To trust or not to trust?

Date: 26 Oct 2007


Globally the use of private trust companies is on the increase, says Steve Cantor, Managing Partner of Cantor & Webb a Miami law firm. “We’ve been seeing private trust companies set up increasingly when a family has a group of businesses across multiple jurisdictions.” Dealing with many South American families he says his clients choose this option because they don’t want a trustee to run their business but would prefer a family member in control.

Although trusts were extensively used in the 70s and 80s for tax planning reasons, in the UK there was a significant change in direction with the announcement of taper relief which made them less attractive.

Richard Baldock, Head of the trust operation at Rothschild Private Banking and Trust explains that “there are four main types of trust: A revocable trust, an irrevocable trust, a strict or fixed-interest trust or a discretionary trust. It’s also possible – and indeed common practice – for the owner to be a beneficiary as well.”

Geoffrey Todd, a Partner at Boodle Hatfield is keen to highlight the role of trusts in tax: “Tax planning using trusts is still alive and well. Families want to protect themselves against law changes and the recent Capital Gains Tax in the UK Pre-Budget Report is an example of this.” Says Geoffrey. “The favourable treatment for business assets was more than a surprise.”

However, according to Daniel Martineau, Managing Director of Close Trustees (Switzerland), who has managed the transfer of wealth or assets from a family business into a trust for more than twenty years “The primary use of trusts for family businesses is to organise succession. Taking this route, business owners would be provided with three elements of support: responsibility for business decisions; creating value for the children who don’t want to participate in a business and assign roles to those who do; and looking for opportunities to grow the business and assist with profitable development.”

But trusts can also be used to avoid the break up of a family business. “If a business owner had a shoe factory, shoe shops and a leather tanning factory, the use of a trust mechanism would allow the different businesses to be formed into a group headed by a trustee,” explains Brian Clarke, Managing Director of Key Trust, Jersey in the Channel Islands. “The family members could continue being in charge of separate businesses but have voting rights over the whole unit as trust beneficiaries.”

He also makes a pertinent point about family members from different cultural backgrounds. “In Indian tradition, the male side of the family takes on the direction and governance of a business, like a Managing Director role, leaving the females, no matter how qualified, without a position in the family business. If the business was left in trust, the trust could serve the social and philanthropic actions of all family members derived from the assets and their value and create roles for the females.”

Peter Rice, Senior Relationship Manager at Vistra Trust Company in Jersey offers us an example of the use of trusts to protect business wealth in divorce. “A wealthy individual I was dealing with in the UK wanted to leave to retire to Spain. We organised fiscal planning and put assets into a trust before he got there. He had an ex wife who had left him and a very young daughter. Sadly he died shortly after his move, but before he died he said ‘please put the assets in trust for my daughter; my wife left me so I don’t want her to benefit.’ With this arrangement there are no wealth taxes, probate or wills because trustees hold the assets. The ex wife tried to get the assets but it survived the court case.”

He adds some interesting points for those worried about trustee involvement. “Trustees work for the beneficiaries so careful thought will be applied to circumstances of beneficiaries and instructions amended if they aren’t working appropriately. He also says there is a difference between common law and civil law trusts: “The legal strength will vary by jurisdiction.” Although Andrew Cleeton, Senior wealth planner at Lloyds TSB International Private Banking says that many countries like Monaco which is a civil law jurisdiction allow residents to dispose of their estates in accordance with rules familiar to them. “It is called a Law 214 Trust must be registered with the Monaco Court, who maintain a register.”

Rose Wong, Head of international financial and trust planning at SG Hambros Bank in London adds her view. “Divorce planning is increasing particularly for children of business owners.” And there are some unique elements that can be applied to a trust. “For one trust, I put in a detailed plan where we had a management committee, composed of one blood line family member and two employees of the business who had worked there for more than five years. The owner wanted ‘honest and loyal staff’ with a track record and set out how he wanted the business run even after death.” As an after thought she says. “I also often highlight mental incapacitation as something business owners should prepare for. It offers peace of mind to the family if plans are in place.”

Penny Lovell, Business Development Head at Family Fleming & Partners (FF&P), who are a family investment management and trust business, manage wealth from past family members who include Robert Fleming, a Dundee merchant and rail speculator and Ian Fleming who wrote the James Bond books. “FF&P set up it’s trust business in 1923 which has now benefited six Fleming generations.” Says Penny. “At a personal level, we know it’s been successful because if you meet the younger generation they understand implicitly that they are simply passing along the Fleming wealth to future children.”

But if trusts are not your thing, Marc Farror, Director, Mourant Private Wealth offers some specific alternatives relevant for families in different countries. He does warn though that a lot depends on the jurisdiction of the family and their tax status and recommends that clients get written advice from a private client lawyer, accountant or tax adviser before choosing these routes. “Tax laws change from country to country with many families having members spread across the world.” Says Marc. “The complexity is enormous. We use four alternatives to trusts: the first is setting up a company whereby a client can transfer an asset like a property into it for tax efficiency. Then you have foundations, which are very popular with Europeans.” He adds an aside. “Trusts are an English invention also used in the US but foundations are very interesting for people from a civil law legislative background like Switzerland. It’s a civil law led structure that is half like a company, where directors are appointed and half like a trust. It’s a concept that is well understood by Europeans.”

Although Jersey in the Channel Islands, where Marc is based, doesn’t have a foundation law, Marc says they run the foundation through Jersey but transfer administration to Liechtenstein or Panama. “Other methods used by families are bonds which are a basic or ‘vanilla’ choice. They allow tax advantages for the UK resident and domiciled client or family who we usually struggle to find offshore benefit for. You can put assets into a bond which, with an underlying fund investment will enable clients to withdraw 5% each year over twenty years and defer tax payments.” Continuing Marc says. “The fourth structure is Islamic, using Sharia principles, called a WAQF. It’s set up for charitable, beneficial or faith purposes like donating to a mosque or supporting family members. Where we have clients from the Middle East we find it much easier to explain a WAQF structure than a trust. The difference is small, the main exception, that you apply Sharia rules. Culturally it’s a better thing because clients tend to understand it. However if there were children in countries like the US, it would be better to use a trust for equality because a Middle Eastern focus may not help that child.

Geoffrey Todd of Boodle Hatfield offers a further view. “You could also rearrange a family’s shareholding for example by splitting the rights attached to shares so that those involved in the business have voting rights and those staying out of it just get the income.” Joshua Rubenstein, Managing Partner at Katten Muchin Rosenman, a leading private client law firm in New York agrees. “Companies and partnerships are common alternatives to trusts and sometimes even additions. Other options include marital agreements, both prenuptial and postnuptial, especially in the United States where they are legally enforced.” He adds that foundations in the US must be charitable and that excessive business holdings are not allowed. “Insurance wrappers can also be used to hold many kinds of investments and to direct the distribution of the proceeds, but business assets don’t always lend themselves to being held in insurance wrappers so advice will be needed.” Andrew Young, Head of Private Tax and Capital at law firm, LG adds a final cautionary note. “Failure to implement lifetime structuring, be it trust, foundation or some other option will give rise to problems, delays and costs for the family at a later date. I make a modest living from helping clients with lifetime structuring but an extremely good living from sorting out problems left by clients who neglect to plan.” Russell Bussey Vice President of AllianceBernstein Global Wealth Management agrees. “Failure to plan leads to many problems and will have a detrimental effect on the families future business success.”

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