FATCAts

Now that everyone is returning to work after the long summer break, we begin to hear the cogs of business clanking back into action. But all is not as it was.

It is now September and families with trusts offshore are looking to see what they can do to maintain the confidentiality of their trust assets and their own details as participators ahead of the arrival of the automatic exchange of financial information, which in some cases starts now.

For these trusts it is already too late – reporting entities across the globe have collated information and exchange is now due. For any trust which switches trustees now, careful planning needs to be done in order to evaluate whether or not they have missed the boat.

Numerous professional trustees have seen an exodus of business to S Dakota, Alaska or Nevada, some before 2017, but many more this year.

Jules was one of the people who came to see me earlier in the year. He has many well-known businesses around the world and years ago decided on the Bahamas as the jurisdiction for setting up his trust. Antonio, an adviser in Jules' home country of Argentina, had approached him with the idea of migrating his trust to Nevada. Antonio, according to Jules, was very persuasive. 

Antonio knew the natural fear and paranoia which Jules has been experiencing over the last few years with respect to confidentiality. ‘The US is not a signatory of CRS, the Trustees will not need to report to the IRS, so your financial information is safe in the US!’  Antonio told him.

Jules was uncomfortable as he was not convinced it was as simple as Antonio was making it look. He had heard of me from a business colleague of his for who I did some structuring work so he approached GFOS for an independent opinion.

I pointed out to Jules that Argentina had entered into an ‘Agreement for the Exchange of Information relating to Taxes’, with the US, on the 23rd December 2016, for tax information arising as from 1st January 2018.  

Under this agreement the exchange of information from the US to Argentina would be either, ‘Upon Request’, ‘Automatic’, and/or ‘Spontaneous’. Jules was shocked; if there was such a treaty in place, why was the US such a safe haven? Why are advisers taking their clients willingly into the US trap?

The difference between the US and a CRS country, I told him, was that CRS countries are obliged to collate and report on all financial information on accounts held by foreigners, whereas the IRS will only report on financial information which comes its way.

Crucial to this special status is that the trust has a FATCA-sponsoring entity, which means an entity which will divulge all information about the assets and participants of the trust on demand.

If the trust does not have a sponsoring entity, or it loses its sponsoring entity status, the trustee must register the trust as a foreign US-based trust with the IRS and the trust will be issued a ‘Global Intermediary Identification Number’ (GIIN). Such a trust has ‘Chapter 4 FATCA status of a participating FFI’, which is indicated on its W-81MY or W-8BEN-E - forms it is obliged to fill out. This information will then automatically be exchanged with Argentina.

The million-dollar question is therefore how likely is it that information will be requested of the sponsoring entity? The answer is, quite high. First information may have been exchanged from the previous trustee if, like Jules his trust is in a jurisdiction which is within the CRS regime, second it could arise from the amnesty demands - most residents in Argentina have declared trust and non-trust assets. Third, if a distribution is made to a beneficiary then the beneficiary must declare that as a distribution from a trust, and fourth, if any one of the beneficiaries opens an account in the US, has assets in the US or in any other way becomes known to the IRS, information will be automatically exchanged.

Before Jules makes a decision, however, he needs to be aware of the consequences of any leaked information which to put it lightly will be catastrophic.

Under US tax law the assets of a grantor trust are treated as the assets of the grantor. It is a small and simple step for the tax authorities of Argentina to declare that the assets of a grantor trust are to be treated for all tax and reporting requirements as belonging to the Grantor.

This is much simpler than arguing that the trust is a sham meaning they don't even need to bother with sham arguments or years of investigation. If the Argentine tax authorities, with the information in their possession, argue this point there is no plan B and almost no wriggle room – Jules would be a sitting duck to be shot at by the Argentinian tax authorities who would not waste a minute to make an example out of him.

Provided some modifications were put in place to his trust and assets in the Bahamas he could not only keep the trust assets and its participators confidential but of even more importance, should there be any leakage, the consequences need not be disastrous!

Jules didn't want to play Russian Roulette and provided we carried out a health- check on his structure, he will keep his trust in the Bahamas. 

If you would like an Independent Trust Review please get in touch with us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline's books 'When you are super rich who can you trust' and 'Winning Business from Private Clients' will be republished on 11th October at Waterstones Piccadilly. 

Interview with the Financial Times

Last week Matthew Vincent, the leading journalist on the private client industry for the Financial Times, called to ask a few questions about the ‘value added’ services that Family Offices can provide.

I am close to a number of CEOs of Single/Multi Family Offices and decided to pick up this issue with them. For many of them I was part of the team that created the family office structure they are running so they felt comfortable to speak openly to me.

First all the CEO’s I spoke to said there was a real distinction between a Single Family Office, where the family or in some cases families have formed a Family Office to look after their financial interests, and the Family Offices which have been formed by investment managers. These investment managers could have come from a range of backgrounds; private banks, hedge funds or fund managers to form a boutique that acts for UHNW families. The attitudes, philosophy and goals of the two are very distinct.

A multi-family office – which is the term I will use for the investment manager led office, has as its primary goal to win new business; increase AUM, and will use many of the methods applied by the institutions they have come from; networking with intermediaries, hosting conferences and an active profile on LinkedIn.

The most pressing challenges faced by single family offices are to reduce costs and drive up returns on investments. Top priorities in reducing costs are to minimise the fees paid to banks and intermediaries, tax and any form of dispute.

For those family offices which either alone or combined with other families, can boast institutional wealth, a reduction of costs is easy if they can secure the same privileges and rates as institutions. They will then invest in these funds available only to institutions; pensions and insurance companies, which are blessed with the best deals, the best professional opinions and the best financial analysts.

The value added for these families in the future is their eagerness to buy the fiduciary arms being shed by global institutions, which could then be built into the private banks of tomorrow.

The families who do not have institutional wealth have different value add objectives. They are looking to private equity to increase returns but recognise that it is a risky proposition.

To minimise the risk, SFOs are first looking for deals which have been pre-qualified by one or more investment analysts. Then they need access to a team of advisers – which we call the inner Ring of Confidence, to monitor the development of the private equity investment, make the most of tax breaks and diffuse disputes before they escalate into a costly problem.

These investors are also looking for a secondary market so that as and when an equity investment succeeds, they can take profits, by selling part to other SFOs.

Notwithstanding the risk, there are some interesting added advantages to private equity investment; first with a good spread, one or two investments will come good, which will be taxed as capital gains against which any losses can be set off, second there are numerous tax breaks for investing in private equity, not least business property relief for inheritance tax and third families like to co-invest – or at least talk about it – sharing is caring!

There have been a variety of initiatives keen to use digital technology to meet the needs of these Single Family Offices. If any-one succeeds which is likely, much needed finance for small to mid-cap private equity will be available and more jobs for professionals eager to work with and for SFOs will be forthcoming.

On tax and Brexit, all Family Offices, large or small based in London, are disappointed that the UK has not followed the Singapore model, which encourages wealthy families to live in their country. As the UK haemorrhages its lead by diluting its tax breaks for non doms, other European countries have taken the initiative and UHNW families are considering seriously emigrating to their shores for the tax breaks; Italy, Portugal, France are keen to attract wealthy families, to name but a few.

All SFOs, whether onshore or offshore, large or small are affected by the speed of change to their world. A few however are excited that the change has thrown up opportunities. If you are one of these few please feel free to comment.

If you have other questions on setting up a Family Office, managing your FO or have other questions please get in touch with us direct:

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline's books 'When you are super rich who can you trust' and 'Winning Business from Private Clients' will be republished on 11th October at Waterstones Piccadilly. 

A woman's weakness

With so much attention on the death of the Princess of Wales over the last few weeks, my attention was drawn to the rich and successful women I have worked with and for, over the years. One particular woman came to mind – the details of her case are altered and I have her permission to write under the pseudonym of Janet.

She lived in the Midlands with her husband of twenty years whose name was Alan. He had worked all his life as head of a depot and even though they lived a simple life, they had two children they adored, many friends and considered themselves happy. Quite unexpectedly twelve years ago, Janet received a telephone call during which she was asked to confirm her maiden name and the name of her father, which she did eventually albeit reluctantly. She was then told that her father’s brother, Bernard had died in a car accident in Australia and she was now the main beneficiary of a trust set up under his Will of many hundreds of millions.

She knew little about her uncle other than he was a successful businessman in mining but had brought disgrace on the family by declaring his homosexuality at a time when it was illegal. Janet asked Mark, the caller, to write to her to set out what she could expect and what she needed to do.

I had been Bernard’s adviser for many years and was responsible for setting up the trust under which Janet was to benefit so Mark referred her to me.

We met in the café in the Royal Academy in London and she couldn't be more different than her uncle Bernard - he was flamboyant, stylish, outspoken and sometimes even brash. As we talked through the circumstances of the trust and what she is to inherit, she was of course thrilled but no one could predict how the new found wealth would influence her life.

With her first lump sum, she paid off her mortgage and put some money aside for the children. Alan gave up his job at the depot and Janet and he went on a three-month cruise around the world.

Alan supported Janet by taking it upon himself to liaise with the trustees and conveying to them their needs and interests, and all was fine for many years. Then, Alan developed prostate cancer and had to undergo surgery and chemotherapy. Janet found herself not only looking after Alan bt also dealing with the trustees which he had done fore years. Unfortunately, she discovered that significant payments had been made by the trustees into their joint account, out of which Alan had transferred substantial sums to himself. 

The relationship between Janet and Alan quickly began to break down. She felt betrayed, she felt that the unfortunate illness had taken a toll on their marriage and soon started looking for ways to become more independent. She bought an apartment in London where she was spending more and more time with her personal trainer Jason, about 25 years younger than her.

She also began building an impressive jewellery collection; she acquired some pieces from teh Elizabeth Taylor collection and had some other priceless pieces of museum quality. She was often asked to lend her pieces to exhibitions and Jason was there to travel around the world with her and help with whatever she needed. Every next time I saw her she always had something new to show me. 

About two years ago, Jean her fine jewellery adviser phoned me in a state of high agitation saying he had seen one of Janet’s pieces for sale. 'Why was I not informed?’ he shouted. We got in touch with Janet and she didn't take Jean's concerns seriously; she actually laughed and said the piece was safe at her London apartment (where she kept most of her jewellery). Jean being Jean and having had experience in dealing with cons demanded to see it for himself and when Janet showed it to him he immediately realised that what she had in her possession was a fake! Her piece was replaced with a fake and the real one was on sale with Christies! 

After a very unpleasant and very long discussion, going through CCTV in her building, aquiring from Christies on the seller of the jewel, Jason was called to explain. He was the only person, other than Janet, who had access to her jewellery. He told us how he had made copies of Janet’s favourite pieces so that Janet could wear them while they were away at museums and didn't think of informing the trustees or even Janet herself because he didn't want to trouble her as she had a lot on her plate. When he was approached by a buyer it was too easy and too tempting not to start selling of the real pieces. He quickly turned vicious, calling Janet all sorts of names and boasting at how easy it had been to rob her.

Janet was distraught; as the case against Jason progressed, she began drinking heavily. I told her that she needed to gather around her professional advisers, who she could trust and gave her my Guidance Notes on how to build an inner Ring of Confidence (which you will find attached to my book When you are Super Rich who can you Trust? due to be republished on 11th October) to work through.

When she had finished, we sat down and worked out what she wanted to do and how we could put together a Ring of Confidence – specifically selected for her. Once a strategy was in place we looked for someone who could help her with her drinking.

I found her an incredible woman who despite the many knocks was still able to simply brush it off and move on, she carried herself with dignity and never complained. Many mistook her for weak or for a fool but Janet learned quickly that the 'friends' you attract because of money can be your worst enemies. She was smart, tenacious and wanted to be surrounded by the right people.

For Janet, I am pleased to say there was a happy ending. Her Ring gave her the confidence she needed to make decisions and it did not take her long to find a new man friend; a private banker. He was perfect for her. He was not her private banker but was someone she could trust because he is able to give her advice whenever her professional advisers are suggesting things of which she is not sure.

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The father with the disappointing daughters

Last week I met a client who I will call Tom, for a coffee, I had given him some tax advice some months ago, so I thought our meeting was a follow up on the work we had done but I was wrong.

‘I wanted to meet because I have been reading your notes and wondered whether you may be able to help on a domestic issue which is getting out of hand.' Intrigued, I asked him to continue, ‘As you know I have built a successful business and have 1,245 people working for me. Each employee reports to a manager and each manager reports to my board. Every month we go through the figures of each department and the board responds accordingly. Everyone knows what they need to do and they do it, if they feel they deserve a better deal, they can ask, we always listen, but they may or may not get what they want’.

‘Over the years, I have taken profits and invested them; a fine country home, farm, beautiful furniture, a number of boutique hotels, other hospitality businesses and an investment management company. I have a really good inner Ring of Confidence – as you describe it – a good team of advisers, which meet on a regular basis and update me on all my investments. I am lucky to be still married to my childhood sweetheart, have one fine boy who works with me, but my three daughters have been a disappointment. I have always been generous with my girls; I have provided them with homes, set up an education fund for their children, and financed their husbands in business ventures, but they are envious of their brother’s success working for me, and are feckless. The more I give them, the more they want and if I tell them they cannot have what they want, they complain, cause trouble and I am worried I have made mistakes in the way I brought them up.’

‘My youngest now wants me to take her husband into the business, when I know he is not qualified, my eldest wants me to set up a gallery for her husband to run, and the middle girl and her husband keep racking up fees buying horses to event telling me each year that the next new horse will make their fortune’

I explained to Tom that all families have their problems but for wealthy ones, the problems are magnified. The UK has centuries of experience in managing family fortunes, largely because, unlike civil law, it promotes primogeniture and the preservation of wealth for future generations. This is the reason why country estates have stayed intact (until such time as they had to be sold to pay tax).

Of course, leaving the bulk of the family fortune to only one child was not always well received by the others, in the same way as Tom’s daughters envy the good fortune of their brother. Maintaining family harmony, in the past, was left to trustees. If the family fortune was held in trust, investment decisions, distribution of wealth and succession was then not the responsibility of the head of the family, in the same way that salary increases is not in the sole discretion of the CEO of any business.

I told Tom about some of the families and the trusts I have had the privilege to work with. Numerous family member requests, I have seen turned down by a board of trustees or accepted with conditions, it is not the decision of the settlor along. If a family member wishes to start a business venture for example; the trustees need to see a business case and will decide whether or not to invest according to the viability of the proposition.

‘On what basis do the trustees make their decision?’ Tom asked. ‘In most cases,’ I told him, ‘the founder makes it clear what he wishes to achieve, which I prefer to set out in a binding – but flexible memorandum. Ideally I like to discuss this with all members of the family. In this way they then know what to expect and can adjust their lives accordingly. Many founders want to incentivise their family members, with matching payments for entrepreneurial endeavour, but I have seen this lead to unfair consequences such as for mothers with young children, or for those who work hard but for non-profit organisations, sporting activities or charities. This sort of approach would merely aggravate Tom’s domestic concerns.

‘Do I need to set up my trust abroad?’ Tom asked. ‘it depends’ was my reply’, ‘on how important tax mitigation and privacy is. Now that privacy is compromised by having structures offshore many founders of family fortunes are moving their structures onshore where possible’.

Tom confessed that he had only thought of trusts as being vehicles to avoid tax, and was somewhat confused as to how a trust could be used to give him and his team of advisers not only control, but family harmony.

I peered at Tom through my ByOcular glasses which I like to wear when I am being serious. ‘Trusts have been used by wealthy families to preserve wealth and family harmony for centuries. Tax was not until recently the main reason for setting up trusts, asset protection, control and family harmony were the main drivers.  Tom was keen to explore further, so we agreed to work together to scope out his concerns to see whether a family trust could be a solution.

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Watch the ingredients

Jamie Oliver celebrity chef and father of five, has admitted to losing £90 million since 2014 by investing in friends’ projects. He is now on record as saying ‘I should not have mixed business and pleasure’.

Jamie Oliver, came up in a conversation I had last week with one of my UK dom clients who I will call Bobby, who is not dissimilar in situation and background to Jamie Oliver. Whereas, Bobby was brought up in Suffolk, not Essex, went to a Comprehensive school not a grammar school, both are UK resident and UK domiciled, both are high profile with high profile families, both have made millions in books and related businesses, both have been caught up in bad press and public disputes, and both have lost tens of millions in loss making projects with ‘friends’.

Bobby was candid about his experience and his expectations of what he thought it would be like doing business with family. I quizzed him on the subject, ‘When I started to make money, it was so exciting, I wanted to share it with everyone, I had made more than my wildest dreams, I wanted everyone to know that I was the same bloke, same standards and values; still like watching football, having a drink with my mates and giving a helping hand where I can, but the people I came across, even my old mates, treated me differently when I had a few bob – I did not want money to change the relationships with those around me but felt almost forced to.’ 

He went on, ‘I was foolish to bring my family into my business profile.’ We were such a happy family when the kids were young, I could not see how publicity could harm them’. 

Bobby has two adult kids, who I will call Jack and Lucy, and two younger ones. ‘Jack and Lucy have had to learn quickly who their real friends are, they had to deal with a lot of negativity and pressure on social media and at school. ‘They now tend to gravitate towards kids of wealthy parents, who understand what it is like to be born into a rich family, but my concern is that a lot of them lack any direction or drive.' He described to me how Lucy made a friend whose parents live in Monaco. Most weekends her father sends a private plane to pick her up to ‘come home’, and whenever Lucy has been with them, the parents are rarely there. They go out with a group of other kids in Monaco where they wear expensive clothes, go to ludicrously expensive nightclubs and get boozed or worse. Bobby says that it took a while for Lucy to find her way out of the group as she has always been an ambitious and driven kid who wants to make a difference.

I explored with Bobby what his goals were. This is a topic I go into in some detail in Chapter 1 of my book ‘When you are Super Rich who can you Trust?’ It soon became clear that Bobby wanted to give his kids a sense of purpose and responsibility.

After a meeting with Jack and Lucy, it became obvious that Jack was drawn to co-investment and project planning – which his father is poor at, and Lucy, was keen to manage a team of advisers and her father’s charitable endeavours.

We; Jack, Lucy and I, with their father’s blessing, set to work on elaborating on the goals set by their father and in selecting a team of advisers which would assist them in delivering his goals, the family’s inner Ring of Confidence. We then needed a structure into which all elements could fit including the family’s objectives, with clear rules as to what was expected of each adviser, and the structure could be adapted to new circumstances over time.  

Jack and Lucy, were excited as they had always wanted to find roles for themselves in their father's business but because he had been badly bruised when working with family and friends previously, he was cautious of bringing his children on board as well. It took him some time to recognise the potential and to recognise that the young generation can be the continuation rather than the destruction of wealth.

The first step was to produce a Report with recommendations which we put to Bobby in early June; he approved. We then agreed an action plan, on how to implement, which we is not nearly complete. Bobby is thrilled. ‘We may not have been able to put back the clock, but we have found a way to engage Jack and Lucy in consolidating and building on my work, filling in the gaps and making my wealth and legacy go further in a way I clearly cannot!’.

Get in touch with us for a preliminary consultation or if you'd like to pre-order any of our books.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423