Sports & Entertainment

View from the CIO: Markets are getting wise to Trump’s rhetoric

​Over the last quarter, it felt like some of the concerns around the US/China trade war had started to subside somewhat. There were signs of a little ground-giving on both sides as Presidents Xi and Trump began to realise it is in everyone’s interests to reach some sort of agreement. Or perhaps the Chinese - like the markets - were simply wising up to Trump’s bluster.

Trump still seems determined to bolster his domestic image and his electoral prospects for 2020 by bashing China, essentially. Only last week, the US blacklisted 28 Chinese organisations for their alleged involvement in abuses against ethnic Uighurs in China’s Xinjiang province. But he also realises that going too far could result in a significant slowdown in the global economy. This would have a knock-on effect on the US stock market, which in turn would upset his election prospects. So he has to tread carefully.

The market, for its part, has cottoned on. The style that President Trump has adopted over the last couple of years has been to delve into things, put in place various red lines and non-negotiables, cry wolf on the ensuing crisis, retreat, wait a while, remove the very thing that created the crisis, then swoop in and ‘save’ the day.

This pattern is characteristic of his foreign policy, including, his current dealings with the Chinese. Initially spooked by the bouts of volatility it created in the past, the markets now appear to ‘understand’ the US President’s modus operandi and seem less affected by the potentially corrosive fallouts, safe in the knowledge they may never actually happen.

One result is that, despite increased volatility, the stock market has continued to be very strong over recent months. The idea that it will just continue with the pace and enthusiasm seen in previous years, though, is taking on less and less probability.

It might not be a bad time to take a pause from the market, to reduce some risk and selectively allocate it to long short equity managers - those able to both take advantage of stocks which they think have good long-term prospects while ‘shorting’ or borrowing stocks whose prognosis is negative. In this way, we think that portfolios will be better positioned to handle any volatility that may come our way.

Disclaimer: This article has been prepared for information only. The opinions and views expressed on any third party are for information purposes only, and are subject to change without notice. It is not intended as promotional material, an offer to sell nor a solicitation to buy investments or services. We do not intend for this information to constitute advice and it should not be relied on as such to enter into a transaction or for any investment decision. Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes. © Copyright Stonehage Fleming Investment Management 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission.

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Paul Weldon - Working with sports and entertainment clients

Paul Weldon, Director - Sports and Entertainment, discusses working with Sports and Entertainment Clients.

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Beyond Paradise: English Trusts have a Future

An unfortunate impact of the media assault on the ‘offshore sector’, prompted this time by the so called ‘Paradise Papers’, is that it tarnishes the reputation of Trusts more generally, whether onshore or offshore. The demand for a clampdown reflects the widespread view that trusts are primarily vehicles for tax avoidance and money laundering, with little understanding of the many other important functions which they serve.

Indeed it is ironic that some commentators are predicting the gradual demise of the onshore English Trust, despite the fact that the alleged abuse has mainly taken place in offshore jurisdictions. For onshore English Trusts, the ‘clampdown’ has long since taken place and they offer limited potential for tax avoidance, other than for legitimate purposes specifically intended in the relevant legislation.

But the English Trust is one of the most successful and enduring concepts in common law, showing itself to be an inherently flexible and durable instrument. It will recover from the publicity, as it always has in the past, as families and their advisors focus on the multiple benefits of trusts, which go far beyond tax and which have served society so well for centuries.

THE ESSENCE OF A TRUST

• The Settlor creates the trust by placing assets under the control of the Trustee.
• The Trustee holds the assets as legal owner, for the benefit of the Beneficiaries.
• The Trustee holds the assets in accordance with the terms of the trust, which are enshrined in the Deed.
• The Trustee may receive additional guidance from the Settlor in the form of a non-binding Letter of Wishes.

The trust industry is itself to blame for allowing abuse and too often in the past trusts (especially offshore trusts) were sold as products, ‘marketed’ primarily for their tax efficiency, rather than the other advantages they offer. But when you look beyond the tax issues, most of the benefits of English trusts remain intact especially for those concerned with long-term wealth and succession planning.

USES OF TRUSTS

Trusts first emerged in English law in the 1200’s usually as a solution to a particular problem. During the Crusades, for example, they enabled assets to be managed in the absence of their owners, for long periods with poor lines of communication.

More recently, prior to the Married Woman’s Property Act in 1882, a father would commonly declare a settlement for his daughters to safeguard their interests, as a woman could not legally hold property in her own right.

Today the trust is frequently used as a vehicle for holding a family business, reducing the prospect of family disputes and avoiding the disruption which may occur on the death of a major shareholder.

Many families establish trusts for specific purposes, such as education, dealing with hardship, or encouraging entrepreneurial activity. Some have valuable art collections or other assets which, for a variety of reasons, are best managed through a trust structure.

Trusts are frequently used to protect the vulnerable, both from themselves and from those who may wish to exploit them - for example children or those who may struggle to own assets directly perhaps because of a disability or limited capacity to make decisions.

They are also used to give family members a degree of anonymity, in the extreme protecting them from extortion and kidnap, or less dramatically, from people seeking a friendship or relationship for the wrong (financial) reasons. Whilst the extent of privacy afforded by trusts is undeniably reduced as a result of recent measures designed to encourage tax transparency (such as the UK Trust Register), they still provide a significant degree of protection.

Finally, wealthy families tend to create philanthropic trusts as vehicles for charitable giving, often involving a variety of family members across generations, working together to use their wealth for the benefit of society. In short trusts can be used to ensure some continuity of purpose for wealth across generations, the trustees being responsible for balancing the differing views of beneficiaries with the intentions of the settlor, as expressed in the trust deed and letter of wishes.

PROTECTION OF WEALTH

The phrase “rags to rags in three generations” is often repeated because it is so true. Using a trust, or indeed multiple trusts, can help protect the family’s wealth for generations to come.

It does so by creating a set of criteria to ensure the wealth is responsibly managed and distributed to beneficiaries on a basis which is sustainable and appropriate. Many wealth creators are also concerned by the potential negative impact of wealth on the lives of those who inherit, particularly those who inherit at a young age. The flexibility inherent in a trust addresses this concern.

EFFECTIVE SUCCESSION

Crucial to this is having strong stewardship in the form of trustees who are able to guide the family wealth in the best interests of the beneficiaries. A trustee is a neutral party, who can negotiate and adjudicate between competing and differing family interests.

It is, however, important to understand the precise wording of the trust deed and most settlors also leave a letter of wishes explaining how they anticipate their trustees will exercise discretion.

Circumstances change and later generations may not necessarily hold the same views or interests as those of the founder. It is in such circumstances that a trustee with suitable experience and judgement will be able to review and reinterpret the original wishes of the settlor in a changing environment.

PRESERVATION OF PARTICULAR ASSETS

Using a trust can help preserve, manage and develop specific assets, such as a family business, an art collection or a heritage estate. No-one would wish such assets to decline through lack of direction, mismanagement or family disputes, as happens only too often.

By placing assets into trust, settlors are able to set out a broad strategy and a framework for major decisions.

On the other hand, no settlor would wish an asset to outlive its usefulness or suffer a severe deterioration or erosion of value. Within the terms of the trust, it is often the job of the trustee to make the judgement to dispose of such an asset if and when circumstances dictate.

CONTINUITY OF PURPOSE

Changing attitudes towards wealth, both in the external world and within families themselves were highlighted in a Stonehage Fleming research paper, entitled ‘Four Pillars of Capital for the Twenty First Century’. This saw a recognition of the changing context in which many families saw their legacy, in terms of four overlapping forms of capital: financial, intellectual, cultural and social.

In essence, the prevailing view was that wealth has to have a purpose and a context if it is to survive through several generations. Trusts help a family preserve the central purpose of their wealth within a changing environment.

PHILANTHROPY

Many people want to leave a charitable legacy, either during their lifetime, or on death.

One of the most effective and popular methods for giving back to the community is to endow a charitable trust, which can help to leave a lasting charitable legacy long after death.

Philanthropic trusts can also provide a helpful gateway to introduce the next generation to the greater role of wealth. It can create a sense of common interest and a common cause – which may help to bind the family together.

TAX

Trusts existed in England long before our statutory tax system, so the system always made special provision for trust taxation. The general principle was that trusts should be tax neutral and not provide an unfair advantage. Indeed because they were used by the wealthy, some governments have imposed strict regimes most notably in the changes made to Inheritance tax in 2006. However, flexibly drawn trusts, predominately those contained in wills, can still provide significant estate planning opportunities.

In broad terms, trustees will pay income and capital gains tax at rates roughly comparable to an individual’s higher marginal rate. Nonetheless it should be noted that there are some classes of trust which are treated as tax “favoured” trusts by virtue of their class of beneficiaries (minor children or disabled persons, for example).

As a general rule, inheritance tax is due at 20% when assets are transferred into trust (on the value above GBP325,000) and there is a “periodic charge” of 6%, every 10 years, with a similar charge on distributions. By comparison, inheritance tax is charged at 40% on a person’s death.

In addition, there are particular tax advantages when transferring certain assets to trust, examples being as follows:

FAMILY BUSINESS /AGRICULTURAL PROPERTY

Subject to certain conditions, the inheritance tax charge on the transfer of a family business into trust can be 100% mitigated by Business or Agricultural Property Relief. There should also be no immediate capital gains tax consequences, so long as it is possible to ‘hold over’ the capital gain. This allows such an asset to pass to future generations without having to pay 40% inheritance tax.

CHARITABLE TRUST

A gift to a charitable trust will be free from inheritance tax and can also be made without any capital gains tax being due.

THE CHOICE OF TRUSTEE

Given all that is said above, the choice of trustees is critical. Historically, the trustees would be family members, friends, or longstanding family advisers who would be appointed to act as trustee on the basis that they would have a deep understanding of the family and their needs. In recent decades however, the complexity, responsibility and risks of trusteeship have increased significantly and there is a stronger case for the professional trustee, who can offer relevant experience, more resources and greater continuity. In practice, many families tend to combine the two.

COSTS

As the nature of the assets commonly held in trusts have evolved, so too have the traditional fee structures. Broadly, the charges depend on three main factors:

1. The amount of work involved in administering the trust and managing the underlying assets;
2. The nature of the decisions to be taken and judgments to be made, hence the level of experienced professional input required; and
3. The risks involved for which the trustees may become liable.

ADVANTAGES OF THE ENGLISH TRUST

A trust made in a UK context will be subject to a complex tax regime, the details of which need to be fully understood, but may well still provide long term advantages for wealthy families. In such circumstances, it may also be that tax mitigation is not the main motivation for using a trust. The English trust is inherently respected and will not generally give rise to the negative association of some offshore jurisdictions. The settlor, beneficiaries and indeed trustees will be able to take comfort in knowing that the trust will be administered in a jurisdiction with centuries of well tested and established trust law, and it would be rare for a question to arise which had not been seen before.

FINAL THOUGHTS

The trust is an alternative to the more usual approach of leaving assets directly to beneficiaries. The trust should be considered where the settlor:

1. For whatever reason, wishes the legacy to remain in collective ownership, rather than be distributed to a variety of individuals;
2. Wishes to reduce the possibility of wealth being squandered or dissipated by individuals who lack the experience or acumen to be good stewards of their inheritance;
3. Wants to specify the purpose of the wealth and to pass on some guidance for successor generations on how it should be used or managed;
4. Wants to preserve particular assets intact, such as a family business, a heritage property or art collection;
5. Wishes to reserve part of the legacy for philanthropic purposes.

The role of the trustee is crucial, and may have a massive impact on the welfare, happiness and unity of the family. It is not just a question of finding a suitably experienced trustee when the trust is established, but providing for the appointment of successor trustees in the future.

It is a system that has worked extremely well, in the past for UK families, particularly those who own land or business assets. Despite the loss of tax benefits and the bad publicity of recent years, the English Trust will continue to play a pivotal role in the management of wealth and succession.

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