Information is Power and Power is King

Many clients don’t know what it is like to be investigated or have authorities breathing down their necks – and they shouldn’t! The uncertainty and confusion which the Common Reporting Standard is bringing to the industry is grave but there are solutions which, if executed properly, can mitigate most of the concerns a typical UHNWI faces today.

The issue is that CRS has disrupted not only the client but also the professional. I was talking last week to Tom, a professional trustee from the Channel Islands. ‘What is the biggest challenge you and your company facing at the moment?’ I asked him.

‘The margins’ he said. ‘Having provided professional trustee services for more than two decades I now feel squeezed and am looking for solutions’.

‘Each year we see more legislation with which to comply. First was the anti-money laundering rules then there came FATCA and now CRS. On top of this I need to act as professional trustee, reviewing and considering all requests for distributions and investments, or risk being set aside as a sham’. I talked about shams in one of my previous notes where I mentioned that if a trust is set aside as sham the consequences are disastrous! Not only will the trustee have to claw back all distributions made since the inception of the trust (which may not be easy if the settlor is dead), they will also have to refund the settlor of all the fees they’ve accumulated over the years (imagine the sums these could reach for large, complex trusts that have been managed for decades and decades) and to top it off the settlor will be treated as the real owner all along (the trust never existed) so he will have to pay back tax on all the funds and make these available to any creditors he may have.

I asked Tom how trust businesses like his were responding to these challenges.

‘In all major offshore trust jurisdictions, the number of professional trustee companies is shrinking. Until recently businesses like mine, were bought by equity houses, but now these houses are looking at the risk side of the equation. If a big trust is investigated by a tax authority and is found to be a sham the repayment of the fees could be ruinous’.

Tom, as the CEO of the trust company, has been tasked with reducing the risk in his business and to make it more profitable.

We looked at the main types of clients Tom had in his business, 75% were UK resident, non doms, who were paying the remittance charge, many of them at £90,000 a year. Of these trusts, 12% owned houses on which ATED was being paid.

I explored with Tom the options. He agreed that the trusts on which the margins were too low and set up by non doms, should be invited to come onshore to the UK. All the others should be restructured on which we could work together.

With regard to the compliance costs generally, Tom would look into using a computerised digital solution which would take a huge burden off his shoulders.

Before we ended our call Tom voiced his concerns; he said ‘any professional trustee which does not anticipate what is around the corner deserves all it gets, but I pity their clients who will of course sue them for not looking after their best interests’.

I encourage professionals in the industry to come together and collectively work towards what should be our common goal to protect clients rather than throw them under the bus when times get tough. We have to educate our clients of the difficulties we are faced so we can work together on the solutions.

Yes, we are faced with challenges but those trust businesses which can find a way to de-risk their trusts will be the winners.

Contact us to get an independent trust review.

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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 pre-ordered from Svetlana  and her book ‘Winning Business from Private Clients’ can be bought direct from the website.

The Basics

I have been privileged to work for many decades with some of the wealthiest families in the world. Over these years I have observed what they do and how, which has allowed me to distil this knowledge and experience into two Protection Plans – one for UK resident non doms, and another for those who want to keep their trusts offshore. Both target the complexities surrounding privacy and asset protection.

In this Note I will focus on the Plan for UK resident non doms.

We have all gotten so used to setting up offshore trusts for UK resident non doms, that we sometimes overlook the huge advantages of bringing the trusts onshore. GFOS offers UK Professional Trustee services to individuals who can no longer benefit from having their assets in offshore jurisdictions. 

As I have said in my previous Notes, there is a real concern that as and when HMRC receives information about trusts offshore, it will pick out the trusts which are weak and whose integrity can be questioned. HMRC knows that nobody who has worked incredibly hard their entire life to build an empire will just hand it over happily to a trustee offshore to own and control it. Investigators will want to set these trusts aside as formal or administrative shams - the more trusts that are considered sham, the more assets they will tax. 

If you or anyone you know has been investigated, you will know that HMRC is ruthless and has deep pockets. It cares little that you have to incur huge professional fees to fight off allegations, not to mention the reputational damage you suffer along the way. It is concerned only with raising taxes; and if it is successful in setting aside your trust, they can charge you to tax on all the income and gains, and on the assets in the trust, as if there never was trust. This will be a catastrophe! Imagine you have had a trust for the last 12 years thinking it is all fine and dandy until 2017 when it is declared sham -  it never existed, you've been the owner all along. The trust property can be used to pay off creditors, you will now not only be taxed on these assets going forward but you will have to backtrack 12 years and pay the tax for that period too.

The grass isn't greener on the other side as the trustees could be put out of business by having to pay back all the fees it earned as a trustee - if the trust never existed then the trustee has no right to keep those fees.

With the GFOS Protection Plan, the settlor can choose the people he wants to take the decisions in his trust. This is what I mean by getting back to basics. Trusts were always designed to be in the same place in which the family lived so that trustees that are known to the family can be chosen.

The family can choose its investment manager, lawyer and/or banker here in the UK. It also does away with the need for a Protector as this person can now be a Trustee - our plan makes sure that all trustees are protected from liability.

The third advantage, is that the income and gains are taxed in the trust on an arising basis, so there is no need to pay the Remittance Basis Fee. This has not been cheap. For non doms who have lived in the UK for more than 7 years out of the previous 9, it is £30,000 annually, for those who have lived in the UK for more than 12 years out of the previous 15, it is £60,000 annually and for those who have lived between 17 out of the previous 20 years it is £90,000.

Of course the income and capital gains will be taxed as these arise, but the beneficiary will then receive a full income tax and capital gains tax annual allowance, which is the fourth advantage.

The fifth advantage is that having the trust in the same country in which you live, means you can stay on top of your trustees and wealth, and as the saying goes – ‘You gain respect, for what you inspect.’

Get an independent Trust Review

UK Trustee Service we provide

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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

Is your adviser on your side?

In my book – “When you are Super Rich who can you Trust’ (currently out of print, but a new batch should be in soon) I have a chapter on choosing and reviewing advisers.

There are various types of advisers, maybe you can recognise one or two:

·      The Jargon Bore

This is the sort of person who is up to date with the latest press releases, cases, budget announcements, legislation and all the professional classifications. The Jargon Bore writes long letters full of the latest extracts and quotes, which takes many hours to craft, proves his superiority but contains no practical advice or real understanding of his/her client’s concerns. Most Jargon Bores will not explain what the jargon means, because this would undermine their power. Less confident clients are attracted to Jargon Bores, because they assume they are intellectually superior, but forget that they are the client, paying for long letters of advice which mean nothing to them. My advice to any client is, if you do not understand what you are being told to do and why – don’t do it!

·      The Problem Finder

The Problem Finder is a special sort of adviser. Whereas professionals are paid to identify the risks, the problem finder goes well beyond realistic warnings. They like nothing better to indulge in the ‘what if’.  ‘What if your daughter were to be a surrogate mother?; what if your grandchild were to be cloned?; and what if your son were to be a sperm donor – how would this affect who could inherit?' Clients can forget they are paying their professionals to find solutions not endless problems. Most problems can be resolved with a simple practical solution which costs very little to implement and to operate, but to the Problem Finder a simple solution – does not ‘butter his parsnips’!

·      The Nit Picker

Every professional likes to have pride in his or her work – the lawyer loves good grammar, neat numbering and proper spelling. Taking care over defined terms and the inclusion of an ‘and’ or an ‘or’, or the use of capital letters for a defined term and not a small one is not nit picking, this level of detail can make a fundamental difference to the meaning in a common law document. However, when negotiating a document – the nit-picker takes minutiae to silly extremes. You will find nit-pickers holding up the execution of a document because the indemnity clause is not in their standard form, even though word for word, the indemnity clause in the document they have been given says the same thing. It is not uncommon for deals to fall apart because of a nit-picker, losing the client many hundreds of thousands of pounds.

·      The Jack of all Trades

Does the professional have any experience in the specialist area being considered? I am a common law trust specialist, so when I was asked to enfranchise our block, as a layman, I knew enough to steer the tenants in the right direction, but refused to take on the work professionally since I would be dangerous on the details. The professional world is now so complex that the Jack of all Trades, will make mistakes. I have seen numerous examples when clients have decided to save the costs of the specialist for a cheaper Jack of all Trades, only to find themselves embroiled in years of litigation trying to unpick the mess their preferred Jack made!

·      The ‘Default Position’ Professional

There are some things that can be changed and some things which cannot – wisdom is knowing the difference. Many professionals prefer a ‘quiet life’, unless a solution is tried and tested and recommended by their ruling professional body, they will not consider it. They tell their client, ‘times have changed, you have to accept it’, ‘it is the way of the world’, ‘this is the way we have always done it’ or ‘we don’t do that sort of thing’. The Default position Professional is not always to blame, in many organisations professionals are prohibited from thinking out of the box – looking out for the best interests of the client, because of ‘compliance’. So often clients are missing out on opportunities to escape from danger or save hundreds of thousands of pounds, because they have an adviser who is banned from thinking what is in the best interests of their client - they must first think what will make the most money for themselves and their organisation.

Billionaires are in no different position to anyone else; they, like so many other UHNWIs, cannot tell if their adviser is sound or simple. They are not trust specialists so need to find someone who is. Never before has this need been greater – the strategy of out of sight and out of mind relied on by many for decades is over thanks to the introduction of CRS.

At GFOS we make available to our clients our years of expertise and knowledge of dealing with trust structures of billionaires around the globe. Our trust review does not just extend to the ownership structure, but how it is worded, administered and managed. This gives us – and you - valuable insights into whether you are working with an adviser who is sound or simple, or simply needs to be set in the right direction.

Get an independent Trust Review

UK Trustee Service we provide

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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

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.’

Get an independent Trust Review

UK Trustee Service we provide

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.

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.

Get an independent Trust Review

UK Trustee Service we provide

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.