Having been in the financial services industry for more than 25 years, it has been exciting to see how the standards of transparency and wealth structuring have been evolving especially throughout the last 12 years.
In the world of the wealthy people also called, High Net Worth Individuals (HNWI), changes happen. For a long time, their advisors were used to certain practices, but since the last 12 years, things have changed.
How may an Expert need to adapt his/her practices? A practical example in the financial sector and more particularly, in the wealth planning field.
What is wealth planning
Wealth planning is the care given to examining the worldwide assets of a family, the family composition, its desires, values and outlook and combining all of these together in a comprehensive way to create an umbrella solution that will fit the family’s needs as closely as possible given external constraints.
Why is wealth planning interesting in particular with younger generations
Time and time again when discussing with large families in the Middle East, I have noticed that even though the family sees itself as tight knit, the younger generation’s opinions on what needs to happen in a crisis situation (demise, creditor issue, incapacity of the main patriarch/matriarch) differs significantly from what the older generation thinks fit. It is obvious theoretically that upon the unfolding of a crisis event, such situation would give rise to complications that a simplistic solution would not have embedded and therefore this situation would not be catered for in a satisfactory manner.
With several demises occurring in the past few years, it has become evident from case studies that families that go for simplistic solutions find themselves fighting over what the patriarch had found satisfactory and they agreed to but only out of respect for the patriarch. Another matter to consider is that families with wealth all over the planet might be losing out on certain advantages because they do not ask for wealth planning solutions. One such family which had significant equity in France had been losing 25% of the equities dividends in taxes deducted at source that were actually reclaimable upon request using a special process with the French tax authorities.
With governments everywhere stepping up the requirements on transparency together with binding regulations on taxes, there is a clear need for implementing a proper strategy to cater for source taxes when investing abroad. Sometimes, more than taxes, there is the requirement to preserve family cohesion and comfort leading to a structuring including higher taxes because the next generation wishes to live in a jurisdiction where taxes are higher and yet be part of the structuring. Aside from the source taxes, there is also the question of proper applicability of one’s desired succession in the case of assets located out of one’s home jurisdiction.
The past, a difficult legacy
In the past, most families and High Net Worth Individuals (HNWI) held their assets either directly individually or through a simple offshore company. Most individuals and families strived to pay the least taxes possible and resorted to more or less complex structuring in order to achieve that goal. Some only had the goal of better coordinating their global wealth and having an organised and global streamlined process for their tax or other reporting (to individual shareholders in the case of large family conglomerates) when creating a comprehensive overall structure for their global assets. In some cases, dodging taxes had been the main guideline and this led to structures that could be sometimes inefficient for inheritance purposes or vice versa.
Many financial centers were built more on the goal of secrecy and preservation of the goal of minimising the tax bill whether in a fully compliant or partially compliant way. I remember an anecdotic exchange as comments on an article on the website wealthbriefing.com back in 2007 where an eminent tax expert was speaking of how Swiss banking secrecy could never be broken and I had commented that it would and that the US would use the foreign accounts reporting rule to dismantle it. This is eventually what they set out to do, implementing one of the most intricate legislation on tax reporting that would rock not only Swiss banking secrecy but also the world’s standards in terms of banking secrecy.
While it was first with FATCA that the “offshore” model was first attacked, there were a number of other occasions where HNWI started seeing that it was pointless to put in place a structure which main goal was minimising taxes in a hardly compliant way. Indeed, there were a number of data thefts, disclosure by hackers of professional databases such as the Panama papers which made it an uneasy time for HNWIs hiding their assets rather than really structuring for an optimised generational transfer. The final nail in the coffin of any attempt to dodge taxes was of course the worldwide application of CRS with the latecomers already having to comply this year and reporting of worldwide bankable assets a certainty rather than a grey area.
Changes with new perspectives
As the legislation grew tighter and especially with CRS, it became obvious that wealth structurers could no longer be simple creators of offshore company structures nor of a simple trust or a foundation without the actual coordination of the global tax and inheritance impact of HNWIs. Wealth structurers today need to be mindful that they have to change their old habits of advising as they were used to advising on a simplified and one-land approach and move into the arena of global coordination of all the aspects of the generational transfer when creating an overall structure for a HNWI family, especially when there is a large or complex family business to cater for.
While some of us already followed this trend since a few years because of our background experience in tax consulting firms, I realised from viewing the structuring put in place for certain HNWIs who have called upon my help that some wealth planners especially in the Middle East and Asia still look very much in a tunnel-like way at structuring for a HNWI. Their approach seems to be with no consideration of either global tax issues nor sometimes even of sharia restraints for Muslim clients in this region. This might often be the case because the client insists that the wealth planner limit the approach in order to have a cheaper solution but personally, I think that a good wealth planner should insist even when a client insists on an incorrect structuring. The insistence of the client might be because he/she wants to maintain control or for some other reason that the wealth planners are not comfortable to delve into but I believe the matter should be addressed because if the structure could cause great financial damage to the coming generations in the future, a wealth planner should insist on understanding the client’s reservations and explaining the optimal solution because ultimately, when explained properly, clients are willing to change their mind and adopt structures that will benefit generations to come and anchor their businesses in a compliant and globally coordinated environment. In addition, millennials may have expectations and situations different from the older generation. Not adapting the solutions to the new generations may present additional risks.
Always update your expertise
As transparency increases worldwide with more than the banking sector affected, it becomes obvious that one needs to keep one’s knowledge updated on a regular basis. Indeed, the changing legislation does not limit itself to banking and new regulations that may affect structures created such as the substance requirements in offshore financial centers pinpoint the need for a broader expertise. Wealth planners who keep themselves abreast of all this changing legislation are the best adapted to deal with the holistic requirement of HNWIs to Ultra HNWIs (UHNWIs) given their greater horizon of expertise. Those individuals who look at only one type of a client’s needs are not capable as good wealth planners are to provide such a holistic solution. I have seen for example a consultant advise a Jordanian client with a lot of worldwide estate including several assets in the US to put his assets globally directly under a Liechtenstein foundation with all the adverse consequences that this had just from a US perspective.
Wealth planners as in-house counsels?
All of the above are just a few reasons that come to mind when thinking about why wealth planning is important. There are a number of other situations (giving the right to manage the company to a particular heir, compensating special needs heirs, etc) which require proper planning. There was a time when compliance had a small role in the financial industry and now this role has been steeply stepped up with the burgeoning of all kinds of regulations. There will come a time when most wealthy families will have dedicated wealth planners to advise them in order to avoid losing out on advantages and also to avoid being in a non-compliant situation in foreign jurisdictions. For now, this is offered mainly by banks, law/accounting/tax firms as most clients do not find the in-house estate planner a viable option although they could be surprised just how much could be done when opting for an in-house expert, especially for the wealthier ones.
As a conclusion, Experts need to be up-to-speed in order to best advise their clients. Clients are there to challenge and ask the Experts questions . In the case of wealth planning, I would say that HNWIs to UHNWIs should revisit on an annual basis with their wealth planners the structures put in place because there may be reasons to amend such structures based on new developments either in structuring or in taxation. No structure should be set in stone and then left forgotten on a shelf as a thick rulebook which nobody examines anymore but each overall structure should be carefully reviewed just like one would review the accounts on a yearly basis. If change is required, it should be carried out and the structure made effective again if legislation had rendered it less effective in a given year. To end this brief analysis, I would like to cite a maxim from Publilius Syrus that I think applies very much to the world of wealth structuring: “Malum est consilium quod mutari non potest”or in other words An advice that cannot be changed is not a good advice. Indeed, in our changing world, it is dangerous to put in place structures that are set in stone and cannot be amended if the legislation changes. It is even more dangerous where such structures are put in place by people who only see one aspect of the client’s needs and ignore the other consequences their choice of structure might have. HNWIs to UHNWIs must resort to an appropriate wealth planner to ensure that their needs are met adequately in this ever-evolving and global world that they and their assets are encapsulated in.
Experts Without Borders stands for a higher level of expertise. More information on www.ExpertsWithoutBorders.Org
MSc, TEP, Chartered MCSI
Citi Private Bank – London, UK