By Paul James
Global Head of Citi Trust
April 15, 2016
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The sea-change in transparency that the financial world is undergoing is transforming the industry, but not the value of trusts.
A new age of transparency has dawned in the financial world.
New legislation around the world combined with increased internal and external oversight and monitoring in many aspects of financial services is transforming the landscape, requiring more information to be gathered and shared with the authorities. What does this mean in practice for those who have trusts?
As a private bank, we are expected to be able to provide clients with clear and timely information on clients’ assets, performance statistics, and to obtain from them detailed information on their source of wealth and other family matters. Recent initiatives such as the Foreign Account Tax Compliance Act (FATCA) and now the Common Reporting Standard (CRS) are setting clear guidelines as to what reporting is required and with whom that information has to be shared.
Under the proposed CRS legislation, banks and financial service providers in more than ninety countries have agreed to pass local legislation to collect client and asset information locally and to exchange that information automatically with the tax authorities where our clients are resident. Should this cause a rush for jurisdictional arbitrage? I would suggest not.
CRS and the automatic exchange of information will undoubtedly not be welcomed by many people simply because it is an intrusion into personal privacy. However, as a global inter-governmental initiative there is potentially no escaping its breadth and scope. Will it cause people to stop using trusts and to repatriate assets to their home jurisdiction? I think not. Our globally-diversified clients have many reasons to maintain their investments and trust structures outside of their home jurisdiction.
The global nature of our clients’ situations is not going to change as a result of CRS. Our clients have families that are increasingly scattered geographically. Family members move around more often; an individual becoming tax resident in more than one jurisdiction is not unusual. More and more, our clients invest across borders in a wider array of asset classes. These family and asset dynamics will not change. Nor will the desire to consolidate globally-dispersed assets within a trust structure that addresses the estate planning and administrative needs of a multi-jurisdictional family.
In addition, clients with complicated circumstances will continue to have sophisticated estate-planning requirements. In fact, with increasing cross-border complexity and regulation, estate planning will become an even more pressing need for the typical private bank client. I believe our clients’ advisors will increasingly be encouraging their clients to think about planning for the future, and putting in place an estate-plan to hand assets and control over to the next generation in an orderly fashion. Previously, benign and non- intrusive legal and regulatory environments made this a less pressing priority for many families. I suspect that the “successor-generation” discussion will become a more important dinner table discussion for many of our clients.
I believe that trusts will continue to be attractive estate-planning vehicles globally. They have been used for centuries for a variety of purposes from avoiding feudal duties, to legitimately reducing inheritance tax, and assisting with the distribution of large and complex estates over multiple generations. Their unique flexibility as asset-protection vehicles remains undiminished.
Clients may begin to think differently about their use, but the attraction of being able to separate legal ownership from the right to enjoy the income or capital value of an asset will remain powerful. The rebalancing of the trust industry away from tax deferral and avoidance and back towards asset protection will continue as transparency progresses and we at Citi Trust believe we are uniquely positioned to assist clients with their needs.