Who is the real boss?

Last week I was in Zurich for a client. During a meeting I was asked ‘Why do some families have more than one trust?’

My cynical reply was ‘So professionals can make more money!’

Everyone laughed, but, it is not actually very funny.

When I first met Bob, he had more than twenty trusts. He had set up his trusts to protect his hospitality business, and each time he developed a new line – glasses, furniture or bedding he was advised to set up a new company and trust so that if one part of the business was sued, the other parts would remain unaffected.

‘This myriad of trusts and companies may be great for preserving my business against litigation,’ I remember him saying, ‘but I need to consolidate the business so I can expand.’

My advice to him was to set up a captive insurance company in Bermuda to protect him from litigation and to consolidate the twenty trusts into one. At the same time, we explored the idea of setting up a private trustee company which would act as the trustee of his trust. All the Protectors were then engaged as directors in the trust, so all his close advisers remained engaged, but just in different, more suitable roles.

We then hired some competent administrators to run it. Bob took a small office and with the assistance of his strong board he has saved millions of pounds every year. He has since that day run his trust and family office exactly the way he and his board want to.

It never ceases to amaze me why so many UHNW families have trust structures which seem best to serve the interests of the professionals; not the family – and some, rather than providing protection, are in fact a beacon of attention to Governments keen to attack structures the moment they have the necessary information.

Another client of mine, who I will call Rajesh, had eighteen trusts, three for each of the six sides of his family. When asked why he had so many trusts Rajesh said ‘I was told I needed to diversify my assets across three different professional trustees and one for each side of the family’ ‘Why?’ I asked him. He was paying much more every year than he would if he had only one or two trusts.

I advised him to set up his own Private Trustee Company (PTC), put his own people on the board, and then the PTC would contract with a professional trustee, with whom he could negotiate a sensible annual fee. We saved him and his family many thousands of pounds every year.

As part of our Culture of Care we work only with clients who appreciate high quality service, and we engage only the top leading professionals across the world. Furthermore, to ensure we provide the best possible service at the best possible price, we have brought together their expertise into a package which can then be tailored to the particular needs and requirements of our exclusive clients. Quality, hand-picked professionals need not be expensive, if they are doing what they are good at, have clear instructions as to what to do and are unhindered in getting the job done.

The reason why professionals are often so expensive or get away with charging more than is necessary, is because many do so much work outside their comfort zone or in areas in which they are not specialists.

Clients need to engage specialists if they want to get the best possible outcome, for the best possible price.

Clients often fail to grasp this basic premise and merely add to this expensive merry-go-round, asking professionals who they already know to engage in work about which they aren't experts in. Let’s take Josh, he has used Serge for many years as his lawyer and CEO of his family office. Serge is very skilled and knowledgeable about corporate matters and in particular on acquisitions and mergers, Josh trusts Serge. Josh asks him whether his trust would be better located in Cayman Islands rather than in Jersey. Serge does not know. Should Serge accept the instructions and start to do some research or say ‘This is not my specialist area, but I know someone for whom it is.’

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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.

Death is a dead cert

One of the topics on the Big Questions last Sunday on which I was invited to speak, was death. Most of us are ,however, so busy living that we give scant regard to death. Only when it happens to someone else, like a parent, friend or child, or a doctor gives you a health scare that we give it any thought and to plan then, maybe too late!

 One gentleman in the audience spoke of inheriting sufficient monies to be able to retire, and that he had made gifts to his children to buy their first homes. For him giving large chunks of money to the next generation was not of concern, he just wanted to survive a further seven years so that his kids could inherit tax free.

The majority of inheritance tax payable in the UK is on estates where the deceased did not anticipate dying until it was too late or resented making gifts to their children while they were still alive and able to enjoy it.

For those with significant wealth the prospect of deciding to whom and how to leave it is a complex puzzle. At what age should a child inherit without conditions? Should they put monies aside in trust for the education of the grandchildren? How, if a child has more than enough wealth never to work, can a father motivate his children to be enterprising? If one child is in business and another running a charity for victims of sex slavery, is it fair that the child in business gets more? Is it right for one child to inherit the business and farm to keep it intact and the others get nothing?

In civil law countries, Napoleon resented the build-up of wealth and power in the hands of the eldest child, and decreed that all children should inherit equally as their right. In many cases this resulted in the selling of family companies and the division of agricultural land into small parcels which proved effective in dissipating the wealth in less than three generations. For founders of businesses keen to benefit more than just the first few generations and to keep the business or farm intact, a trust vehicle was a perfect solution.

However, not all founders of fortunes want to use trusts to create a dynasty. A client of mine from  one of the wealthiest families in India, Razak, took the decision that his children should inherit outright and equally the moment he and his wife died. The fact that two of his four children were passionate about horse racing and would no doubt squander their inheritance – was of little or no concern to him.

He nevertheless set up a trust during his lifetime, and he gave the following reasons:

‘I want to protect my wealth from opportunistic creditors and greedy governments during my lifetime for which the trust is a perfect instrument, but on my death I do not want my assets run by professionals and I do not want to give reasons for my children to fight and fall out.’

Razak then set up a trust to hold his business interests for his children under which all the siblings could benefit, but only from the income, not the capital. One of his sons, Asim, worked in the business, but his brother and two sisters did not. They resented their brother getting a big salary from ‘their’ business and started litigation to break the trust. The trust deed was not well worded and gave ample opportunity for his siblings to attack it. The dispute lasted nearly ten years and was hugely expensive in time and professional fees. The irony was that as the family fought the value of the business declined until it was sufficiently low for Asim to buy it with the assistance of a third party investor.

Asim has been working extremely hard ever since to build it to its former glory of his father's day. This led to even greater resentment among his siblings and they severed all connections.

A trust, whether to protect assets or to create a dynasty is an excellent tool, but it must be worded well and include strong, robust family governance processes. In this new era of automatic exchange of financial information, a trust now needs more than a Protector, Reserved Powers and a Letter of Wishes if it is to survive.

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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.

Plan B - Live on BBC 1

Last Sunday, I was invited by the BBC to join the Big Questions program at 10.00 am with Nicky Campbell in Salford Quays, just outside Manchester , to debate raising the top rate of taxation to 50% or above. We were told to be in Salford the night before, so I travelled by train from Euston, had supper in the Beefeater and stayed in the Salford Quays Premier Inn, curtesy of the tax payer.

It is not easy to prepare for such a debate, because it is hard to predict in which way the debate will go and to spout a prepared piece is not in the spirit of a debate. A lot of what I wanted to say, was not possible, and much of what I did say was not planned – hey, ho!

Nicky asked repeatedly those in support of raising the rate of taxation, whether it was a moral issue, or whether they thought that by raising the rate more revenue would be collected. He had the facts and statistics about the experience in France, when Hollande raised the upper rate to 75%; the deficit was EU 80 billion and the revenue only EU60 million. Most speakers in favour of a rise did not answer this question directly.

Nicky introduced me as someone who would not wish to see the rate raised, in fact I said I would like to see it lowered. I pointed out that the super-rich do not need to pay the higher rates – by changing their behaviour.

If they are non doms, they can keep their monies abroad, or if they are an entrepreneur they can keep their money in their company, thereby avoiding the higher rates of tax.  It will then only be the employed and the pensioner who will pay the higher rates of tax. Personally, I do not think this is fair.

I am all in favour of billionaires paying taxes, but we should not approach them with a hammer if we wish to fish for their business. My personal view is that we need to make our tax system attractive for billionaires to come to Britain, and to bring their billions with them. Why do we have a tax system which attracts billionaires to live in the UK, but yet encourages them to leave their billions stewing in Switzerland. Why not extend the reliefs to billionaires who bring their trusts to the UK? I have done my little bit through HighTrust International an onshore trust administration business. There are several tax advantages to having a trust in the UK and many practical reasons as well, but the Government could do more to attract billionaires’ and their billions to Britain.

Despite the best efforts of Gordon Brown to stamp out avoidance, there are still so many reliefs and easy ways the super-rich can avoid paying tax. I made the point that currently corporation tax is set at 19% and due to go down. This is great for businesses which are seeking to locate to Britain, where it is safe and secure to do business. The UK has a fantastic and experienced workforce, an excellent and fair judiciary, and it is a great place to live. But with the tax disparity between 19% corporate tax and 45% as the upper rate of income tax, the temptation for those who own a business to keep the profits in the company, is just too great. If they do not take the profits out as income, they will not then spend, and if they do not spend they are not supporting British Businesses and the country will not produce the revenue the Treasury is hoping for

From my experience of billionaires, they only hoard their wealth in their investment management company from which they invest direct into projects, many of which have social impact as one of the primary objects whether in sustainable energy, energy savings, or pharmaceutical advances. They use their money to fill the gap in funding which financial institutions cannot.

The comment made by Alex Wild of the Tax Payer’s Alliance was well made. In reality employees or shareholders are already paying 50% tax if not more, when taking into account the National Insurance, Pensions Contribution and the inequality of franked investment income. Sadly, although true, it is not understood by many journalists and so this fact is often overlooked.

Thank you Nicky and your team for inviting me to the debate. It was an honour to take part. May I also thank all of you who took the time to watch, and as always I welcome your comments and feedback.

Watch Caroline on The Big Questions

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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.

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.