Wealth Management: Wealth check-up - it's decision time

For Howard Bilton, Hong Kong-based chairman of The Sovereign Group, a firm of international tax planners, the recent rash of tax-related bank investigations and the spate of tax information exchange agreements signed in the wake of last year's G-20 declaration reinforces the need for compliant and legitimate tax planning.

"Any wealth holding strategy that relies in any way on confidentiality or bank secrecy cannot be classified as genuine and never has been. What is now clear, if it wasn't before, is that tax evaders will get caught," says Bilton. "But in the modern era, all nations permit their taxpayers to defer taxes through the use of pension and insurance-related products or charitable structures. Such schemes are approved, fully compliant and legitimately form part of sophisticated tax planning. Where there is an underlying family business, the scope for tax deferral can often be far greater."

The children of wealthy business owners may also be facing potentially embarrassing tax demands if they inherit undeclared funds from their parents. "Hiding assets and incorrect reporting have never been a good idea," says Bilton. "It might seem an easy way to avoid tax but ultimately it may cost the taxpayer far more than they save in interest, penalties and even their liberty. If you don't want to leave a legacy of problems for the younger generation, or live in fear of getting caught yourself, you should seek proper advice and get your affairs in order."

And now may just be the best time to do it as governments worldwide encourage voluntary disclosure in advance of more draconian measures. Ashley Crossley, Baker & McKenzie partner and joint head of London wealth management, says: "Families should be dealing properly with their assets and the various asset disclosure schemes, such as the UK's deal with Liechtenstein, are a key plank for enabling families to become compliant without incurring punitive penalties or bad publicity. If there is anything non-compliant in their past histories then families should take this opportunity to resolve it, both for themselves and their future beneficiaries."

Traditionally, non-compliant business from Europe would generally flow offshore to the Caribbean, while from the US it would flow to Europe's bank secrecy centres. But offshore centres from Alderney to Western Samoa have practically all now committed to international standards on information exchange to get on the OECD's "white list" of jurisdictions. Assessment of implementation is now underway. "The tightening of standards is good news for those compliant centres and is good news for the wealth management industry," says Crossley. "It is an opportunity for the best jurisdictions and the best service providers because good business will coalesce around quality rather than seeking out the lowest common denominator." Families should also be reviewing their wealth holding structures to take advantage of more recent legislative developments.

"The most important issue for family businesses is to ensure that there is a clear segregation between family shareholdings and the underlying business in order to minimise opportunities to disrupt the running of the business. Major family disputes can damage the share price, effect borrowing, trigger margin calls and, as we are seeing in some high profile cases, attract hugely intrusive publicity. All families should ensure that there are dispute resolution mechanisms in place – family constitutions or councils – to minimise the chances of litigation."

In terms of vehicles, Private Trust Companies (PTCs) that enable the family to have some input into the management of trust assets are very popular, particularly in Russia and the CIS where families tend to be more patriarchal and operate their businesses from the top down. But the use of Family Limited Partnerships (FLPs) is growing in civil code countries where forced heirship rules apply, and in the Middle East and Far East where shari'ah law is often involved, because FLPs enable families to apportion specific shares of the assets to heirs without damaging the underlying business.

For John Rhodes, a director of Stonehage Law, an advisory business of Stonehage, the multi-family office, diversification is the key. And not just in terms of asset classes, but also in terms of investment managers and geographic location. He cites a JP Morgan survey that found that only about 11% of families on the Forbes' rich list managed to stay on the list over a 20-year period. The report, which long pre-dated the financial crisis, found that the primary reason was excessive concentration of assets.

"I was in contact recently with a former client whose family business had lost everything. It was a shattering event and he was readjusting to life as an ordinary mortal,' says Rhodes. "He never envisaged that the family business would fail but was lucky enough to have diversified while the going was good."

Rhodes does not think that anyone should assume that the financial crisis is over yet and advises clients to sit down and consider what is really important to them, especially relationships with their spouse, children and other family members.

"Clients should also watch the level of their borrowings," continues Rhodes. "If they are over-borrowed it could be the bank that gets to decide if or when an asset should be sold or it may be, as a number of clients found after the demise of Lehman Brothers, they don't have access to voting shares at a critical time."
Diversification is equally important in terms of investment managers. "Families shouldn't take anything for granted and must be prepared to be really boring about due diligence," Rhodes says. "They should insist that their primary advisors run regular health checks on investment managers and undertake independent audits not just on their portfolios but on their structures and processes. This will cost money but may save considerably more."

Finally, says Rhodes, wealthy families should diversify geographically. "Their businesses may be static but owners are increasingly mobile and family members may be spread all over the world. They have access to world class advisors and world class investments, so they should be aware of any new opportunities that are opening up in different jurisdictions and should be looking to take advantage of any new tax breaks as they become available."

It is inevitable that tax rates worldwide will increase further to meet the needs of governments trying to rebalance their books and it may be that some families are having to consider moving their residence to more favourable tax regimes.

"Provided that the change of residence is executed rigorously, individuals will still be able to travel back – and invest back – into their former place of residence as necessary, while maintaining non-resident status," says Bilton. "The fact that property prices are rising in most low tax jurisdictions is testament to the current demand from individuals and families arriving from high tax regimes."

But, as Crossley points out, tax is only one factor. "A good lifestyle and high quality services may be just as important to them," he notes. "This is particularly important for HNW families in business who need good access to financing and professional services. But London and New York should not take anything for granted. All jurisdictions must focus on the economic impact of tax changes and keep an eye on competitors." l