of Jeff’s who I will call Tom, was investigated by HMRC and they found a letter written by Jeff on facts given to him by Tom to say that the companies owned by his trust were held as a nominee and therefore no tax was payable. The ‘facts’ given by Tom, it turned out, could not be substantiated by correspondence and documents, so HMRC found Tom guilty of tax evasion and Jeff of criminal conspiracy. HMRC then decided to investigate all of Jeff’s other clients, including Lou.

One day, out of the blue, Lou received a letter from HMRC enquiring about his three trusts in Jersey. And that was the beginning of Lou’s three-year terror of tax inspectors and his trusts.

HMRC wanted to know everything, it wanted to see all correspondence with his trustees, the trustee minutes, and all bank transactions.

HMRC made it very clear that tax evasion was a criminal offence and if found to be serious would culminate in criminal proceedings and a custodial sentence. Lou was concerned, he appointed the best lawyer he could find. The lawyer wanted to go to Counsel for an opinion and appointed an accountant to crunch the numbers and carefully check what tax was due.

His trustees were also worried, they appointed their own local lawyers who were nearly as expensive as Lou’s lawyers. They also insisted on going to Counsel and charged for their time even when travelling to London at hourly rates, as well as their accommodation and living costs which they greedily got out of the trust fund they administered for Lou. They also appointed a tax adviser for a second opinion who they also paid out of Lou’s trust monies.

The investigations found income in the property trust which should have been declared as a benefit, distributions offshore which bought art which was then brought back to the UK and sold, and UK situs assets in his financial assets trust which should have been declared as subject to inheritance tax at the ten-year anniversary of the trust.

Lou was furious, he had been paying Jeff frightful fees to ensure that he paid all taxes due and was now being treated like a criminal, labelled by HMRC as a tax evader and threatened with custodial proceedings! He had engaged Jeff to ensure he paid all his taxes, but his good intentions ….  was no defence.

With legal fees escalating at an exponential rate, Lou wanted to sue Jeff, he took a legal opinion. Did he have any right against Jeff’s professional insurance policy? He was advised that he had a good chance, and so started litigation against Jeff – who unable to cope with the claims committed suicide.

At this point Lou was stressed; the investigation, the haemorrhaging of his wealth in fees and the death of Jeff, had taken its toll, which his wife could not tolerate. She went to live with her daughter and started divorce proceedings. Even more fees were payable; even more lawyers, even more legal wrangling.

Eventually a friend suggested Lou offer his wife a luxury holiday in the Maldives as a second honeymoon and an emerald encrusted eternity ring. Good advice, Lou managed to save his marriage and stop the frightful fees from fleecing his funds.

He retreated, reputation ruined, wrongly accused, rightly angry – defeated and destroyed. ‘If only I had entrusted you to review my trusts, none of this would have happened. I would have saved hundreds of thousands of pounds!’.

It had not occurred to him that his trust was not trustworthy, and that Jeff was cutting corners to save costs. It never occurred to him that he could be guilty of tax evasion when he intended to pay all his taxes.

Lou had not expected HMRC to be so merciless, mean and menacing towards him as a suspect tax evader. He learned the hard way that HMRC cares little about how much it cost him to fight his corner. HMRC is tasked to fill its coffers, by whatever means, however long it takes – and at whatever cost.

By the time I saw Lou, last week, he had paid HMRC; tax, interest and penalties, the ordeal was ostensibly over, the nightmare apparently ended, the worry largely lifted, but he was a shadow of his former self, he looked older, had lost weight, and stood stooped.

‘You must tell your readers to do what they can now to avoid the terrors of tax investigation; a paradise for professionals.’ Lou had paid a total of £781,361 over a short three years.

Caroline Garnham is CEO of Garnham Family Office Services – The Trust Specialists

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be bought on Amazon  and her book ‘Winning Business from Private Clients’ can be bought direct from the website or from Svetlana.

Drama at the tennis

On Monday last week I flew out to Monaco. This was my second trip in two months. I had client matters to attend to but was also kindly invited to the tennis. On my previous trip I had sensed a change in mood and wanted to know whether the residents in Monaco were still feeling safe and if not, why not.

The tennis was, I confess, a great treat. My hosts entertained me to lunch by the pool and then full of good food and champagne, I and another guest, David, settled down in our box to enjoy Pablo Carreno Busta against Fabio Fognini.

Pablo won, but Fabio was the clear favourite; born 30 minutes’ drive from the Principality. The crowd applauded, cheered and stamped their feet in support. Fabio is clearly talented, but spoilt his game with bouts of angry emotion when he threw his racket across the court. The crowd voiced their frustration with boos and hisses.

Thank you Pierre and Alistair for a great day.

But once outside the tennis, I wanted to know whether the mood really had changed in Monaco and why. There is no income tax, so why should any change bother them? True, Monaco used to be known as – ‘a sunny place for shady people’, but the Principality has worked hard to attract only residents with a clean Anti Money Laundering records who are tax compliant, so that could not be at the heart of the mood change.

Everyone I asked said the same thing, ‘Just two years ago, Monaco, was a bubble, we felt safe; no taxes to pay, higher police per person than any other country and an exceptionally good way of life. But this has now changed’. But, what was making them feel less comfortable?

Monaco, like every other country in the world, other than the US, is under pressure to comply with the OECD initiatives which include the automatic exchange of information. If Monaco does not comply, it will be black listed by other countries. But if there is no tax in Monaco, why should this exchange bother them?

The problem, it would appear, is that most residents do not have all their assets in Monaco; many have homes and financial assets in countries where they do not trust the government.

Roy lives in Monaco in which he has a bank account to fund the lifestyle of himself and his young family. However, he still has family and business interests in the country of his birth; Indonesia. His other business interests are in Russia with its headquarters in Cyprus, and he holds other financial assets through a BVI company in the Bahamas. He does not want too much information getting to the governments of Russia or Indonesia.

He has trusts in both the Bahamas and Cyprus, but Monaco is a civil law country, it does not recognise trusts. If a hostile government wanted to set aside a trust to raise more revenue the fear is that they could do so in Monaco!

Roy and I met on this visit. We took an afternoon to go through his concerns which centred on privacy, protection of his assets and the exchange of information. I also went through with him the real danger for many wealthy individuals with assets in numerous jurisdictions of a government running an argument on the doctrine of sham, (which I covered last week) and starting a claim in a civil law country.

After a very short conversation, it was clear that Roy’s trusts and assets were vulnerable on many fronts, his structure needed to be overhauled and made much more robust. I outlined what could be done and how to do it. Roy is lucky he has recognised the new dangers and is prepared to do something about it, I fear that others may not be so wise.

For many, Monaco has felt safe for decades but now the CRS has upset this delicate balance. The cosy world in which they have been living has unexpectedly and suddenly shrunk.  Those for whom privacy is a concern now need to review their ownership of assets outside Monaco.

The tsunami of disclosure is coming, for those who are prepared, it will not harm them, but there are others who may not be so lucky.   

There are solutions, but being out of sight and out of mind, to evade tax is not one of them.

Caroline Garnham is CEO of Garnham Family Office Services – The Trust Specialists

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be bought on Amazon  and her book ‘Winning Business from Private Clients’ can be bought direct from the website or from Svetlana.

What would you do?

Imagine for a moment that you are Edward, head of strategy at the Treasury, who has been asked to increase the tax take from the 114,000 non doms living in the UK and paying £30,000 a year to claim the remittance basis of taxation.

You have been given a big budget to increase your team investigating non doms and you have been told directly by the Chancellor of the Exchequer to make investigations as painful as possible to extract revenue.

Later on this year you know that you will be sent details of the offshore assets held by non doms living in the UK and you want to be prepared.

You have taken opinions from leading tax Counsel on how best to attack offshore trusts, and have been told that the most effective form of attack is to argue that the trust is a sham. You have also been advised that if successful, the trust will be treated as ‘void ab initio’, which means, ‘wholly invalid and of no effect’ [AvA].

HMRC will then be in a position to tax the settlor, as if the trust had never existed.

Given that the rewards are high and that HMRC has the full backing of the Government, the chance of HMRC running such investigations are high. The cost to the settlor of proving that he or she had the intention to set up legally binding obligations at the time will be difficult and expensive.

For the Government tosucceed it needs to prove ‘on the balance of probabilities’ that a trust was not really intended. To do this, it could look closely at the correspondence with and the marketing literature of the professional who set it up.

Bhavik came to the UK with his family in 1985. In 1992 he was encouraged to set up a trust with his offshore assets by a friend, who recommended he go to ABC Trustees Limited.

In 1992 the marketing literature of ABC Trustees Ltd said ‘You can avoid income tax, capital gains tax and inheritance tax if you set up a trust, now with ABC Trustees Limited’. At that time, there was no hint of the Government ever getting a glimpse of the set up documents and so there was no concern then that it could be attacked.

HMRC tax inspectors ask Bhavik to disclose the correspondence entered into by Bhavik with ABC Trustees Limited before it was set up.

In an email Bhavik writes, ‘I am reluctant to set up a trust with Trustees I hardly know who will take all the decisions with regard to my offshore assets without my consent. I need to be able to have control and must be able to remove my trustees whenever I want without reason.’

ABC Trustees replied, ‘Your concerns are not uncommon. Most of our clients however are willing to proceed with a Protector of their choice who is given the power to remove the Trustees whenever they chose and appoint others……… Given the significant tax advantages of a trust, although it appears you have lost control, in practice ABC Trustees do what you want them to do.’

This correspondence shows clearly that the intention was not to create a binding obligation on the trustees, but to obtain a tax advantage. If this is then supported by a history of total compliance with the wishes of the settlor, then the Government is in a strong position to succeed and tax the settlor accordingly.

If the Government succeeds, Bhavik will naturally be furious and would want to pursue ABC Trustees Limited for negligence and the return of their fees.

But not all is lost, HMRC has not started to investigate Bhavik who can carry out an independent trust review now, to see what he can do to stop HMRC investigating his trust or succeed in its arguments against him. This review will save him many thousands of pounds in legal and accounting fees, not to mention the time and anguish in defending such an unwelcome investigation from HMRC.

If you would like to find out more contact the trust specialists:  

e mail:              svetlana@garnhamfos.com

Telephone:       020 3740 7423

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Caroline’s book ‘When you are Super Rich who can you Trust?’ can be bought on Amazon  or on our Education Tab ; or from Svetlana.

Your luck is running out

What if a tsunami was approaching would you stand on the beach and watch in fascination? What if you booked a holiday on the maiden voyage of a super cruiser, would you play cards as the ship sunk?

If you are healthy and wealthy, don’t wait for disaster to strike, act now; be wise – think, take action. The erosion of privacy is imminent don’t wait to see how it will affect you; anticipate the dangers and protect against them - now.

I worked with Peter Klimt for several years in the 1980’s, he and I were in the same tax team.

Peter has a supreme brain and a bird’s eye view of commercial transactions and tax.

He was an incredible lawyer, but an even better entrepreneur. Soon after we worked together he left the law to join the board of Dawney Day with Guy Naggar.

Our paths did not meet again until early 2008 when we bumped into each other in a restaurant in Baker Street. We swopped numbers and agreed to meet at his offices in Grosvenor Gardens close to Buckingham Palace. He had done supremely well – a self-made billionaire. A Lucien Freud hung in his office and a Tracy Emin wheelbarrow filled with rubbish and barbed wire was in one of the board rooms in the basement. His business empire owned 400 properties world-wide, several chains of restaurants, fashion houses and retail shops. Peter was riding fast and high – nothing could go wrong, he had the midas touch. Peter was the brains, Guy the business heart – a perfect combination – as long as they stayed healthy and wealthy, which is not a wise strategy. They were gambling on luck.

A few short months later, Peter’s son was involved in a car crash in France and was critically ill – Peter dropped the business in Guy’s hands to be at his son’s side. Then Lehman crashed and the banks demanded the return of their money. Dawney Day collapsed – spectacularly.

When the storm of bad luck hit, the foundations of Dawney Day were exposed, and crumbled. It did not survive without Peter at the helm and the support of the banks.

The foundations of a wealth or business empire need inspecting. Can they survive the erosion of privacy due to hit later this year. If you have not given this much thought - you need to act NOW. 

By the time litigation shows on the horizon or your ship hits an iceberg – it is too late.

Do you have a trust? If not, why not? It can provide for succession, mitigate tax, protect your assets from litigation, and prevent the erosion of privacy. If you do, who is in control? Do you trust them to act in the best interests if a dispute arose or an investigation were to commence? If you have a professional trustee will they rack up expensive legal fees to protect themselves against you? If you have your own trustee company, do you have the right people as directors?  Who does the administration is it efficient? Is it overly complex? Is the complexity to your advantage or does it best serve the ‘suits’?

If your structure has a Protector, a Letter of Wishes or reserved powers, it will sink when struck by litigation from a greedy government, disgruntled heir or estranged spouse. If it needs reinforcing, action needs to be taken now. Start with a simple independent review. It is no good, asking your lawyer or trustee to review your structure, they are not going to point out where the weaknesses are, it needs to be done by an independent specialist. Litigation is already on the horizon; privacy will be lost later this year. Don’t wait and see what will happen – take action - do something – now. Good luck is not a strategy and won’t last forever.

Caroline Garnham is CEO of Garnham Family Office Services – The Trust Specialists

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be bought on Amazon  and her book ‘Winning Business from Private Clients’ can be bought direct from the website or from Svetlana.