This article is written by Philip Marcovici, who served as a partner at Baker & McKenzie between 1982 and 2009. It originally appeared in the March 2018 issue of Citywire Switzerland. Marcovici now consults with governments, financial institutions and global families in relation to tax and wealth management.
Historically, there has been an overemphasis on taxation in asset and succession planning, fuelled by advisers who were focused more on bank secrecy than on understanding the real needs of their clients.
It is critical that wealth owners understand their tax position, learning from advisers and being guided by them, without allowing their advisers to effectively ‘kidnap’ their wealth by keeping the family in the dark about how their own structures really work.
It is important to understand both the changing world of tax enforcement and the fundamental reality that the luxury product offered by the private banking industry in the past – secrecy without much more – has fallen away.
This has real importance not only for families connected to countries at the forefront of tax enforcement, such as in North America and western Europe, but also for families connected to countries where the tax systems are still developing, and where corruption and misuse of tax information are rife.
And in a world where disparities of wealth are increasingly at the forefront of the political and social agenda, is ‘hiding money’ either an option or the right thing to do?
The new generation
I have worked with many wealth owners from the younger generation who on inheriting assets from their parents have negotiated ‘voluntary disclosure’ arrangements with tax authorities – essentially coming clean on past tax evasion that has been undertaken by previous generations.
This often costs more than it would have done if the older generation had simply paid their taxes and undertaken legal ways to reduce their exposures. Was the older generation right in believing they were doing the younger generation a favour by salting money away in secret accounts and opaque structures?
I have also come across a remarkable number of situations where the older generation has worked hard to achieve secrecy, managing to leave their assets in a messy labyrinth of hidden structures, facilitating theft and abuse and leaving a legacy of mistrust and unresolved tax liabilities for their family to sort out.
Tax laws are difficult for anyone to understand. Even the most sophisticated tax adviser will not have all the answers.
Today’s wealth-owning families are international. Different family members may live in different countries, the family is likely to invest in a number of places, and citizenship can sometimes play a critical role in the tax picture.
The only certainty in the tax world is that the laws will inevitably change, and constantly do.
The wealth-owning family does not need to become expert in the tax laws of every country that affects them and their investments. Rather, they need to be able to understand the advice they receive from experts and challenge it by asking the right questions.
Most importantly, tax should not drive the succession and asset protection plan – the real needs of the family should, and these go far beyond taxation.
Appropriate governance, checks and balances designed to protect clients, and clearly defined approaches to deal with risks such as divorce, political change and much more are the keys to holistic and effective planning.