Family Governance II

In my last note, we looked at how poor Family Governance can adversely affect disputes outside the family in offshore trust situations. Poor Family Governance is the term I use to indicate a lack of accountability of trustees, and how it can adversely affect disputes.

This week, I will look at how poor Family Governance can adversely affect disputes within the family.

Last week, I was the guest of the International Business Finance Summit, presented by the Bahamas Financial Services Board. It was clear from the Government Ministers who attended and spoke, that the Bahamas is focussed on positioning itself to be the most attractive jurisdiction for businesses owning families to base their home and headquarters.

However, if it is to succeed in attracting these highly discerning clients, it needs to be able to demonstrate that their trust structures operate good Family Governance.

Let’s take the situation of Don who is keen to set up a trust with his second wife Susan. Don has a son from his first marriage, Ali, a son from a brief relationship, Josh following his divorce and a young daughter with Susan, Rebecca. He gave Ali a house and a large settlement when he divorced his mother, and the same for Josh when he became 21.  He wants to benefit only Susan and Rebecca.

The trust was set up for him before Josh was born and the beneficiaries are, his wife, children and grandchildren. He is very concerned that on his death, incapacity or the sale of his business that Josh and Ali, will put in a claim against the trustees for a greater share. He asked what he could do.

There are a number of provisions which can be included to deter Josh and Ali from bringing a claim, many provisions are variations of a ‘no-contest clause’. This is where a beneficiary who brings a claim against the trustees will be excluded from benefit.

My personal view is that such clauses are a retrograde step. Trustees must be accountable to the beneficiaries and if they do not act in the best interest of their beneficiaries, the trustees must be made to account. If this right to make trustees accountable is removed the are then beyond reproach.

Another possibility is to ask the beneficiaries to declare that in receiving a benefit on reaching 21, they will renounce any further right to benefit. This could again act as a deterrent, but it is by no means watertight against a claim.

Don is citizen of a country where children are forced heirs, which means they could put in a claim that the trust be put aside on the basis it is a sham. If the case succeeds then each child will get such share as is permitted by law.

To succeed Josh and Ali’s lawyers will need to analyse the trust in close detail to see what powers the trust has and whether these powers were exercised by the trustees independently from Don – which is unlikely.

The other avenue that Josh and Ali could pursue would be to see whether the powers over the trust were reserved to a Protector and to explore whether the Protector only exercised his powers at the request of the Settlor, in which case it may be argued that the Protector was the Settlor’s alter ego – and was therefore an administrative sham.

To make these arguments against the trust – are likely to be extremely expensive in legal and fiduciary costs. If both Ali and Josh are excluded as beneficiaries from the trust, the trustees would have no alternative, but to continue the action, because they may otherwise be restricted in their means to negotiate a settlement.

In most family disputes, excluded beneficiaries do not care how much a trust costs to resolve a dispute, on the basis that if they cannot benefit, they will make sure there is little left after legal fees for Rebecca and Susan!

My personal view is to steer Don away from ‘ruling from the grave’, and to put in place good governance principles. Mechanisms which will make the trustees or people who take the trust decisions accountable with their office, and not their pocket.

One trust dispute with which I was involved in a similar situation, was frozen in taking a decision, and as each year passed with the dispute unresolved, the legal and fiduciary fees got ever bigger.

If the trustees making the decisions could lose their office if they failed to resolve a dispute swiftly they are more likely to act in the best interests of the beneficiaries and resolve the dispute as soon as possible.

My suggestion for the Bahamas if it wishes to attract the business it wants, is to promote themselves as a jurisdiction which specialises in and understands Family Governance which is reflected by their trust law. I am actively advising clients on setting up robust wealth ownership structures. 

If you have comments or would like to discuss matters relating to, privacy, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Family Governance

Last week I wrote about the announcement of the BConnect Club launching its online platform which connects clients direct to exclusive deals, invite-only events for Family Offices and UHNW and an independent resource of information. If you would like to hear more, please get in touch with Svetlana.

This week I'd like to write about something I consider of utmost importance when planning for family wealth structures.

The term ‘Family Governance’ is a term I used some twenty years ago in response to the question: Why do most companies survive for a considerable time after the death of the founder, whereas most trusts do not?

At that time, I was due to go on a long-haul flight, so took with me the Cadbury Report and the Greenbury Report (which later became the Combined Code of Corporate Governance) to see what I could incorporate into trust structures with substantial wealth to assist in creating dynasties.

As a result I coined the phrase Family Governance, which I define ‘to facilitate effective, entrepreneurial and prudent management of family assets that can deliver long term success of the family wealth.’

At the heart of good governance is accountability; the executive or directors of the company are accountable to the Shareholders. In a similar way in the traditional trust, the trustees are accountable to the beneficiaries. However, beneficiaries have never had the power to remove the trustees – the trustees are accountable not through their office but through their pocket. If any decision causes a loss to the trust fund the trustees are obliged to make good such loss.

As trusts became ever more useful tool for international families with substantial wealth, so did the need for professional trustee indemnity became important. Now, it is commonplace for the trustee to be liable only for acts of fraud or gross misconduct. This I contend has undermined their accountability and good governance.

There are three areas in which disputes arise, which I will look at over the next three weeks to see in which ways accountability has been undermined, with reference to cases in which I have been involved. The first area of dispute is with extra family parties.

Trust assets are outside the reach of the creditors of the settlor, provided the assets are properly settled within the time limits set by the jurisdiction which governs the trust. I was working for a very wealthy individual, he was anxious about putting his business into a trust structure, given the need he said for the trustees to make good commercial decisions affecting the running of his business, which he did not feel comfortable that they could do.  A few years later he was sued by a former business colleague who accused him of fraud. If he had put his business into a Trust in a timely fashion as advised, he would have saved his business. Instead it suffered irrecoverable loss.

Protectors are often given powers to remove and appoint new trustees, but the office of a Protector is not comfortable. Take the situation in which I was involved recently. A beneficiary requested the trustee to pay to him trust assets in specie. The trust was of considerable value to the professional trustee, so they acted slowly and with extreme caution.

My client asked the Protector to remove and replace the trustee, but the trustee sent only a record of the decisions taken without any reasons behind them, and refused to fund him to take a legal opinion. The Protector with no recourse to the trust fund to indemnify him against the cost of legal action, was afraid to do anything, but if he did nothing, and a loss was incurred he knew he could be sued by the beneficiaries for breach of his fiduciary duty to remove the trustees when required.

In a similar case, trustees were asked to bring a trust to an end in favour of a particular beneficiary. They incurred huge costs in approaching each of the other beneficiaries to get consent to the distribution and a waiver of any right they may have against the trustee. The beneficiary disputed this cost as not being for his benefit but for the benefit of the trustees. However, the trustees were not liable as the loss incurred was not as a result of fraud or gross misconduct.

The third area of dispute is with regard to the spouses of the settlor and/or the beneficiaries. One case in which I was involved many years ago, involved a settlor of a substantial estate. She subsequently divorced her husband. He claimed in the divorce, that the trust assets should be brought into account, since the trustees had never denied her request for monies. The matrimonial judge made an order in favour of the husband, but the trustees refused to make the payment to my client on the grounds that the payment was not for her benefit but for the benefit of her former husband.

In due course, the Judge made an order that she was in contempt of court, and threatened her with prison. She pleaded with her trustees to make the payment to stop her going to prison – which they did but not without a waiver from her of her rights to sue them for loss due to their breach of fiduciary duty.

These cases highlight the frustrating situations which arise due to a large degree on a lack of good governance which is prevalent in most international trusts.

Next week I will address the difficulties which can arise between families and how poor governance exacerbates the problems.

If you have comments or would like to discuss matters relating to, privacy, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

A Club for UHNW Families

I am proud to announce BConnect, a Club for UHNW individuals and single-family offices, which combines the connections and expertise of both GFOS and Bespoke Connections to form a ‘one stop shop’.

Our mission is to introduce our UHNW members and single-family offices of which GFOS and Bespoke Connections have, between them hundreds, to investment deals, luxury products and advisory services through our digital platform. We use technology to connect our UHNW members and single-family offices with the opportunities, skills and expertise of our contacts and make the connections between them bespoke and personalised.

My boutique law firm, GFOS focuses on the protection of family wealth and the preservation of privacy, in a fully compliant manner. I was head of the private client department of Simmons & Simmons, and am a practicing lawyer and fellow of the Chartered Institute of Taxation. I have worked for some of the world’s wealthiest families for over three decades and know a lot of people, many of whom share my passion to connect the UHNW community and their single-family offices with investment opportunities, products and services they may not otherwise find.

In setting up Protection Packages for my UHNW clients I am frequently asked to be on the board of their ‘Headquarters’, the board which sets out the strategy for their single-family office or global business empire, either in an executive or non-executive capacity. From this lofty position, I am able to find out what these wealthy families want. They are looking for good returns without excessive costs, freedom from disputes, privacy and meaningful succession.

Ankush Mehta who founded and runs Bespoke Connections, is of the same view. He is in business with a team of 15, working for hundreds of single family offices helping them to find the investment opportunities they are looking for.

With record low interest rates and stratospheric compliance costs, single family offices are tasked to find good investment deals. Many speak highly of the service and connections Bespoke has made for them, but are also aware that if they are to see more deals in real time in their area of interest, across the globe, connections need to be made digitally.

Through BConnect we want to offer you a better way to connect to our UHNW individuals and single-family offices.

For centuries, the private client industry has relied on personal contacts to find the right investments, luxury products and advisers. Each adviser has on average 3,000 – 5,000 contacts, how can you keep in touch with them all, in a meaningful way, if not digitally?

In my book ‘How to win business from Private Clients’ I address this question.  Everyone has an innate fear of the influence of strangers – to build trust, this fear must be overcome. It takes between 5 and 12 touches before this innate fear begins to abate and trust starts to grow. If you only ever do this in face to face meetings – it can take years, Most people give up after just 2 touches – one meeting and one follow up. This is not enough to build trust and win business.

Only 1-2% will buy from a stranger, to win business effectively and efficiently, it is necessary to overcome the ‘innate fear of the influence of strangers’ and to connect more regularly - digitally.

My book sets out an eight-point plan and shows you how with the proper use of digital technology, you can increase touches and build trust electronically, easily, cost effectively and simply – at a click of a button.

If you have an investment opportunity, luxury product or advisory service which you think may be of interest to our UHNW members, and/or you wish to buy my book, simply contact Svetlana who will put you in touch with the appropriate person.

Our launch party is on the 20th March for our UHNW members and single-family offices. If you wish to find out more simply contact Svetlana on 020 3740 7423 or e mail on svetlana@garnhamfos.com

Hugh Grant's hacked off

Last week, Hugh Grant was awarded a six-figure sum from the Daily Mirror Group for a breach of his human right to privacy. The DMG admitted that it had turned a ‘blind eye’ to the unlawful tapping of his phone by its journalists over decades. The compensation he said he would give to the charity ‘Hacked Off’ which was founded to lobby the Government about press intrusion.

But what is all the fuss about, you may ask? Hugh Grant has made a lot of money from being an actor, he should accept that his private life is of interest to the public and journalists are paid to find stories which sell newspapers.

William Hague is on record as having said ‘If you have nothing to hide, you have nothing to fear’.

We live in a world where privacy is a thing of the past. Everywhere we go, cameras are watching us – we accept this intrusion, to keep us safe, our mobile phones tell the world where we are at any time – we accept this intrusion as vital evidence in catching criminals – every-time we use our browser, we leave a foot print about who we are, what we like and what motivates us – we accept it, because the internet gives us more of what we want. Most of us do not care, we are neither famous nor rich, the public is simply not interested in what we do or say, it does not materially affect our lives.

The reason why Hugh Grant took the DMG to court and supports Hacked Off is not that a few journalists listened to his private conversations – but that they could ruin him. Look at how the stories about Kevin Spacey and Woody Allen have affected their lives. People won’t want to work with them, their films may be boycotted, the public has no sympathy.

Politicians can similarly be affected. Would the knowledge that Tony Blair smoked pot at university, or that John Major tucks his shirt into his underpants, or Trump paid a pin up girl to keep quiet about their affair affect how you vote?

Max Mosley, youngest son of Sir Oswald Mosely and Diana Mitford, said that the invasion of his privacy was ‘theft’. He will not be remembered for his presidency of the FIA, his contribution to the safety of motor racing, his physics degree, or his work as a barrister, but for the images of his naked buttocks and orgy with five women, one dressed in a military uniform. Is he now overlooked for offices, positions or invitations, due to the fact that he liked a ‘gang bang’?

In today’s world of invasive technology, we cannot stop the collation of information about our private life – the genie is out of the bag, and no amount of lobbying and campaigning is going to put it back in. But it is not the information we need to worry about, it is how it is to be used, by whom and for what purpose – and of most relevance whether it will materially affect us.

Governments across the world want to raise as much tax as they possibly can. But Governments, like journalists are not above the law. Salacious stories about Hugh Grant may sell newspapers, but tapping phones to get them is illegal. Governments may wish to raise more taxes, but is the collection of offshore financial information, where there is no suspicion of tax evasion, an invasion of human privacy and an abuse of power?

It is neither morally nor legally wrong for UHNW individuals to transfer money to trustees in an offshore jurisdiction. The fact that this is then no longer owned by the tax payer, is a matter for legislators to devise anti-avoidance legislation. It may be irritating, for governments to see so much money out of their tax reach, but this is no justification to invade their privacy and attack them.

Of course, there are some people who have set up trusts offshore who never intended to cede control to the trustees. These people should, in my opinion, be reported under an obligation which the OECD could initiate, to declare a suspicion of tax evasion. But surely it is not right for the government to collect and exchange all sensitive financial information, regardless of any suspicion that tax is being evaded?

Furthermore, it is not a good use of public funds to engage in fishing exercises, and to attack legitimate structures offshore which will only lead to the loss of thousands of pounds in professional fees and little if anything to show for it for the Treasury.

By all means, Governments should pursue tax cheats and dodgers, but they should not waste precious public money chasing butterflies.

If you have comments or would like to discuss matters relating to, privacy, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Charities - the biggest scam?

Travelling through the foothills of the spectacular Dolomites with seven of my former Simmons partners, most of them litigators, on our annual skiing trip, I caught the tail end of a conversation. ‘What happens to funds raised for a charity, which is more than it needs – like the funds raised for the victims of the Grenfell Tower disaster?’ I piped up from the front of the bus, not really able to engage fully in the conversation over the drone of the engine – ‘Cy-Pres’.

Of course, the answer is much broader and more worrying than that one word.

Most charitable trust funds are worded so widely, that only a fraction of the funds raised need be spent on the main purpose, such as the victims of the fire and their families. The rest can be distributed to other grant making trusts, a local Council for it to spend on regeneration of the district or on mental health services; if that is what the purpose clause provides.

The doctrine of Cy Pres only kicks in when the purpose of the fund however broadly drafted has been exhausted. If a charity is set up for the relief of a specific disease ‘Xsis’, which is then eradicated, the doctrine of cy-pres allows an application to be made to the court to amend the terms of the charitable trust to follow as closely as possible the original intention of the testator or settlor to prevent the trust from failing. So, if Xsis affects African males living in Uganda, which has been eradicated, the court could change the terms of the trust so that the funds can be used for the relief of ‘Ysis’, as it also affects African males living in Uganda in much the same way as Xsis did.

Although I was not able to follow closely the conversation, what appeared to be the subject of discussion was how little had been distributed and how no-one appeared to be answerable to the complaints of the families who had suffered.

The body to which charities are answerable is the Charity Commission, but this is overburdened and under staffed.

David Holdsworth, the charity registrar in England and Wales, is on record as having said ‘It is unusual for us to be involved in this way as regulator but because of the urgent need of the victims of this tragedy, and because of the great generosity of the public who have given millions to different charities, it was right that we stepped in and helped charities work together in the best interests of those affected’.

By August of last year, the Charity Commission, said that a total of £18.9 million had been raised mainly by three charities; the Red Cross which raised £5.75m, the Kensington & Chelsea Foundation a further £5.75m and the Evening Standard which raised £6.78m. Of this sum only £2.8 million collected had been distributed by August to the victims, less than 15%.

The Red Cross said: ‘Every penny of the £5.75m raised by the Red Cross for the London fire relief fund will go to the surviving victims of the Grenfell Tower disaster and their families’. It said funds it had raised were being distributed on its behalf by the London Emergencies Trust, which had by August handed out £551,000 in grants.

These payments include a £10,000 Fresh Start grant. In addition, survivors who spent more than six hours in hospital can get a payment of £3,500 and those who lost a relative in the fire can get a payment of up to £20,000.

But, what of the remaining £5.25m? What is it being spent on, by whom, and who is making sure it is being spent for the purposes which the donors gave? If the Red Cross has given it to the London Emergencies Trust has it got any responsibility to ensure that it has been spent on the victims of the blaze – no! It is only the Charity Commissioners to whom charities are answerable and it is too busy with its 200,000 odd charities in Britain to keep a close eye on any one of them; and the monies these charities hold are ENORMOUS! In 2015, the top 5,000 charities held between them £17.46 billion – and I thought it was to be spent, - not kept aside for a rainy day.

According to David Craig’s book ‘The Great Charity Scandal’ there are 1,939 charities in Britain for children, 581 for the relief of Cancer, 354 for birds, 255 for animals and 81 for alcohol abuse. The Charity Commission cannot hope to help charities work together for the best interests of those affected, it hardly has the resources to make sure that the funds are being spent for the purposes for which they were raised – if at all.

Is it hardly surprising therefore with so little scrutiny that wealthy individuals seeking to make a difference set up their own  to make sure it is run properly, but this then adds another charity to an already overburdened Commission – and the problems thereby get worse.

From my experience rot sets in where money is allowed to accumulate without proper checks and balances as to who is making the decisions, where the money is going and what for. There are always complaints about how much charities spend on administration and marketing, which can be as high as 50%, but this could be just the tip of a rather stinky iceberg.

I have no solution, maybe you do?