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Features - July 2007

 

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Made to measure: a fine fit for a family fortune

Made to measure: a fine fit for a family fortune

Preserving wealth through family offices and private trust companies

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The Bahamas Investor Magazine
June 27, 2007
June 27, 2007
Betty Roberts

The complexity and sensitivity of issues related to family continuity and wealth management can be considerable. Clients fortunate enough to face the challenges of dealing with extraordinary wealth no longer look at single-solution providers. Families often face a seemingly limitless raft of threats to their financial well-being: confiscatory taxes, volatile economies, spendthrift children and political uncertainties.

The family office has been a feature of most major fortunes since the 1800s, but transformation of the shape of this office is under way. Families want dynamic partnerships and advisors who will help them to fulfil lifetime goals.

Most wealthy families invest directly in business ventures and in property, but once the founding entrepreneur has gone, who is going to manage these assets and on what basis? Will a part of the family fortune be available to support the entrepreneurial activities of younger family members? Who will administer and oversee these arrangements on an ongoing basis—senior members of the family, independent trustees, the head of the family office or a private bank?

The management of the family’s collective holdings in the company or the portfolio of assets is the central need around which the family office revolves and the central management of this fortune prevents the spendthrift activity of many family members inheriting fortunes.

The shape of a family office
Traditionally, family offices offer safety, secrecy and a certain amount of pampering; however, globalization, an increasing need for asset allocation and management, and complex estate planning have prompted the creation of virtual family offices, multi-family offices, family offices within banks and the separation of the more personal family matters from wealth management services.

Choosing a location
In choosing a jurisdiction for the location of a family office, one must consider the following:
* What office procedures and controls will need to be put in place and what is the infrastructure (airports, communications, high-end services)?
* The nature of assets held and the issues of control: Where are the main tangible assets held and will the main activities revolve around intangible assets or are business interests also involved? Are the business interests mobile or fixed?
* Is the virtual family office a solution to many of the problems versus a private trust company (PTC)?
* Tax considerations are high on the list where national policies allow family members, wishing to serve a family office, are able to live in tax-neutral jurisdictions. Regarding regulatory and compliance obligations, if a private trust company forms a part of the solution, clients will be looking for jurisdictions with a light touch on regulatory oversight.
* Tax treaties, taking into consideration patents and/or royalties, play a role in choosing family office locations for artists and entrepreneurs.
* Exchange of information and access to information. Wealthy families are increasingly sensitive about the confidentiality of their affairs and with good reason. Kidnappings and other criminal acts present real dangers for exceptionally wealthy individuals.

The role of the family office: a tough job outline
* Investment management
One of the most common functions of the family office involves the execution of investment goals. This involves a large spectrum of activity including participation in the formulation of time horizons, risk profiles, asset allocation and the choosing and monitoring of managers.

Nowhere is increasing specialization more evident than in the investment management industry. The purchase of investment advice now requires a substantial degree of expertise. The question is where should this expertise be—in-house or with an independent manager selection specialist?

Other essential services of the family office include:
* Personal liability and security evaluation
* Life insurance needs evaluation
* Estate planning
Planning for wealth distribution and about important issues such as:
1) planning for disabled family members;
2) protecting assets from creditors;
3) spendthrift beneficiaries;
4) the succession of family businesses;
5) guardianship of children; and
6) charitable planning

* Tax compliance
Working with tax professionals in numerous jurisdictions
* Other business management services
Active coordination of legal/tax/ accounting issues relating to active business interests
* Philanthropic planning
Frequent use of foundations, as that gives them a less professional structure, longevity of their giving objectives and, many times, anonymity
* Financial reporting
This may involve combined portfolio accounting. There are often multiple brokers, custodians and managers servicing the family office and information will normally be accessed and distilled electronically by the family office
* Arranging and monitoring audits
* Asset purchases
Family offices offer advice on buying and selling big-ticket items like aircraft, property, art, yachts or even racehorses

All of these elements require considerable management skills. Often, the family will have an acknowledged leader from the senior generation. But will he or she have the necessary skills and experience and where do they look for support—the family office, their professional advisors and trustees or their private bank?

Banks and family offices
Driven by competitive pressures and the greater complexity of the lives of wealthy people, banks have begun catering more diligently to their clients’ needs through family offices. In many respects it is a natural evolution, as the focus of the international banks in The Bahamas has for many years been concentrated on the management and preservation of private wealth.

Family office services provided through a bank can be a good marriage, but the degree and complexity of service to be offloaded on the bank will vary with family circumstances.

Private trust companies
Independent trustees may face difficult legal and fiscal issues in ceding any significant degree of control. Where active business ventures and trading activities are involved, the internal procedures of big banks will simply not operate with the required speed and efficiency in decision making.

There is increasing use of trustee companies tailor made for a particular client, which may be to some greater or lesser extent influenced, owned and/or controlled by one or more members of the family. The Bahamas responded to this development with the passage of private trust companies legislation in 2006. These special purpose trustee companies institutionalize governance of family finances, improve transportability of the family office and enhance control.

The purpose trust completes the shape of many family offices
Confidentiality is invariably an issue for those wishing to set up family offices under a PTC umbrella and this begs the question as to ownership of such a company. The purpose trust established with the “purpose” of owning the shares of a PTC is often the answer, as there is no need to have named beneficiaries in the trust instrument. The trustee of such a purpose trust would generally be a bank/trust company licensed to do business with the general public.

Made to measure: One size does not fit all
Today, for many such investors, the solution of choice must be one carefully designed to fit their personal and family needs, and flexible enough to react to changing circumstances in the global village. It would be a grave mistake to suggest that the family office can be reduced to a standardized optimal model. The solution is often a casserole with many elements of the service provided from different kitchens. Then the sum total of their output needs to be continually distilled, analysed, cross-referenced and communicated, as someone has to check the impact of one piece of specialist advice upon another.

Arguably, The Bahamas is well equipped to take advantage of many elements of the tremendous growth and the global relocation of family offices for the mega-wealthy. In the past few years, the legislative framework, with the addition of legislation covering the private trust company, purpose trusts and foundations, has come to fully complement the many other advantages of residence, confidentiality, accessibility and infrastructure that have existed in The Bahamas for some time. Although the absence of reliable and affordable cellular service was once regarded as a negative factor in considering The Bahamas, there have been recent strides to rectify this. In the final analysis, all that may now be required is that The Bahamas itself recognizes and makes  the world aware of the country’s full potential in this service arena.

Bio
Betty A Roberts, FCIB, TEP
Betty A Roberts currently serves as president & CEO of First Trust Bank Limited, Lyford Cay, Bahamas.

A former CEO & managing director of SG Hambros Bank & Trust (Bahamas) Limited (formerly Coutts & Co), Roberts has spent over 30 years in the private banking industry. She is a Fellow of the Chartered Institute of Bankers, London and a member of The Society of Trust and Estate Practitioners (STEP).

Roberts has been an active participant in the various bodies that support the professional development of the banking community in The Bahamas, serving from time to time on the Bahamas Financial Services Board, the Bahamas branch of STEP, the Association of International Banks and Trust Companies in The Bahamas and the Financial Services Consultative Forum.

She currently serves on the board of a number of financial institutions in The Bahamas, is a director of the Lyford Cay Foundation, a director and avid supporter of the Christian Counselling Centre and Treasurer of the Bahamas branch of the International Women’s Forum.

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