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The concept of trust is tried and tested over centuries.
But the reasons for setting up trusts have subtly shifted over time with a greater emphasis on tax and fiscal planning or, to put it another way, as a means of removing certain obligations from the settlor (or other parties). While much of this tax planning is legitimate, at least at the outset of the trust structure, it is often viewed negatively in hindsight creating the risk of adverse publicity and/or punitive tax charges/penalties. One only has to look at the fallout from the rulings on various filming financing structures in the UK in recent times (Take That anyone?) to realise that the cure can be worse than the disease…
Ever increasing focus on the affairs of the super wealthy and related tax “leakage”, especially in relation to UK-resident people with non-domiciled status (“non-doms”), has driven a host of tax changes and more aggressive regulation in the UK. The extension of Capital Gains Tax (“CGT”) and most recently Inheritance Tax (“IHT”) to properties owned through a corporate or trust structure brought into question the value of offshore trust structures for UK non-doms and gave the sector a new concept and vocabulary when “De-enveloping” (moving a property out of a structure and into the name of an individual) was born.
Add in the greater push for enhanced international transparency (FATCA, Common Reporting Standard etc.) plus individual country efforts to see through “the corporate veil” (for example the UK’s proposed register of the beneficial owners of foreign entity owners of UK property) and it is clear that the writing is on the wall for trust structures that rely on “aggressive” tax advice or secrecy. Of course, there is a discussion to be had on the line between secrecy and legitimate confidentiality but let us not get into a debate here…
However, the creation and use of trusts is not finished. Even in the US, where grantor trusts are “looked through” for taxation purposes and require specific, additional reporting, they still have value for legitimate asset protection. In fact, the DNA of a trust which separates legal title and beneficial ownership offers a unique solution to some of the challenges faced by wealthy families around the world, for example:
• reducing country or political risk by diversifying assets out of a volatile home country (or region);
• minimising the impact of “forced heirship” provisions or legitimately protecting assets from future creditors; and most importantly,
• building and supporting a framework for the effective transfer of assets and/or wealth within a family.
This last role, however, requires a new “breed” of trustee, capable not only of discharging legal/regulatory obligations which extend to tax compliance, but also of acting as a trusted partner to the family senior (the wealth creator) or family council. This partnership can execute a very long term strategy that not only protects and enhances the trust assets but also seeks to protect beneficiaries from themselves and/or each other. Often difficult messages can be delivered most effectively by a long term partner with no interest in the pot, no finger in the pie.
The wealth creator could rightly be concerned about the impact of a sudden transfer of wealth to one or more of their successors. For some, the challenge of managing a windfall, participating in, or taking charge of, a family business and/or navigating through a world of professional advisors could be difficult or impossible to handle. And how they will respond to such a change in circumstances can be difficult to predict yet could cause ramifications for years to come. A trustee partner can help facilitate a smoother transition through multiple generations.
And there are many ways to provide a family with comfort that the appointment of a trustee does not mean giving up reasonable influence over the management of trust assets. A Private Trust Company (“PTC”) can be a flexible alternative as trustee. The board of a PTC can be extended to enable trusted advisors or family contacts to be involved in decision-making. However, while this lends some flexibility, it is vital that all the parties understand and respect their fiduciary obligations to the wider class of beneficiaries. Protectors too can have a role to play in ensuring that the families’ wishes or directions are enacted but the role demands a detailed understanding of the associated fiduciary and legal obligations.
So do not give up on the trust and watch this space for future signs of life. Trustees have a unique position as trusted partner offering independent advice and judgement to families in the most delicate and (often) contentious situations. There are many flexible structures to protect the influence of the wealth creator and enshrine the voice of family advisers or independent experts. In fact, it is ironic that changes to the treatment of offshore trusts in the UK which are designed to prevent abuse may ultimately restrict choice and undermine a structure that could be invaluable to the modern family just as it was to their ancestors…
Simon Perchard, Director
+44 (0)1534 500445
+44 (0)1534 712469
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