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.
While much of this tax planning is legitimate, at least at the outset of the trust structure, it is often viewed negatively, 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 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 and most recently inheritance tax to properties owned through a corporate or trust structure brought into question the value of offshore trust structures for UK non-doms. It gave the sector a new concept, and moving a property out of a structure and into the name of an individual, or de-enveloping, was born.
Add in the greater push for enhanced international transparency, plus individual country efforts to see through the corporate veil, such as 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 in:
• 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
• 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 (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 and 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 advisers 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.
Simon Perchard is a director of VG
