Issues of the moment for the trust industry

Whither goest thou?

Issues of the moment for the trust industry / A look at our language
By Robert Clifford, Investec Trust

When Mopsa in Winter’s Tale wanted to know where her friend was going she said: “Then whither goest? Say whither?” Today we wouldn't use those words, they sound strangely anachronistic. Language changes and arguably the line some people might use today to say the same thing would be: “What’s up?” While the majority of us in the trust sector have not adopted urban slang, the language of our industry has changed and those changes are revealing in terms of the development of the trust industry over recent years and the trend for the future.

Not too long ago the words we were hearing were ‘secrecy’, ‘privacy’ and ‘discretion’. Today However those words seem out of touch with the needs of clients and the industry. The words of today that resonate with trust professionals perhaps  include ‘legitimate’, ‘confidentiality’, ‘transparency’, ’complex’, ’flexibility’,  ‘rapidly-changing’ and, yes, ‘expensive’.

 

Confidentiality and transparency

The careful balance between confidentiality and transparency is still evolving and, over time, jurisdictions will be defined by the positions they take. Contrast, for example, the positions of Jersey and Liechtestein. Jersey has entered into Tax Information Exchange Agreements (TIEAs) with the US and the Netherlands whilst Liechtenstein, the only civil law country with detailed legislation in relation to trusts, appears set on absolute secrecy. In Jersey, requests for information exchange, which must be specific in relation to existing investigations rather than automatic, have trickled in, with just three requests over the last 12 months. In Liechtenstein the flood gates were breached with the sale by a former LGT Bank employee of confidential client data to the German and British Revenue authorities, amongst others. It is understood that some 13 countries are now conducting their own investigations, as tax authorities have shared that information. It will be interesting to see whether and, if so how, the industry in Liechtenstein can recover. But it is not as simple as it seems. Whilst some positions are easy to contrast, setting the bar for the future is harder. The language being used in Jersey is cautious – welcoming international cooperation under the TIEA process and being prepared to take a limited lead, but looking too for active participation from leading OECD nations and finance centres, with echoes of the much-debated level playing field argument.

Questions of a level playing field arise too from the EU draft ‘white list’ published in May 2008. The list schedules countries considered to have money laundering controls equivalent to controls in EU member states. The white list’s purpose is to determine those countries in which transactions require less scrutiny. Despite excellent track records, far superior to those of most countries on the list, the Crown Dependencies have been omitted, raising questions of political or commercial motivation. It appears however that the UK does consider the Crown Dependencies to be equivalent and it is expected that the IMF will include Jersey on its own white list to be published next year.

 

Complex

If the optimum balance between transparency and confidentiality has yet to be struck, one thing is certain: we live in an increasingly complex world. Whilst the underlying questions in our industry are perhaps much the same –- finding the right answers for international families against a backdrop of continuous change –- the mountain of new legislation is challenging. A particular highlight of the last year has been the changes to the rules for non-UK domiciled residents. The proposed changes began with the premise that all non-UK resident trusts were avoidance vehicles and that all benefits from trusts should be taxable.  Further, trusts were largely to be treated as transparent for settlors with gains arising on UK assets or non-UK assets being taxed on an arising basis. Trusts appeared likely to become more of a liability, with the possibility of worldwide tax on distributions from trusts. Intense lobbying brought about material and positive changes to these rules. The changes result in an increase in complexity and, arguably, potential exposure for non-UK resident trustees. Going forwards trustees will need clear investment and distribution strategies, which takes into account not just the source and nature of profit but also the timing of realisation and distribution. More generally the matching rules for capital payments have changed. The new “last-in, first-out” rule will mean trustees should not be considering distributions without considering what gains can be realised to maximise the benefit of taxation at the 18% capital gains tax rate. Clear records and good UK tax awareness will be prerequisites for effective administration. It is not just in the UK, other jurisdictions such as the US and Canada more than match the UK for complexity. This complexity means it is easier than ever to get it wrong and more specialisation in administration matters is to be encouraged.
No discussion in relation to the increasing complexity would be complete without mention of the credit crunch. Whilst perhaps not affecting trustees directly in the same way as banks, the central message resonates – if you don’t understand it don’t do it, especially if you are a trustee.

 

Flexible

Trust and associated laws continue to change as jurisdictions seek to provide ever more useful tools for estate planners. Guernsey introduced new a trust law in March 2008, consolidating the existing law and introducing new features including hybrid trusts for beneficiaries and non-charitable purposes, perpetual or ‘dynasty’ trusts, purpose trusts and reserved power trusts. Guernsey law can now assist as regards asset protection, by excluding the application of foreign law when considering issues of capacity, validity and the functions of the trust. The brakes have also been taken off for private trust companies, which are increasingly popular for wealthy international families, with the abolition of the provision which made Guernsey directors of both Guernsey and foreign trust companies personal guarantors in the event of a breach of trust by a corporate trustee. Trusts can now also be drafted to exclude beneficiaries’ rights to trust information – subject to Court overview if beneficiaries apply.

The focus in Jersey, which updated its trust law in 2006 and has further changes planned for 2008, has been on increasing flexibility in relation to companies incorporated in the island. The changes made include introducing treasury shares, abolishing the financial assistance provisions, simplifying procedures on distributions to shareholders and allowing financial services businesses to act as corporate director of other Jersey companies.

 

Legitimate

The trust industry has changed beyond recognition over recent years and a good slice of the credit for the improvement has to go to STEP – giving the industry a combined voice and both facilitating and encouraging education to the highest standards.  Whilst collectively standards have risen, they need to continue to rise. Both individual businesses and individual jurisdictions need a reputation for probity, to survive. At the individual business level that probity means doing what it says on the tin for every trustee, understanding the trust framework and putting the beneficiary first. This has to be done with knowledge and information and, frequently, with the courage and ability to take difficult decisions.

At a jurisdictional level, legitimacy comes through the setting of sound standards of regulation and intelligent international engagement. It has been interesting to note in particular the direction the industry in Switzerland is taking, following the ratification of the Hague Convention in July last year. Benefiting from more certainty in relation to trusts than ever before but suffering from a lack of regulation in the area of trust services, Switzerland has huge potential to become a modern day centre of excellence for trusts rather than a jurisdiction which might live in the past. In the absence of trust regulation, the establishment of the Swiss Association of Trust Companies (SATC), which aims amongst other things to ensure professionalism and integrity in, to advance technical knowledge of, and to strengthen the standing of, the trust business in Switzerland, is a positive step in the right direction. Elsewhere regulation continues to reinforce client confidence and improve reputation, such as in Cyprus where, under new legislation, a licence from the Central Bank is now required for trust service providers.

 

Expensive

Without any empirical evidence at all other than personal experience, I would suggest that for some families, trusts are seen as an increasingly expensive option but with a considerable degree of fluctuation in pricing between jurisdictions and between businesses. There is no such thing as a standard trustee and no such thing as a common standard of delivery. Much of what happens in a trust structure happens behind the scenes and is not readily appreciated, at least not contemporaneously, by beneficiaries. Trusts can be managed in line with a defined risk appetite, a good level of understanding and a high level of delivery against clear and regularly reviewed objectives or they can be managed in other ways. Risks can fail to be appreciated and may sink to the bottom. In these cases the price will often be paid later, either in terms of failing to meet objectives, perhaps in the amount of historic work required to bring a trust up to standard as circumstances change or, in some cases, in litigation.

Regulation remains a factor in determining where to provide trustee services, both in terms of whether or not a jurisdiction is regulated at all and the weight of regulation in that jurisdiction. It is when regulation reflects best practice that everyone, from the client to the industry, wins.

More than ever before, trusts must be run with a clear understanding of the rationale for the structure and the rules in the home jurisdiction that might apply to prevent optimisation of the benefits. To do that well is, in many circumstances, a consequence of qualified and experienced people, excellent systems and taking the time to build meaningful relationships with settlor, beneficiaries and their advisers, looking up, not down. In the long term those trustees that do it well are inevitably cheaper than their colleagues that do not.

 

Rapidly-changing

The shape of the trust industry continues to change, just as it continues to grow and define itself. The new centres of Dubai and Singapore (which is now the second largest private banking centre) continue to grow and innovate. In the old world, as Switzerland makes itself more attractive to trust professionals at a time of uncertainty, it is interesting to note the fundamental changes to the bases of taxation in Jersey and Guernsey are now being implemented in response to issues identified by the OECD and the EU Code of Conduct Group as harmful tax practices. Growth is still there too with, for example, deposits in Jersey surpassing £200 billion for the first time and Channel Islands funds industry and investment management figures up significantly.

In the UK the changes to the tests for tax residence of trustees have been implemented in a move that does little to help the UK’s international trust business and has also introduced new uncertainties for non-UK resident trustees that are members of groups with a UK presence. Equally the introduction of supervision by HM Revenue and Customs, under the Money Laundering Regulations 2007, raises new questions about the UK as a jurisdiction for international business, given the potential conflicts.

Looking forwards, change continues and the challenges grow. There is however perhaps a gradually increasing awareness that the quality low tax jurisdictions are setting the standard rather than causing the problem and the degree of self interest being brought to some of the debates begins to be seen for what it is. Why is it for example that jurisdictions that have entered into TIEAs with the US appear on Senator Levin’s list in the Stop Tax Haven Abuse Act? How can the EU white list of equivalent jurisdictions omit the Crown Dependencies when the IMF has praised achievements in meeting international standards on anti-money laundering and success in complying with FATF recommendations?

Specialism and expertise are necessary and quality is critical if the trust industry is to move forward with a professional, qualified, “thinking” service. The recruitment and retention of trust practitioners who understand and can provide the level of expertise needed is more important than ever. Training, recruitment and retention of quality staff is an investment in the long-term future of the trust business and is to be applauded. In a relatively mobile international environment where the best employees choose to invest their talents will be critical.

Finally it is worth noting that the UK Finance Bill is interesting in that the apparent attempt to torpedo trusts failed. If trusts are simply avoidance vehicles then the transparency of the trust set out in the 18 January 2008 draft legislation should have been non-negotiable. In the event it was not. That leaves the advantages accruing to beneficiaries of non-UK resident trusts as deliberately intended, coupled with an invitation to trustees to invest in the UK without Draconian consequences for settlors. The direction in which success lies for the trust industry in this area is therefore in substantial structures where the time and consequent cost to plan, manage and review properly is built in. Trusts are not static, quick win products. Yes, they can be expensive but expense is relative to benefit and benefit, properly and consistently delivered in a complex and changing environment, has a significant value.

The language we use today in the trust business is the language of the future. Trust professionals continue to be well placed to develop a fascinating and challenging business, which will increasingly educate, improve and specialise in order to succeed. In the words of the Bard, the trust industry can “avouch it is able to bear the fardel with expertise” or, in hopefully words of urban slang with less longevity, “It’s time for the homies to step up and face what’s vexing, dawg”.