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I will confess to being a little ‘old school’ in my approach to trustees’ duties.  Because trustees are handling other people’s money, I really like black-and-white rules.

Of course, in real life there is a lot of ‘grey’, but this grey can usually be solved – after a little consideration –  by a policy that says “If in doubt, don’t do it”.  In this way the grey is all converted into black, life is simple, and the beneficiaries benefit from the most risk-averse approach, which in most cases should guarantee their interests are protected.

But perhaps I am a dinosaur?  Perhaps the fiduciary world is changing and I have failed to keep up?

A recent decision of the Royal Court in Jersey: Re May Trust [2021] JRC137, has forced me to rethink a few things.  This decision seems to have slipped under the radar, but I think it is very significant for trustees.

Let’s explain using hypotheticals:

 Hypothetical 1:  Money in the bank

I am managing $1 million of a client’s money which is in a bank account.  Let’s assume that keeping the money available at call is important in this case and that the money is sitting in an operating bank account (0% interest).

I am aware that the bank in question has an overnight call facility that offers 5%.  Switching the money to this account does not affect risk or liquidity.

What should I do?

In my black-and-white world, there is no option here.  I MUST put the money in the call facility.  If I do not do that, I am in breach of my duty to act in the best interests of the trust and of the beneficiaries – and I believe that I would be personally responsible (and personally financially liable) if I failed to do it.

Hypothetical 2: Paying Tax

I have two different ways of doing a transaction.  One way would result in a tax liability for the trust, and the other way not.  In all other respects, the two versions are identical

What should I do?

In my black-and-white world, I MUST choose the tax-free method – based on the same logic as hypothetical 1.

However, we live in a changing world.  A world in which ESG is not just a word but it is also a new way of life.  It is not all just about money anymore.  Other things are important too – stakeholders, society, the environment and moral principles.

Here is the third hypothetical:

Hypothetical 3 – Paying Tax – Version 2

I have two different ways of doing a transaction just as in hypothetical 2. One results in tax liability, and one does not.

The difference here is that the founder of the trust asks me to choose the taxable way.  Her reasoning is that she feels that by paying tax, the trust, and therefore indirectly her family, is delivering a social good.  She points out that the family constitution envisages a wider role for the trust – not just securing the family’s financial future but also achieving socially beneficial purposes.  I check the trust deed and find there is nothing (except my internal ‘moral alarm’) that would prevent me from doing what she asks.

In my black-and-white world, I would think long and hard on this point, but in the end, the dinosaur me would choose the tax-efficient way.  That’s because my duty is not to the founder.  Instead, it is collectively to the beneficiaries as a whole – including small children and the unborn.  Paying unnecessary tax might not be in their best interests (I have no way of knowing) and therefore I would most likely refuse to do so.

But perhaps I am wrong?

The facts of the case Re May Trust are not quite the same as hypothetical 3, but they are getting close:

The trustee in that case was asked to make a distribution to a charity that was a beneficiary of the trust.  The trustee had the power to make the distribution and was happy to do so.

The trustee could have made the distribution to the charity directly – with no tax consequences.  However instead the principal beneficiary asked that the distribution be made to him personally on the basis that he would then personally donate it to the charity.  Doing it this way meant that the beneficiary (not the trust) would have a significant tax liability – and it was a lot of money (£ 75 million).

In my black-and-white world, I am not so sure that this is a problem, but some thinking is required.  The reason it might be OK is that there is no negative impact on the trust itself as the tax obligation falls on the beneficiary – and what he wants to do is arguably between him and the tax authorities.  On the other hand, if you think of this as a way to get money from the trust to the (beneficiary) charity, then it is a problem because the charity ends up with 25% less money this way.  Finally, my objective as a trustee is to provide benefits to beneficiaries. Is providing money so that they can pay unnecessary tax providing a benefit? I really don’t know. Neither did the trustee, which in that case was IQEQ.  So they went to the court for guidance.

The court decided that the distribution (including by implication the money to be paid in tax) did qualify as a benefit to the beneficiary.  Not every benefit needs to be a financial benefit. The court said that meeting the family’s social justice aspirations is also a benefit.

Does that affect my decision in hypothetical 3?  Perhaps it does, but only if the family as a whole (not just the founder) supported the tax payment – as they did in the May case.

I see this as a really positive development.  Families and their trusts and foundations are not always just about money and they never have been – and it is great to see the courts recognising this.

On the other hand, this new world creates some new challenges for us dinosaurs.  Here’s hoping we manage to adapt.

 

 

Last week I attended Masaryk University’s seminar on “Beneficiaries of trust-like and foundation structures”.

This is the second such event I have attended.  They are very extremely informative and also professionally organised and presented, and I am truly grateful to prof. JUDr. Kateřina Ronovská, Ph.D. and her colleagues for the opportunity to participate.

This month’s J&T Bank client magazine includes an article I wrote on the re-emergence of a Czech family business culture.

Many thanks to Helena Svárovská and the rest of the team at J&T Family Office for the vote of confidence in my story-telling abilities.

PT Trustees specialises in providing bespoke protected account, trust, and escrow solutions to business.  It was established in 2012 and currently manages over 80 billion CZK per annum of protected, trust, and escrow funds for a large number of businesses.  

Because it meets rigorous corporate governance, quality of staff, systems, and IT standards, the UK regulator has approved PT Trustees as a travel trustee, and it is now the largest provider of travel trusts (ATOL Trusts) in the UK.

I am delighted to be a part of the project team that has brought PTT, its know-how, its technology, and its willingness to innovate to the Czech Republic.

I have been saying for a long time that business trusts are an interesting area – with huge unrealised potential in the Czech Republic.

Here’s the proof:  www.pttrustees.cz

Family business succession in the CEE region is a little different. That’s because most family businesses were founded after the end of communism in the 90s, and most are still owned and controlled by the first generation.  At the risk of generalising, that means that we are usually talking about a single owner / founder, who is now typically in his 70s.

He (it is almost never she) still takes an active, hands-on, role in the business.  Control is absolutely fundamental to his philosophy, and ego is a core attribute.  Despite the fact that these businesses can be vast, employing hundreds of staff in multiple locations, the founders still believe “the business is me, and I am the business” and “Only I know what to do”.

This positioning can make the process of planning to pass the business on from the first generation to the second generation challenging.  These problems are often exacerbated by a lack of advance planning and investment in the children’s business skills and knowledge.  As a result, the children are not always the right people to control the business – and even if they are, they sometimes lack the skill sets they need to do so.

Remember, a succession plan is not just a legal document – it is a process within the family.  It takes time and energy to implement, but that investment pays dividends.  Many Czech families are only now embarking on this process – perhaps a little late – but better late than never.

This in turn explains why it is that now, at this stage in the development of our family business context, we spend a lot of time focusing on children.  Doing this is important, but as we do so we run the risk of overlooking one of the most important lessons we can learn from truly multi-generational businesses abroad.  If we have made mistakes with the children, we may be able to fix them.  But what about the grandchildren?  Why not start the succession process early and develop these young people so that later on there are no problems that need to be fixed?

One of the most important parts of this is the memorable, important and valuable lessons that the Founder (Granddad) can impart to the grandchildren from the very beginning – even as he bounces them on his knee. Preparing future generations to lead and understand the business is one of the most important investments a family business can make.

This is challenging.   We are reluctant to talk to our children about their legacies and even more reluctant to discuss these things with sometimes very young grandchildren. We don’t want them to know how much money we have, or how much money they are going to inherit.  This is valid.  We need to protect them from a sense of entitlement and from the ‘silver spoon syndrome.  However, we also need to strike a balance.  If we over-protect them from the negative aspects of inherited assets, we miss the chance to maximise the positive aspects.

When preparing grandchildren for a future where one day they may inherit the family business, it doesn’t make sense to deny them any information or knowledge. If you do that, once they get their hands on their share of the family business, they won’t have any idea what to do with it.

Here are some of the gifts you should give your grandchildren

• From a very young age, make sure that they know what your business is and what it does. If your business makes things then it’s easier; you can take them around the factory and show them.  Make the tours as fun and interactive as you possibly can.  If your business provides services rather than goods it is a bit more challenging, but usually, with a bit of imagination a lot is possible.  From the age of around 7, my own children were able to understand what a trust was and how people used then. Their knowledge was of course far from complete – but they did know with absolute certainty that working with trusts was a truly exciting and fascinating vocation! 😊
• Make the interactions that they have with the business as interesting, as fun, and as educational as possible.
• Help them understand how important the business is to the family. They should know that the nice life they enjoy is derived directly from the success of the business.  Because the business is important, we all as a family, need to nurture it, to make sure it succeeds
• When the older generations get together for reasons connected with the business, bring the younger generations along and involve them to the maximum extent that makes sense. This may dictate a different approach for different age groups.  You may not want 8-year-olds attending your family council meetings – but 15-year-olds might benefit from that.  If the 8-year-olds are doing something else, think about how you can connect that to the business.  When the family dedicates time collectively to the business, try to make sure that the entire family is involved.
• Make sure that you maximise the possibilities for the young ones to do work experience and internships in the business.

Being part of a family business can be truly rewarding. The special combination of family and business delivers great returns.  Not just financial returns, but also emotional returns and relationship returns.

Many family businesses are the source of family conflict, but if you develop your family correctly it can instead be something that binds them together more strongly.

Some people accuse me of being a ‘stuck record’.  I keep endlessly repeating the same points and asking the same questions over and over again.

Despite accusations that this is due to memory lapse associated with old age, the truth is that I keep repeating myself because the messages are important, and many people simply don’t get them.

One of my questions is this:

“As a family business, you probably consider a strategic plan, a budget, and a marketing plan as business imperatives.  But what about your business succession plan?  That’s just as important.  Do you have one?”

My blog article this month is to confess that there is one more plan that needs to be added to that list, the emergency board plan (or EBP).  The article is inspired by an excellent piece written for the STEP Journal by Hayden Bailey, Partner at the London law firm, Boodle Hatfield.

In my work, I spend a lot of time focusing on the long-term impacts on family business of the retirement or death of the founder.  These are essential questions.  However, Hayden’s excellent article also reminds us not to forget about the short-term impacts.

This is especially relevant in the CEE region where many family businesses are tightly controlled by the original founder from the 1990s who also usually has a very ‘hands-on’ approach to the business.  The founder exercises absolute control over the business and makes all the important decisions.  That is perfectly fine – and in fact for many of my clients, it is an essential part of how their world functions.  It is often also a question of trust.  “I can’t trust anyone but myself to do this.”

But what then happens when the founder is suddenly and unexpectedly unavailable? This can be because of death, but it is more likely to be a result of health issues.  It can be temporary, for example in the case of hospitalization, or it can also be permanent.  In my experience, when this happens there is an initial period of total business paralysis.  Nobody really knows what to do, key projects grind to a halt, important and necessary decisions are not made, opportunities are missed, and unnecessary costs are incurred.

This is why an EBP is an essential part of the wider succession planning process.

What is an EBP?

A business succession plan sets out the steps to be taken to ensure the long-term continuity, management, and control of your family business.  In contrast, the EBP is designed to provide a way for the founder to decide the immediate things that should happen.  This can include:

Announcement

How to manage the announcement of the death or incapacity, both internally and externally.  Who should be told? (Consider key customers and suppliers, external lawyers, banks, and other stakeholders)

Legal Authority to Act

Who has legal authority to manage the business in the short term? There needs to be someone, or more likely some small ‘committee’ that is able to meet at the earliest opportunity to deal with high-priority day-to-day management issues such as bank loans, financing, debt management, cash‑flow issues, and bank‑signing authority. (It is very important that the necessary legal authorities to act are set up in advance – as by the time the problem arises it will be too late).

Shorter-term strategic  

The plan can name trusted friends or advisors who can be brought in to ‘steady the ship’ in the interim period before the longer-term business succession solutions kick in or the founder recovers.  If you have an Advisory Board and/or Family Council, what role do they play here?  (Families often play an essential role in longer-term solutions, but you need to bear in mind that in the immediate aftermath of an event like this, their capacity to act can be limited).  This group needs to deal with the bigger issues and ensure that nothing important is missed or lost. Key issues include the status of ongoing transactions, negotiations, and legal proceedings.  They also need to set a roadmap and identify which issues need to be dealt with in the next week, the next month, and until the founder returns or the longer-term succession solution kicks in.

Information

The plan should also set out a program for reporting to the family – including details of what should (and what should not) be shared, with whom, when, and how often.

If the succession plan includes a supervisor or Advisory Board, it is very important that they are also fully informed, not least so that they can make sure that whatever is happening is consistent with the founder’s wishes and vision.

So, an EBP is important.  For some families, this will be a chapter in a much larger long-term succession plan.  For other families it will be a separate document. The form of the plan is not so important.  What is important is that it exists.  As with business succession generally, failure to properly plan will inevitably lead to cost, conflict and, missed opportunities.

 

 

Image credit: Owen Blacker

 

 

 

There is a nice article (featuring a quote from me) here: https://advokatnidenik.cz/2022/12/08/experti-na-sverenske-fondy-reaguji-na-prulomove-rozhodnuti-soudniho-dvora-eu/

I am all in favour of eliminating Money Laundering and the financing of Terrorism, and I strongly support any sensible steps taken by the State to present the misuse of the financial system for these purposes.

Unfortunately, over recent years, the EU has started to go far beyond what is sensible, imposing a range of measures which in my opinion, have zero impact on criminals, but have a hugely negative effect on innocent individuals and families as they seek to go about their legitimate business. In many cases, the rules are just downright silly.

It is also interesting to keep in mind the protections provided to us all by the GDPR and the European Convention on Human Rights. The Convention says:

Article 8 – Right to respect for private and family life

1. Everyone has the right to respect for his private and family life, his home and his correspondence.

2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country

Despite these basic protections, the EU and the Czech State have imposed a number of rules around the Register of Beneficial Ownership which seem to directly conflict with those important rights. They argued that this interference with our fundamental rights was justified because it was proportionate and necessary.

I support the existence of a UBO register. It is important in preventing abuse of the system. The State, banks, and contractual parties have a logical interest in knowing who is behind companies and who they are really dealing with. Criminals must not be allowed to use companies to hide their criminal activities.

What I strongly disagree with is the extension of this system so that the private details of company shareholders and in some cases also trusts and foundations are exposed to public view, available not just to those with a legitimate interest, but to anyone at all.

‘Anyone at all’ includes your nosey next-door neighbours and other people with ill intent including gold diggers, blackmailers and scam artists. Thus, the state has been taking steps with the stated objective of preventing crime which have the actual effect of helping criminals. That’s not proportionate and nor is it necessary.

Thankfully, common sense has finally prevailed!

Last week, the Court of Justice of the European Union (CJEU) decided that the measures in the EU Fifth Anti-Money Laundering Directive (5AMLD) which require EU Member States to give the public unlimited access to their UBO registers are invalid because they breach privacy and data protection rights.

The CJEU said that the measures in 5AMLD go beyond what is necessary and proportionate. Making the register public enables a potentially unlimited number of persons to find out about the material and financial situation of a beneficial owner, and that information can never be recalled from the register. Making the register fully open to the public thus violates individuals’ privacy, it said, concluding that Member States must put appropriate safeguards in place to protect privacy in accordance with articles 7 and 8 of the Charter of Fundamental Rights of the European Union.

As a result of the judgment, Luxembourg and Holland have already suspended public access to their registers

I suppose Czech will follow soon (as the Czech State is now in effect in breach of GDPR!) and I hope that a renewed sense of common sense will apply to future AML measures.

Here is a link to some nice coverage (in Czech) of the Czech Bar Association seminar:  https://advokatnidenik.cz/2022/11/07/v-praze-se-uskutecnil-mezinarodni-seminar-k-privatnim-nadacim-v-cr/

 

It was a great pleasure to speak again at this year’s STEP conference on International Foundation Law in Prague.
Thank you to Stepan Holub and ČAK – Česká advokátní komora for organising another great event. The conference was also co-sponsored by Asociace pro podporu a rozvoj svěřenských fondů, z. s. As usual, there was a fantastic range of international speakers and it was a very informative and useful day!