As if families weren’t complicated enough already, planning succession involves tax and trust issues – as well as raw nerves, hissy fits, and flying crockery, says Caroline Garnham
As if families weren’t complicated enough already, planning succession involves tax and trust issues – as well as raw nerves, hissy fits, and flying crockery, says Caroline Garnham
Sitting in George having dinner with a client the other night, I was asked what, in my opinion, was the significant danger to family wealth. As a fellow of the Institute of Tax, I used to think the biggest threat was tax. I am now not so sure.
The well-documented case concerning the Thyssen family is a case in which the dispute was over £100 million. The legal fees in fighting the dispute, however, allegedly cam to £120 million, and the case was only finally settled by arbitration.
Family conflicts, whether divorce or disputes, cause more long-lasting damage, and not only to wealth. I have seen family companies destroyed and sold, charities deprived, and mothers distraught over power struggles among her children. The dispute is not always about money or power: it can be anything which is designed to settle deep emotional scores using the complex and expensive machinery of the legal system.
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The simplest way to avoid any arguments is to split the wealth up equally and let each family member deal with it as they wish. But it is not always so simply. The wealth may be in a family business, such as Caledonia Investments, which has been held for the Cayzer family for over five generations, or property, or the founder may think that the wealth is too much to entrust to one generation.
Many people think the easiest way to preserve the wealth is to put it in trust and appoint trustees of integrity, commercial commonsense, and an understanding of the wishes and intentions of the founder. In this way, the founder hopes to perpetuate their benevolent dictatorship beyond death, to preserve the wealth not just for the next generation, but for the benefit of successive generations or for charity.
However, ideal trustees, who are prepared to take on unlimited liability for the sake of keeping the peace between the more difficult members of your family, are not always easy to find.
If an offshore trust is required, the task is even harder because, for tack reasons, if you are a founder, you need to appoint people are resident in a country which only recognises trusts, but is also tax neutral. Professional trustees are therefore often required. In this case trustees are inevitable chosen who are highly efficient administrators and knowledgeable of trust matters; they are usually not chosen for their commercial acumen or knowledge of your business.
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Seldom do they have the strength of character to carry out your wishes. Furthermore, a professional trustee which is a bank also has the interests of its shareholders to consider and is therefore keen, wherever possible, to keep out of family disputes, either by hiding behind legal advisers or, in a situation of conflict, diving the trust fund among the warring factions – precisely what you do not want to happen.
Family conflict is not often easy for such professional trustees either. They are frequently in danger of being manipulated or threatened by self-serving beneficiaries, leaving them vulnerable to expending considerable monies in legal fees out of the trust in order to prove their impartiality and professional integrity.
At the heart of family governance is communication. Most UK trusts have succeeded for many generations by cleverly choosing trustees resident in the UK to keep an iron grip on information. This, however, does little to empower the beneficiaries to lead a responsible and meaningful life: it promotes distrust and is often the breeding ground for family conflict.
Family governance on the other hand introduces formal decision making procedures, accountability, responsibility, and a spread of power. Communication, to be effective, must be formalised like board meetings of companies. If not, there is a danger that issues which could give rise to a conflict will not be discussed only dealt with in a cursory manner.
Meetings also need to be properly chaired: the family member with the thickest skin and sharpest elbows should not be allowed to dominate the gathering at the expense of the more timid attendees. Decisions need to be taken formally and minuted. Family governance will not ensure harmony, but it should assist in preventing disharmony damaging the family wealth.
Accountability and responsibility are also essential. A family cannot be asked to make decisions – whether to buy – unless they are fully briefed in an impartial, complete manner, by advisers qualified to do so. These people, as well as the person responsible for disseminating information, should also be accountable. Just as a director can be removed by his company’s shareholders, so the person providing the information and implementing the decision should be responsible to the family, whether they be a minority or majority shareholder.
Another important aspect of family governance, which can sometimes be overlooked even in the best of family wealth structures, is distribution of power. It is not usual to see a competent and motivated individual with a great deal of power within a wealth structure; for example, one family member could be the chairman of the family council as well as CEO of the family business.
Peter Buckley wisely resigned from his family counsel to remain chairman of Caledonia Investments, and to deflect some of the criticisms against him from his relatives. If the power is focused on the founder, then this dynamic is often a bad thing, since it is his wealth and his family. However, it is not advisable for the next generation, or generations, to have too much power concentrated in the hands of one person. This can give rise to sibling rivalries, jealousies, and damaging conflict.
Most offshore trusts now have a letter of wishes. In most cases, this does little more than tell the trustees how to distribute the trust fund in the end of the founder’s demise.
