Equiom recently hosted a STEP roundtable, the participants considered the challenges faced by fiduciaries and trustees when managing trust assets: from disputes and litigation to regulation, privacy and tax considerations. Written by Helen Swire.
In a return to in-person events for the first time since 2020, nine private client experts came together in London in March 2022 for a STEP roundtable discussion, sponsored by Equiom. The participants considered the challenges faced by fiduciaries and trustees when managing trust assets: from disputes and litigation to regulation, privacy and tax considerations.
The Chair of the roundtable, Thomas Dumont QC TEP, Barrister at Radcliffe Chambers, opened the conversation by asking those around the table their thoughts on the ongoing development of beneficial ownership registers globally, especially in light of the greater speed some countries have moved at to implement registers in 2022.
Although the general consensus was that registers of beneficial ownership can help governments with transparency and regulation, James Quarmby TEP, Partner at Stephenson Harwood, expressed concerns around the implementation of publicly searchable registers. ‘I am in favour of beneficial ownership registers, but I don’t see what a publicly searchable one achieves other than undermining privacy: it is a disproportionate response to a threat,’ he noted. ‘If the reason for a beneficial ownership register is to fight money laundering and corruption then the information recorded should be available to prosecutorial authorities. It is disproportionate to disclose everyone’s details to the whole world on a database on the off-chance that some of those people are breaking the law.’
Rebecca Bettany TEP, Family Office Adviser at Bettany Consulting, agreed that a major concern for clients around the possibility of public registers is not that of publicising their tax dealings but rather protecting their personal security and that of their families. Graham Marsh, Director in the Private Wealth team at Equiom, echoed this point, commenting that even prior to the advent of registers, high-net-worth individuals (HNWIs) had been concerned about children and grandchildren being named in the public domain as beneficiaries of trusts and other such structures.
John Ford, Partner at Alius Law, noted HNWIs’ perception that simple search engine websites could pose a threat to their privacy and safety: an issue that would likely be amplified by publicly searchable beneficial ownership registers.
‘There is so much miseducation and ignorance around the trust industry, so why would we not want to be fully transparent about how we work?’ asked Nina Johnston TEP, Managing Director at Equiom.
Nonetheless, added to the concerns around privacy are worries about the reputational risk associated with being publicly named on lists of beneficial ownership, especially in the light of the sanctions arising from the Russian invasion of Ukraine in February 2022. ‘A lot of people have been sanctioned, not necessarily because they have done something wrong, but because they are deemed able to put pressure on Putin,’ said Bettany. ‘It is wrong to assume that anyone who has been sanctioned has gained or invested their money illegally. We must put pressure on Putin, but we must not necessarily publicly “write off ” someone with a Russian passport and with Russian money.’
Reputation and litigation
Tied up with the reputational risk of public registers of beneficial ownership is the risk clients face of litigation. ‘Information is power’, observed Ford. ‘There is a real risk that open beneficial ownership registers allow people to pursue litigation against someone whom they can identify from these registers to be a beneficiary or settlor of a trust.’
Ford added that he has seen fiduciaries being deterred from representing clients who have been the subject of ‘salacious gossip’ in the press simply due to their assets and connections, and not for reasons related to their actions. Dumont therefore asked the roundtable participants how fiduciaries and trustees can appropriately support clients where there is a potential threat of litigation while protecting their own business practice and reputation.
Michael Pulford, Partner at Pinsent Masons, responded that potential reputational damage can be mitigated as long as the trustees discharge their obligations appropriately. ‘From the outset, the trustee has to make a value assessment to understand as best as they can what the litigation might centre on, what risk it might entail and, from the commercial perspective, what work might be required on their part,’ he explained.
Eugenia Campbell, Private Client Tax Director at RSM UK, concurred with this, noting that with the increased pressure from account freezing orders and the advent of unexplained wealth orders, banks are extremely cautious of risk, and fiduciaries must have the appropriate experience and support to make informed decisions.
‘It boils down to experience around the commercial risks and if the trust company can manage it,’ agreed Johnston. ‘Not all trust companies would take on a potentially litigious case: they have to be sure they have the appropriate experience to deal with it and all the related commercial factors.’
But what about for those fiduciaries that have taken on a client that has later ended up in litigation? Alice Dumoitier, Director in the Client Services team at Equiom, advised appropriate advance preparation: ‘You might need to consider an exit strategy if you have fiduciary duties to discharge. It is all very well taking something on, but when you have fiduciary responsibility it can be very difficult to step back if necessary. We have all seen cases where a structure has become overly litigious and then you cannot exit the structure because of the fiduciary duties that you have to continue to discharge. You have to have a strategy in place before you get into that: undertake rigorous due-diligence, have access to historic correspondence, meet with the current lawyers and understand the resourcing requirements and overall liquidity of the structure.’
Supporting the family
In the participants’ view, while potential litigation could pose one external threat to trust assets, there are also many internal challenges that trustees must face up to.
Marsh commented that, with the right assessments and due-diligence in place, fiduciaries would not necessarily reject a litigious case on the grounds that it is too expensive or time-consuming – but that those risks must nonetheless be weighed up, especially if litigation relates to family disputes dating back over generations, where beneficiaries are in conflict.
Bettany and Johnston agreed with Marsh that such disputes can be hugely emotive, requiring trustees to balance personal views and relationships as well as their fiduciary duties. Dumoitier added, ‘When the beneficiaries themselves are in contention, they all have their own litigation strategies. Their interests won’t necessarily be aligned and the trustee has to remain impartial, understand the conflicts and work out how to manage them. It can become extremely complicated and that’s where having an experienced trust director is vital.’
The participants all agreed that mediation is preferable to costly legal challenges in terms of ironing out disputes: whether that takes the form of lawyer-to-lawyer mediation, whole-family mediation or meeting with different family cohorts at different times.
‘Sometimes lawyer-to-lawyer mediation is a better route because they’re disconnected from the emotive side of the trust, they have their instructions from their clients and they can move the process along,’ pointed out Dumoitier. ‘The important thing is to ask the clients at the outset to set out their aims. It can be very expensive for them if they forget what they’re setting out to achieve and drift away from their initial goal over time.’
Johnston also remarked that it is not necessarily a beneficiary dispute that can lead the trust down an unintended path. ‘You also find scenarios where the beneficiaries are all entirely in agreement about what they want to do and when they present it to the trustee it’s actually not in their best interest because it would create a tax liability,’ she warned. ‘It’s not just when they are in conflict that you have to consider that something could be the wrong direction for the assets.’
Campbell commented that best practice is to undertake all appropriate due-diligence prior to embarking on a relationship with a client. ‘It is also key to take the right specialist advice, for example on the exposure to tax liabilities, which helps you as trustees support your decisions and evidence why you have taken certain actions,’ she added.
‘Tax is not necessarily a decision-driver for global clients; it’s something that we have to remind them to be aware of,’ said Dumont. He asked how fiduciaries help clients to remain efficient as well as fulfilling all the reporting requirements imposed on them by regulations such as the Common Reporting Standard, the US Foreign Account Tax Compliance Act 2010 and automatic exchange of information agreements.
‘Taxation is not the main motivator for many clients, but it’s a vital element of succession planning,’ answered Quarmby. ‘I don’t know any trustee that is going to take on a trust without tax advice: they want to know if what they are doing is sensible and what tax implications it will have for moving and investing assets. Any time a decision has to be taken, the trustee will want to do the thing that is most efficient and improves their client’s top business line of investment.’
Marsh reiterated that putting assets in trusts has to be efficient in tax terms for clients’ peace of mind: ‘Increasingly, the focus and demands from private clients nowadays is more about privacy, confidentiality and protection. They want security not just for this generation but also the next: the protection of it is paramount,’ he said.
Moreover, as the world grapples with the fallout not only of the situation in Ukraine but also the impact of the COVID-19 pandemic, Bettany concluded that using tax-efficient structures to manage assets is not simply a move to increase personal protection. ‘There are a lot of wealthy families who are not just trying to keep hold of the money for their own benefit,’ she said. ‘Rather, they are directing it into philanthropic causes. We now see many who are making impact investments, wanting their assets to be a force for good.’