News that U.S. states like Nevada and South Dakota have started to take away trust business from Cayman and other offshore centers late last year has hit the mainstream media, prompting claims that the United States is “a tax haven” and the “new Switzerland.”
Many trusts relocated just before a disclosure deadline came into effect in January. The United States states has not signed up to a standard developed by the Organization for Economic Cooperation and Development that aims to exchange taxpayer data globally. As a result, certain U.S. states will provide greater confidentiality, or as activists call it “secrecy,” than the rest of the world to family trusts.
The general trend was not news to the industry. Assets held in South Dakota, for instance, have jumped from $32.8 billion in 2006 to more than $226 billion in 2014.
Brian Taylor, managing director of trust company ZEDRA in Cayman, says the shift to the U.S. is an industry-wide issue, but he doubts the viability of such a move.
“People are already questioning why you might do.”
Tax planners are indeed contemplating whether it makes sense to move business to the U.S. to perhaps avoid the common reporting standard for the next year or so.
“But then you need to think: Is the expertise that you have in those jurisdictions the same that you have in Cayman?” he asks.
“Really, if you are the sort of client that Cayman wants to attract, which is the top-tier clients who are having their structures for family reasons because they have family members in many jurisdictions, just a short-term move is shortsighted.”
Clients appreciate their privacy and they don’t want their names made available unnecessarily, he acknowledges, but most are fully reporting, anyway, and there has been no reluctance to provide additional information under new transparency rules like the common reporting standard or U.K. FATCA.
“It is the way that the world is going and clients are recognizing that.”
Taylor endorses the position of the Cayman government to demand that transparency has to be for legitimate purposes such as law and tax enforcement, and not for transparency per se.
The issue is rather that the U.S. should be subject to the same rules.
Even though the pressure on Cayman is always greater because of “its success and notoriety,” he says, it is a jurisdiction that is based on good infrastructure and experienced lawyers and accountants.
“There will always be a requirement for that solidity and that expertise,” Taylor says.
“Cayman is well placed by continuing to follow the lead in adhering to global standards. When you have law abiding clients, they are entitled to their privacy, but we are ensuring that our clients are doing the right thing and doing things properly. And if Cayman continues to do that it can only continue to flourish.”
Growth for the trust business in Cayman is going to come from the Americas, which is ZEDRA Cayman’s main focus, and also from Asia.
“Asia’s use of Cayman is increasing. And the opportunities in Asia are increasing,” Taylor says.
ZEDRA recently opened an office in Hong Kong, which last year overtook Singapore in wealth management assets under management.
There is already a lot of familiarity in Asia with the use of Cayman funds. The next step for successful entrepreneurs who use Cayman funds is to consider how they can pass on their wealth to the next generation and determine the right structuring for their families and their companies.
Because firms like ZEDRA will offer multijurisdictional solutions, wealth management growth in Hong Kong does not necessarily have to be a detriment to Cayman to the extent that there are opportunities for Cayman trusts and funds.
“Which is why there are a lot of Cayman law firms expanding there as well,” says Taylor.
In addition, he notes, Cayman’s popularity in Latin America will continue.
Most trusts in Cayman are multijurisdictional trusts set up by families with family members and assets in different countries. Wealthy families, in turn, who live in a single country and have all of their assets there would derive no real benefit from an offshore trust, he notes.
“That is why Latin America has been so popular.” Many families send their children to college in the U.S. or Canada, who then might find a spouse and stay. “That’s when there are opportunities that places like Cayman can help with.”
Taylor says most families are not setting up trusts for tax reasons but for generational reasons. The aim is often to preserve wealth for subsequent generations in a way that they cannot spend it all. Other times, the desire is to keep assets separate to prevent family members from falling out.
“We are becoming more like historic U.K. and U.S. domestic trusts that are set up for those family reasons,” Taylor says.
While the family trust set up by a matriarch or patriarch is still the norm, younger people, who have become wealthy at an earlier age, are also using trusts. However, they will not put all their assets into a structure, and will use the trust more like insurance in case something should happen to them, for the benefit of their children, he notes.
The trust industry itself is also undergoing change. In the early 2000s, accounting firms and law firms sold their trust businesses to banks. More recently, banks have been disposing of their trust companies, by selling them off to private equity firms and other private investors. The result is a more dispersed market of smaller trust businesses.
ZEDRA is the product of a private buyout of the trust business of Barclays. Following the buyout in January and rebranding to ZEDRA, the group added offices in Hong, the Netherlands and London to its offshore companies in Guernsey, Jersey, the Isle of Man, Switzerland, Singapore and Cayman.
As an independent company, Taylor says, the advantage is being more flexible and entrepreneurial. It also means that ZEDRA can develop its business in the Americas, while Barclays’ private banking business had a stronger focus on the U.K., Europe and the Middle East.
Bank-owned trust companies sit on the balance sheet of the bank and are curtailed to some extent by group-wide risk management and country risk considerations.
“The banks are all about obtaining assets, and the independents are more about being a trustee,” Taylor says. “Now we are able to act independently for our clients. As only the trustee, you are trying to find the best investment managers for your client, the best credit options.”
In contrast to a bank which already has a natural client base that additional products and services can be marketed to, the challenge for ZEDRA is all about name recognition.
“As a global company, we are well placed. The challenge that we have is that we haven’t dealt with this part of the world for a while,” says Taylor. “We are a new company and a new name. We have to make people aware of our background and who we are.”
This does not mean that the company doesn’t have lofty goals. At its launch, ZEDRA said it would double in size within the next five years.
Although ambitious, it is achievable, Taylor believes, with the growth of the offices, the expertise that is in the group and the ability to grow as an independent company.
And of course, given the current landscape in the trust world with many smaller trust companies, he adds, “Clearly there is going to be consolidation.”