UK: Family Control Of Offshore Investments

One of the most difficult aspects for a founder in making Wealth Structures, involving trusts, functional, not only during his lifetime but thereafter, is to decide who is to be put in control over what and in what capacity. In this regard in my experience of setting up Family Structures there are usually two aspects of control which need to be considered separately, the control of wealth distribution, for which it is usual for the founder to form a Family Council, and the control of the business or investment process, for which it is usual for the founder to form a Family Committee. Certainly, at the outset, the founder may like to take the roles of both the Family Council and Family Committee, but if he wishes his objectives to be fulfilled after his death, he should, not only know who is to serve on these bodies, but how often they should meet, what should happen in conflict for which decisions they are responsible and how this is operated, who can appoint successors and how they can be removed. These rules and guidelines should be included in the Family Governance Statement.

The choice of Trustee is and always will be difficult. However, before considering the wishes of the family and the legal problems associated with these wishes need to be properly understood. For example is it imperative that the trustees are not resident in the UK, or does it make little difference, is there a particular jurisdiction in which they should be resident, to take advantage of its specific legislation such as in Cayman to take advantage of its anti forced heirship rules, or its Special Trust Alternative Regime? There are also certain jurisdictions where the trustees should not be resident such as in most civil law countries such as France and Spain, but Switzerland may be suitable. In cases where the founder has people he knows and can trust, in an appropriate country who are willing and able to act as his trustee then there is no need to employ the services either of a professional trustee or use a private trustee company. However, if the founder is not so fortunate, he may have to use the services of a professional trustee in a suitable jurisdiction or create his own trustee company.

Many clients are concerned about transferring their wealth to a professional trustee with extensive discretionary powers, full ownership and control. These concerns need to be explored before deciding on the right solution. For many clients their requirements are satisfied with a suitable person or persons whom they trust, appointed as a Protector or Family Counsel whose primary function is to monitor and supervise the trustees and report to the family. If the beneficiaries are at any time concerned that their best interests are not being served by the trustees then the Protector or Family Council has the power to remove them and appoint another. To do the job properly the Protector or Family Counsel should first review the trustees to establish whether they are suitable to do the job required of the founder and his family. Thereafter he should continue to monitor and supervise the trustees, discuss and report their performance with the family and communicate the wishes of the family to the trustees. If he does this job properly, in our experience, the Protector or Family Counsel need never use their powers of removal since both the trustees and beneficiaries will be adequately informed and instructed. In many cases, however, professional trustees would prefer not to have their services monitored and their actions supervised, they would prefer to communicate direct with the founder and his family. In our experience, a lack of monitoring and supervision invariably encourages poor performance and consequently leads to concern on behalf of the client. If this concern is then allowed to fester it can lead to the family asking the Protector or Family Counsel to exercise their powers of removal.

In some case the family, often for very good reasons, are not satisfied with the combination of professional trustees with a suitable Protector or Family Counsel. For example, the family may want their trusted advisers to take the decisions with regard to income or capital distributions to beneficiaries’ business or investment decisions or they wish to have a number of trusts to be administered in a number of jurisdictions, and like to have a central trustee.

In this case the family may decide to form a trustee company in a suitable jurisdiction and appoint the family’s trusted advisers as the directors with a professional trustee in a suitable jurisdiction being the administrator. The advantage of this arrangement is that if at any time the directors wish to change the administrators this can be achieved by simply changing the contract with the administrators, the trust assets will however remain with the same administrators.

In cases where the family does not have suitable advisers to appoint as directors, or for reasons of confidentiality he does not want the details of his wealth in trust disclosed to his advisers then the professional trustees may still be the preferred route, but with suitable checks and balances using possibly not only a Family Counsel but also a Family Committee.

Trustees are frequently appointed and then left to distribute the income and capital to the beneficiaries as best they can given the circumstances at any one time or in accordance with a letter or memorandum of wishes. This is probably not a bad policy for small trust funds when it is expected that the fund will be depleted within ten years or so. However, where the fund is substantial, unless restrictions and guidelines are put in place, it can produce beneficiaries, skilled at extracting money from trustees to fund an extravagant lifestyle. This type of beneficiary I call the "professional whinger".

It is also often very difficult for Professional Trustees to be the arbitrator in a family dispute. For example we have just finished a case where Professional Trustees were left to decide how a trust fund should be divided between a stepmother and her step-grandchildren. The Letter of Wishes provided little assistance other than to say that she should be "provided for".

• Fixed Income Followed by Capital Distribution

In some cases, a founder may want each beneficiary to receive a fixed income for a specified number of years and is then to be entitled to the capital, or part of the capital, outright. Some people hold the view that each beneficiary should, at a certain age, manage and deal with their inherited wealth as they think appropriate. This type of arrangement, unless the beneficiaries are encouraged to be responsible, can also lead to an irresponsible attitude to wealth in anticipation of a fortune at a specified age.

A fixed income also restricts the trustees’ ability to negotiate with a spendthrift beneficiary. For example, if there is no age at which a beneficiary receives his share of the capital absolutely, the trustees could agree to pay out a capital payment to the beneficiary in consideration of his agreeing to resettle the surplus wealth on his children.

Fixed income does not mean that the beneficiary needs to receive all the income arising to the family’s fortune. This is often of concern to UK domiciled families who are encouraged to transfer the wealth surplus to their requirements into an interest in possession trust for their adult children to avoid inheritance tax. An interest in possession trust means that all income arising to the trust must be paid out to the beneficiary. It does not mean, however, that all income within the structure needs to be paid to the beneficiary. If a suitable wrapper is placed between the investments and the trust, the income stream can be carefully controlled.

• In Accordance With a Distribution Policy and Reviewed by a Protector or Family Council

In our experience many founders for whom preservation of wealth is important like to set out their ideas with regard to access by the beneficiaries to the family wealth in a distribution policy which is incorporated in a Letter or Memorandum of Wishes or Governance Statement. For example, some clients permit access to wealth by the beneficiaries only after a certain investment or business profit has been made and in some cases, this may only be up to a specified cap. For other clients, they want their children and remoter issue to receive only a reasonable distribution, and whatever else is made should be re-invested, this could be coupled by access to wealth for achievements and success and on approval of a business or philanthropic plan.

If wealth is to be distributed in such a manner, it is usually necessary to appoint a Protector or Family Counsel who is not only familiar with the wishes of the founder but knows the family well and is able to withstand pressure from individual members keen to spend. More often than not the Family Counsel is appointed from a mix of trusted family members and advisers.

In my experience where the family has substantial wealth this arrangement is not only the most fair arrangement, it is also the most effective in preserving the family wealth in accordance with the founder’s wishes.

The family may not be happy to leave the running of the business or the investment management process to the same people as those who are to decide the distribution decisions or the Family Office. In many cases, the family may therefore require a separate body of advisors from the Family Council or the Family Office, the "Family Committee"

If the Wealth Structure involves a trust which owns the family business it will be important to establish the relationship between the Family Committee and the Trustees.

Trustees are under a duty to collect in and manage the trust fund in the best interests of the beneficiaries. In many cases the founder may not wish his trustees to diversify their investments or to consider to any great extent whether it would be in the best interests to diversify. Furthermore the founder may be very concerned that the trustees may now be the people best able to make right decisions with regard to the majority shareholding their own.

It is possible to reserve the business decisions to a Family Committee which can then make investment decisions like an absolute owner. In Cayman this is specifically embodied in legislation and the trusts are called "Reserved Povers Trusts".. The trustees will, however, continue to have a duty of care to monitor and review the decisions and to ensure it is in the best interests of the beneficiaries.

Alternatively, the Family Committee could be merely consultants to the trustees, but with power to remove the trustees, in which case, the trustees are not obliged to carry out the decisions of the Committee but should take their recommendations seriously at the risk of loosing their position as trustee.

In simple structures involving limited wealth and only one or two trusts the relationship between the parties, which in this case may be just the trustees, the protector and the family can be set out in a Letter or Memorandum of Wishes from the founder to the trustees and protector.

Where, however, the wealth is substantial or the family and wealth structure is more complicated the relationship between the members of the family, the family trustees, the Family Council the Family Committee should be set down in writing in a Family Governance Paper.

The formality of this procedure is not always considered necessary where the family fortune consists primarily of the family business, but if the family wealth is to be preserved it is always advisable for what is understood within the family to be put down in writing. Very often families say that they have not need to distil their understandings in writing, because they are all on good terms. In our experience, however, this is exactly the time when these understandings should be written down and particularly when a change is about to take place, such as the sale of the business and when the family wealth is in cash or liquid investments.

The primary purpose of the Governance Paper therefore is to ensure the proper, efficient and cost effective enforcement of the founder’s and family’s wishes.

This requires:

• each, trustees and each member of any Council or Committee to know what is expected of him or her and how they fit in to the enforcement of the founder’s and family’s wishes;
• proper reports to be made;
• a proper procedure for reviewing, monitoring and supervising all functions which have been outsourced
• regular meetings to be held which are properly attended, minuted and carried out;
• proper appointment, removal and replacement of the Council and Committee members;
• adequate reporting to all members of the family to ensure they are being involved and remain committed;
• proper procedure to deal with any family disputes and disagreements.

Some families also like to stipulate that all family members must contribute to a Family Database by writing a yearly paper setting out events, disappointments and achievements. This not only begins to record a family history, but is also necessary for the trustees or Family Council to help them decide the next year’s distribution policy and investment policy. The family may also like to consider a procedure to encourage that all adult beneficiaries to contribute and attend the family meetings such as bonuses

Ideally the Family Governance paper should be distributed to all family members, trustees and advisers involved in any aspect of the Wealth Structure or Family Office. This may not always be practical if there is sensitive or confidential information in which case the Family Governance Paper may need to be divided into several sections.

In our experience the more that families with substantial wealth can be encouraged to set out the rules to govern their family wealth in a structured fashion as described, the more likely the founder’s wishes will be enforced and the family disputes resolved with the minimum of cost and disruption.