Lisa Vizia of Saffery Champness in Guernsey examines the changing roles of offshore family offices in Guernsey and what the implications will be.
It seems that change is the new norm in many areas of the financial services world, largely as a result of the current challenging economy in which legislation, regulation and risk management are all shaping the way in which we work and advise our clients.
The offshore world is no exception to this and there are a number of developments that are exercising family offices and their offshore providers or partners. One example of this is the United States' Foreign Account Tax Compliant Act (FATCA) and other information exchange agreements that international finance centres are signing up to – Guernsey currently has 46 – with various countries. The result of these, and other similar arrangements, is that family offices and their offshore providers are increasingly having to contend with, and understand, complex cross-border issues and international tax legislation, particularly those emanating from the UK and US.
More positively, there is now a greater arsenal of solutions potentially available to the offshore trustee advising a family office which allows for the selection of the right structure that particularly suits the family's needs. This is especially important, bearing in mind the relative sophistication and financial literacy of the second and third generations who have come to the fore of wealthy families. They are not expecting a vanilla solution from their trustee who will be expected to be knowledgeable and up to date about the latest options available for bespoke solutions for each client.
Examples of the types of structures being utilised include foundations, now available in Guernsey and Jersey, which open up wider fiduciary solutions to civil law jurisdictions; purpose trusts, private trust companies, family partnerships, limited liability partnerships, protected cell companies as well as Vista trusts in the British Virgin Islands and STAR TRUSTS in Cayman. As the fiduciary works in partnership with the family office and becomes part of the inner circle, of greater value than a standard service provider, they will set a great deal of store on building knowledge and awareness of the family, maintaining and developing the relationship for the true and genuine benefit of the beneficiaries.
The fiduciary will effectively create a trust structure reflecting underlying holding entities and asset groupings, ensuring that each area is structured correctly. Therefore, a detailed knowledge of the various structures available, such as those listed above, is essential. Some clients may have hundreds of investments in different structures across many banks, custodians and jurisdictions and it simplifies things to bring everything under one umbrella and consolidate where appropriate from jurisdictional, tax and legal perspectives.
Wider change issues coming to the fore cross both the political and geographical boundaries, which may drive clients to seek stability and confidentiality, including the Arab spring and persecution in Russia and the former Soviet republics. Here, wealthy families are looking to transfer their assets out of often politically-troubled countries in order to invest in safe havens, such as London, in assets like UK property and gold, for example. They may go one step further and seek immigration to the UK or US which requires more complex and technical tax planning advice and the structuring of appropriate solutions in the light of increased tax legislation.
Furthermore, since the credit crisis the investment world has changed. Trustees are increasingly dealing with non-standard assets and investments in the new regulatory risk-based environment. The management of risk, rather than its avoidance, is taking a more prominent role, where diverse portfolios are involved. Before the credit crisis the awareness of risk around standard investments, such as investment portfolios, was generally well understood. This now has to be more widely and deeply correlated across the total wealth of the family, to include the nonstandard assets such as hedge funds, private equity, commercial and residential property/development and businesses. It is important to have the knowledge to understand any investment and drill down looking at all aspects involved. There is now no choice for the private client practitioner administering or working with an international family office. We may not be the advisers, but we need to be aware of the advice that is being given and that correlates through to the investments which go beyond cash in the bank and a standard investment portfolio. This approach not only meets the regulatory risk-based requirements and the client's expectations but also adds value to the relationship.
In conclusion, it is essential that all trustees dealing with family offices – arguably often the most complex of fiduciary structures – ensure that they are kept well abreast of international and global developments across the legislative, regulatory and risk areas. Clients are increasingly sophisticated and it is for the fiduciary to add value by updating and liaising with the family office and their advisers on the potential solutions available to them. There's never been a more exciting time for the trustee to add value by becoming a well-informed partner at the family table.
Originally published in Private Client Practitioner's 2014 Guernsey Special Review, January 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.