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Introduction Soviet wealth: to Cyprus & beyond IFCs: East versus West The cultural imperative: wealth structuring around the world Diversifying risk: the growth of the multijurisdictional structure California dreaming: West coast billionaires see things differently Private jets: now may be the time to buy Investments of passion: fine art wins favour

2014


Welcome to this inaugural edition of our new Wealth Structuring 20:20 report, a feature publication that aims to tap into the issues facing high net worth individuals around the globe, and investigate the themes and challenges affecting this elite group.

It’s clear to us that the world’s wealthiest individuals cannot afford to stand still in the current climate, which sees macroeconomic uncertainty alongside rapid legislative and regulatory change. In the face of choppy stock markets, real estate has once again been the asset allocation of choice, with private investment in commercial property up to US$92bn in 2012, compared to US$47bn in 2009. New York, Hong Kong and London remain the primary beneficiaries of private investment into commercial real estate.

Introduction

As 2014 progresses, however, we see confidence returning to the international capital markets as many governments move towards getting a grip on massive budget deficits, and financial institutions regain their footings. The aftermath of the global financial crisis will bring a new wave of challenges for the growing class of high net worth individuals

In this edition, we look at wealth management and structuring on an international scale, considering the impact of the Cyprus crash on Russia’s wealthy; the unique challenges facing high net worth individuals on the West coast of the United States; and the different cultural issues that arise when embarking on cross-border wealth structuring. We are also well aware of the significant changes within regulatory environments around the world and the impact of wealth regulations specifically, coupled with the complex geopolitical environments that push many high net worths towards structures focused on diversifying risk. And finally, we have looked at the smart investment in alternative assets, whether they be fine art or private jets. We hope that this edition of Wealth Structuring 20:20 provides useful insight to our readers. Certainly it seems that, when we review information from the Capgemini World Wealth Report 2013i, the number and aggregate wealth of high net worth individuals in the world is growing and continues to reach record levels, increasing 9.2% to reach 12 million by the start of 2013. Aggregate investable wealth also increased during 2012 by 10%, reaching US$46.2 trillion, and so wealth structuring has never been more important or more complex. Despite possible perceptions to the contrary, in 2012 the number of millionaires and other wealth individuals in North America grew by 11.5% to reach 3.73 million, and overtook Asia-Pacific, which grew 9.4% to reach 3.68 million. However, while a great number of the world’s richest individuals now call

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America home, wealth growth was the strongest in Asia-Pacific at 12.2%, driven by strong fortunes in many of the region’s countries, followed by North America at 11.7%. Tellingly, almost half of the global population of high net worth individuals is resident in just two countries - the United States and Japan.

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We hope that our articles on the following pages address some of the issues that are front of mind, and provide interesting food for thought. Please don’t hesitate to get in touch with your usual Appleby contact should you wish to discuss anything further.

/offshore centres in Asia, Africa and elsewhere are thriving in response to a growth of wealth in many developing countries/

Introduction

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Soviet wealth: to Cyprus & beyond

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IFCs: East versus West

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The cultural imperative: wealth structuring around the world

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Diversifying risk: the growth of the multijurisdictional structure

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California dreaming: West coast billionaires see things differently

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Private jets: now may be the time to buy

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Investments of passion: fine art wins favour

seeking international exposure.

When it comes to asset allocation, the Capgemini report tells us that the world’s wealthiest people exhibited a clear bias towards wealth preservation in 2012, allocating nearly 30% of their funds and other assets into cash and deposits, with alternative investments making up only about 10% of allocations globally and that split evenly between structured products and private equity investments. According to Boston Consulting Groupii, offshore wealth (defined as assets booked in a country where the investor has no legal residence or tax domicile) rose in 2012 to 16% of investable assets, with Western Europe the predominant source and Switzerland the most popular destination. It remains to be seen how the impact of FATCA and other regulatory initiatives will impact this capital flow, particularly as governments in Europe and North America push individuals to move money onshore.

CONTENTS

Contributors: Farah Ballands Partner Appleby Jersey

Carlos de Serpa Pimentel World Wealth Report — Capgemini (June 2013) ii  Global Wealth — Boston Consulting Group (May 2013) i 

Partner Appleby Cayman Islands

applebyglobal.com

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Soviet wealth:

A three-hour flight from Moscow, a double tax treaty and a generally very beneficial tax system have long made Cyprus the destination of choice for Russians looking to invest money overseas.

to Cyprus & beyond Contributors: Elizabeth Henson Andrew Terry

In 2012, statistics from the Central Bank of Cyprus showed Russian money dominating foreign direct investment into Cyprus, worth around €880m to the country. But following the 2013 banking crisis in Cyprus and subsequent bailout, there were fears that Russian money would start heading elsewhere. Today, whilst there are some signs of a shift, the ties between the two countries remain strong. Elizabeth Henson leads the Private Client and Private Business team at PricewaterhouseCoopers in London, and a significant number of her clients are ultra high net worth individuals from Russia. She says: “The banking industry in Cyprus has suffered in recent years. Some of the more sophisticated clients now don’t want to use Cyprus for holding companies, and sometimes they are using UK companies instead. But some family offices have stayed in Cyprus because it remains a cheaper, professional place to run things from, particularly if you have employees on the ground.”

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Stalin Skyscraper on the Kotelnicheskaya Embankment, Moscow

She adds: “Definitely amongst the very wealthy, with a greater level of sophistication, the use of Cyprus holding companies for new transactions is being questioned and greater consideration is being given to using the UK, the Netherlands and Luxembourg.”

New generation of wealth The political environment in Russia is such that many wealthy Russians continue to look for structures that allow them to get their money out of the country with maximum effectiveness. Andrew Terry, a senior tax partner at Withers and co-head of the firm’s CIS practice group, says there is a new generation of rich Russians, following in the footsteps of the super-rich oligarchs who made their money in the privatisations of resource companies in the 1990s.

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He says: “Now there is a group of very wealthy entrepreneurs coming from Russia who have made money in very difficult circumstances, often involved in less sensitive industries outside natural resources. This group of high net worths, once they have assets over about $500m, is looking to exit Russia and is providing quite a lot of business for offshore jurisdictions.”

The new rules restrict how “politically exposed persons” hold their liquid assets and where they can bank. “There is greater emphasis on looking at where companies are managed and controlled,” says Henson, “so if you have a BVI company and someone sitting in Russia is a shadow director taking all the decisions, that may be challenged.”

He says his clients are increasingly interested in investor protection, as opposed to just tax. “With the Netherlands and Luxembourg there are bilateral investment treaties, which mean that if the Russian state were to seize the assets of the underlying subsidiary of the Luxembourg company, then the Luxembourg company would have rights to either get those assets back or seek compensation.”

Because of fears about expropriation of assets, many of Russia’s wealthy have relocated to London, often using offshore structures through the Isle of Man, Jersey and elsewhere to manage their wealth. Henson says: “Since the election of Vladimir Putin as President in 2012, there has been a high level of political uncertainty, and so people have been moving to the UK, including moving their families here. We have seen Switzerland becoming popular as a destination for Russia’s wealthy, and we have also heard of Russians using Singapore as a base for a gateway into China, and choosing that as the start of a move eastwards.”

President Putin is also pushing to have ownership of Russian companies held onshore rather than allowing the use of offshore or non-Russian holding company structures. Legislation introducing these changes has already passed on second reading in the Duma.

But whilst the super rich may, to some extent, have turned their back on Cyprus in favour of new structures, for Russia’s wealthy middle classes the Mediterranean island remains a destination of choice. Terry says: “The number of clients moving money out has been significant, but not huge, and the shift is still ongoing. But it’s expensive to move and any of these new structures are more expensive than Cyprus.

There are also changes to the tax scenario in Russia that are pushing high net worth individuals to shift money overseas. The government, like elsewhere, is moving to increase sophistication in the domestic tax system as part of an economic drive to claw back revenues, such that the authorities are seeking more information and driving greater governance.

More transparency

/Since the election of Vladimir Putin as President in 2012, there has been a high level of political uncertainty/

“The people who had deposits at the Bank of Cyprus wouldn’t have enough money to interest the banks of Geneva or Zurich; if you want to put US$500,000 there, they aren’t going to open an account for you. So those middle classes are not necessarily relocating.” Russia and Cyprus remain strong bedfellows, even if Russia’s billionaires are starting to pursue other options.

Contributors:

A theme resulting from the new rules is a noticeable shift towards greater transparency and onshore structuring by Russian clients, Henson says.

Elizabeth Henson

Private Client and Private Business PricewaterhouseCoopers London

Terry adds that post-Cyprus, “Many Russians have been looking to other jurisdictions, and particularly Luxembourg, the Netherlands, Sweden and Latvia, with some double-tier structures using a Luxembourg parent above a Russian company with a UK company above that.”

Andrew Terry

Senior Tax Partner Withers Worldwide London

/For the wealthy of China and many parts of Asia, IFCs provide a well-regulated, simple, stable and well-run business environment/ Nicosia, capital of Cyprus

Traditional Russian nesting dolls

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IFCs: East Versus West »

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Contributors: Hubert Tse Hélène Lewis

The global financial crisis brought with it a great focus on offshore finance in both the United States and Europe, as governments struggled to get a grip on massive budget deficits by cracking down on missing tax revenues.

IFCs: East versus West

Meanwhile in Asia the impact on international financial centres (IFCs) was entirely different, as instead of a clampdown on transparency and a raft of new regulations, the offshore centres of Hong Kong and Singapore thrived on the back of growing wealth in the region. As the West pursued a campaign against IFCs and the distinction between tax avoidance and tax evasion blurred, so the East looked to IFCs to offer a familiar, comfortable and stable platform for high net worth individuals looking to keep money offshore.

Growth in the East China is a classic case in point. GDP growth stood at 7.7% for 2013, and has, since 1978, averaged 10% a year, putting the country on track to be the world’s largest economy by 2020. But currency exchange controls mean that the Chinese citizens who are benefitting from that growth in wealth cannot convert their money into foreign currency, so they cannot bring dollars into the country or convert their renminbi without getting approval. Hubert Tse, senior partner at Chinese law firm Boss & Young in Shanghai, advises global, Asian and Chinese hedge funds, private equity funds,

/For the wealthy of China and many parts of Asia, IFCs provide a well-regulated, simple, stable and well-run business environment/

sovereign wealth funds, family offices, endowments, pension funds, insurers, financial institutions, asset managers and HNWIs in China. He says, “In terms of the numbers and the level of sophistication, Chinese high net worth individuals have changed dramatically in the last ten years since I arrived in Shanghai. You now find there are a large number of Chinese high net worth individuals having some of their assets outside of China, via immigration, outbound investments and overseas IPOs.” For the wealthy of China and many other parts of Asia, IFCs provide a well-regulated, simple, stable and well-run business environment, while China, for example, still suffers from often opaque regulation, long-standing bureaucracy, a less than open capital market and an almost non-existent wealth management platform. Moving money or consolidating wealth across a number of Asian countries is also complex given the different pace of regulatory development in each jurisdiction. Yangshuo province, China

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“European clients are highly impacted,” she says, “because the laws are changing so swiftly. The pressure of the media, which is focused on creating the division between the wealthy and the middle class, is creating a political environment that is leading to more aggressive legislation targeting individuals.”

The result is that Hong Kong and Singapore have prospered, while the use of pure offshore IFCs in the Atlantic, Caribbean and Europe by Asian families has also increased. These would include Bermuda, the Cayman Islands, the British Virgin Islands, Jersey, Guernsey and the Isle of Man. Hélène Lewis is a partner in the law firm SimonetteLewis, based in the British Virgin Islands, and is also the worldwide chairman of STEP, the Society of Trusts and Estates Practitioners. She says: “Asian families have long been attracted to the BVI, for many reasons including the stability of the dependent territories. They don’t have to deal with aggressive governments, and offshore centres are deemed to be efficient and secure.”

She points out that most IFCs are well accustomed to grappling with enhanced regulation, which has been tightening since the 1990s with anti-money laundering rules and “know your client” legislation. As such, she is optimistic about the long-term impact of the current regulatory crackdown on all IFCs: “The survival of IFCs will be assured,” Lewis says, “because of the fact that prudent planning will continue to be a feature of high net worth and ultra high net worth decision making. The protection of wealth for future generations is not in itself abhorrent.”

She notes that as Asian wealth is maturing, so too are the disputes that are arising amongst BVI companies: “We now have mature companies with mature problems, including family disputes about inheritance and estate planning issues, sometimes turning into dramatic court battles,” she says. Meanwhile new centres like the Seychelles and Mauritius are gaining favour also, thanks to lower costs and because they are increasingly seen as a gateway to continental Africa for investors. Mauritius continues to play a strong role for India, and both centres fall outside the umbrella of being British dependencies or British overseas territories.

St Georges, Bermuda

Regulatory challenges in the West But the boom in the use of IFCs by Asian clients is in marked contrast to what is going on with European and North American clients, who are being pushed by governments to move money onshore. Lewis says: “The popularity and importance of confidentiality, which has driven the growth and development of offshore centres, has been critically impacted by what was essentially meant to be a drive for tax revenues. The unique selling point of several financial centres has been severely eroded.” She points out that the majority of what people do in offshore financial centres is legitimate and prudent tax planning, but says the impact of the Foreign Account Tax Compliance Act (FATCA) from the US, along with efforts by the EU, the G8 and the G20 to drive tax harmonisation has impacted Western high net worth individuals.

It is likely that, for those for whom cost is an issue, there may be some reshuffling between certain offshore centres. But Lewis concludes: “Shifting to centres where costs of compliance are less rigorous may, in the short term, appear to be a move people are making. But as long as international regulators like the OECD (Organisation for Economic Cooperation and Development) and the FATF (Financial Action Task Force) continue to impact on our business, I don’t think that shifting centres is going to be productive in the long run. Indeed, with the recent introduction of global standards for the automatic exchange of information between tax authorities worldwide, few jurisdictions will be outside the wide net cast by the OECD.” There is currently a clear east-west divide for IFCs, but in the long run their important role in the efficient movement of capital, and aiding of high net worths in developing economies, looks assured.

Contributors: Hubert Tse

Senior Partner Boss & Young Shanghai

Hélène Lewis Financial District, New York City

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/the boom in the use of IFCs by Asian clients is in marked contrast to what is going on with European and North American clients, who are being pushed by governments to move money offshore/

Partner SimonetteLewis British Virgin Islands

Hong Kong Central Business District, China

/Tax laws are changing fast across Latin American states/ The cultural imperative: wealth structuring around the world »

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As wealthy global families continue to spread internationally, sending children to school overseas and structuring their assets across jurisdictions, so the emergence of different cultural approaches to wealth management takes centre stage.

The cultural imperative:

wealth structuring around the world

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Sao Paulo skyline, Brazil

Contributors: Richard Hay Hal Webb Filippo Noseda

Significant differences exist in the needs and attitudes of high net worth individuals from the Middle East, Latin America, Western Europe and Asia, and globalisation brings with it little harmonisation of approach. Richard Hay is a partner and head of international private banking at the international law firm Stikeman Elliott in London. He says: “There’s no doubt that globalisation and the ability of wealthy families to move around to get educated increases the need to reconcile the inconsistent requirements of different tax systems and different cultural attitudes to wealth.” He notes that the biggest things that differ between cultures tend to be proclivity for control, in terms of how much trust clients are prepared to put in their service providers; desire for privacy; and different sensitivities to cost. For example, he says: “Some families in Asia are highly cost sensitive, with a strong desire for control and, in terms of privacy, they can be reluctant to pass too much information to their advisers. They are family-orientated, and so they will only share information on a need-to-know basis.”

Contrasting approaches By contrast, the concerns can be markedly different when advising Latin Americans, he says: “They are often less control-orientated, but they are pretty concerned about the stability of their governments, and they have often had experience of sequestration of assets. That means privacy is a big issue and they like the enhanced confidentiality they perceive to be available in places like Switzerland.” Hal Webb is a partner at Cantor & Webb, a Floridabased law firm focused on the representation of high net worth international private clients. He has spent many years dealing with Latin American clients, and says that in his experience these clients have historically been very conservative in their approach to wealth. “They deal with a lot of risk in their businesses, politically and economically, in their home countries, so they invest their assets in a very conservative manner,” he says. But he notes that conservatism is changing with younger generations, even though the focus remains on preserving wealth, growing assets with inflation, and being in a position to pass wealth on to descendants.

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Political risk and the safety and security of family members are further worries, whilst kidnapping risks mean confidentiality of information is vital. Tax laws are changing fast across Latin American states, and as such wealthy individuals often go to great lengths to comply with legislation in their home countries. Webb says: “We see various types of structures, and different vehicles, being used, not just trusts and companies but also insurance products, funds and other types of Special Purpose Vehicles being employed for sophisticated planning by people from Latin America.”

He says there has been a resurgence in the use of trusts and foundations on the continent, spearheaded by the success of the Hague Trust Convention and the increased number of jurisdictions offering private foundations laws. “In Germany, where there are lots of anti-tax avoidance provisions, private foundations have become very popular,” says Noseda. “These are vehicles that allow families to create a strong governance and succession plan across generations, and to keep it within a family without the need for shares.” Several large German corporations are now owned by foundations, such as Bertelsmann and Lidl. For the wealthy of Asia there appear to be different drivers again to their structuring, with many inclined to move money out of the region to avoid rumours about them within the professional services community. Hay says: “Some clients seek to avoid that chatter by going to places like Jersey, but there they find cultural differences in the way that advisers are used to operating, compared to what they are used to.”

/Tax laws are changing fast across Latin American states/

He adds: “But in some of these countries the laws are so new that there is a lot of uncertainty about the outcome if the planning were to be scrutinised by the local tax authorities. There are new laws in Peru and Colombia, for instance, and structures haven’t been tested in those countries yet. This is precisely why it is always essential to obtain advice from quality local tax advisers.” Brazil has a new provisional law that will affect offshore companies, and which will potentially be made a permanent law with effect from 2015. That is already giving rise to new wealth management structures.

And then there is the Middle East, where neither tax nor confidentiality is an issue, and yet, Noseda says: “Currently we see a lot of desire to protect assets in the event of the fall of governments, so political risk and structural risk is on the agenda. But also domestic planning is important, with individuals often concerned about leaving assets to their tribes, giving rise to dynastic trusts.”

European thinking In Western Europe, advisers say there are also noticeable contrasts in the way different countries approach their wealth structuring compared to others.

No matter what the specific cultural drivers, most high net worth individuals seek to keep some of their assets outside of their home country, and increasingly look for cross-border planning to spread risk. Taking into account the various sensitivities is critical to making such multijurisdictional structures work.

Filippo Noseda is a partner and joint head of wealth planning at Withers Worldwide in London. He says: “People in the UK very often want tax planning, to create a structure or a trust from a UK tax perspective. Yet, when you look at Continental Europeans there is still tax planning involved, but more often than not the concern is with succession planning, and the older generation trying to understand how they can ensure that the businesses are passed down one or two generations in compliance with local rules but also taking into account the opportunities or possibilities that a trust or foundation can open up.”

Contributors: Richard Hay

Partner Stikeman Elliott London

Hal Webb

Partner Cantor & Webb Florida

Filippo Noseda

Bogotá, Columbia

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Partner, Joint Head of Wealth Planning, Withers Worldwide London

/wealthy individuals tend to embark on cross-border wealth management strategies to mitigate risk/ Diversifying risk: The growth of the multijurisdictional structure »

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Contributors: Richard Pease Justin Greig Lele Modise

Wealth planning has always been about managing risk, whether that is the risk of extortion of assets by governments in the developing world, or the risk of a high level of taxation for those based in Western Europe.

Diversifying risk: The growth of the multijurisdictional structure But as the number of high net worth individuals emanating from the emerging markets has grown, so too has the diversity of those risks, and the need for cross-border structures to mitigate them.

Richard Pease is counsel to the law firm Lenz & Staehelin in Geneva, specialising in international wealth planning. He says: “When you talk to clients from Russia and the CIS states, they are concerned about what might happen if they or their family members fall foul of the Kremlin, or if they become exposed to things like blackmail, but it’s principally a risk of a governmental nature. “If you are talking to a South African, you might be discussing political exposure of a different kind, with worries about uncertainty in the government and the rise of extremist parties. In Latin America, there is a fear of kidnapping and unpredictable tax changes,” he says. In each case, wealthy individuals tend to embark on cross-border wealth management strategies to mitigate risk, but with different concerns come different demands from a structuring perspective.

Going global Pease says clients are often looking for safe and secure jurisdictions offshore, but not necessarily in the same part of the world. “A South African client might favour the Channel Islands rather than Mauritius or the Seychelles,” he says. “While someone who is resident but not domiciled in the United Kingdom, and who is worried about UK changes to tax, might prefer a Caribbean jurisdiction rather than the Channel Islands, perceiving them to be a bit close to home, even though they are fiscally autonomous.”

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Cape Town, South Africa

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That said, Singapore is seen as an up-and-coming jurisdiction for Asian clients coming out of Indonesia and Malaysia, precisely because it is on the doorstep and negates the need to look further afield. But in Hong Kong and mainland China, clients who want offshore structures to provide security often favour the British Virgin Islands, an extremely popular jurisdiction among Asian clients.

/wealthy individuals tend to embark on cross-border wealth management strategies to mitigate risk/

Justin Greig is a private banker at Standard Bank. He says clients generally seek to diversify performance risk by having multiple structures with different service providers in different jurisdictions, so it is relatively rare for a client to pursue a multijurisdictional diversification strategy with a single trustee.

But it does happen, particularly for larger more complex structures: “For instance, one family I work with is located around the world,” he says, “and certain jurisdictions offer double tax treaty benefits for basing the holding vehicles in them, like Netherland Antilles for South Africa-based investment holding companies, for example.

ownership structures outside their home jurisdictions, the increasingly global nature of wealthy families is fuelling the growth of such structures. Wealthy individuals are often less motivated by tax than they are by certainty, security and confidentiality in their wealth management. Pease says: “You are dealing with people who feel they shouldn’t put all their eggs in one basket. So you may have a Liechtenstein foundation owning a Jersey company owning a property in Belgravia, which theoretically doubles or triples the jurisdictional risk, but there are clients who think that arbitrage between jurisdictions gives an extra degree of security.” In South Africa, Lele Modise, a partner in the law firm Bowman Gilfillan, says: “High net worth individuals in South Africa are people who already have businesses here and are looking for above average returns whilst mitigating country specific risk. They tend to go through Mauritius, the BVI, Malta or the Seychelles, as countries through which they make investments to other emerging markets.”

Changing landscape The popular cross-border structures are set by where the clients are coming from, but are also under constant review in today’s fast-moving regulatory environment. Pease points out that the use of a company set up in Jersey to buy a house in London made good sense for non-residents looking to avoid the payment of inheritance tax and capital gains tax until recently, with new plans in the UK to tax gains made by nonresidents. He says: “Taxation isn’t the main driver of these structures that it used to be. Firstly, that’s because many clients coming from jurisdictions such as Abu Dhabi and Dubai don’t pay income tax, while in high tax countries it’s become much more difficult to mitigate your tax exposure. Meanwhile clients are becoming much more cost-conscious, so they will ask whether the BVI is going to be cheaper than Cayman, and they are going to think twice about doubling up their structures.”

All the time that the primary concerns of stability, security and confidentiality remain, however, multijurisdictional structures will grow alongside multijurisdictional families.

Contributors: Richard Pease

Counsel Lenz & Staehelin Geneva

Justin Greig

Private Banker Standard Bank Jersey

Lele Modise

Partner Bowman Gilfillan South Africa

“In terms of convenience, Jersey works for beneficiaries who are in the UK, while Mauritius is preferred by those who are based in South Africa or the Middle East,” says Greig. Whilst political risk, fiscal efficiency and exchange controls, among other things, have long pushed clients with global portfolios of assets to pursue

/Wealthy Americans from New York and the West coast are said to be moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska/

Belgravia Town Houses, London

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Marina Bay Sands Hotel, Singapore

California dreaming: West coast billionaires see things differently »

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Contributors: Holly Long Stephen Foster Jim Cody

While the wealth coming out of the emerging markets may be what grabs the headlines right now, the 2013 Forbes Billionaires list serves as a healthy reminder of where a large percentage of the world’s richest people still reside, and that’s in the United States. Of the 1,426 billionaires named by Forbes, some 442 are from the US, compared to 386 from Asia-Pacific, and 336 from the whole of Europe. Much of the new wealth being generated in the States is coming out of the West coast, from California’s resurgent Silicon Valley tech community. Indeed two of the Forbes top five made their money on the West coast: Bill Gates and Larry Ellison, founder of Oracle.

New breed of HNWIs However, it seems that this new breed of high net worth individuals (HNWIs) based in the West coast are different from the wealthy elsewhere in the world. Holly Long, vice president of private client services at ABD Insurance & Financial Services, spends her time advising the Silicon Valley elite on protecting their fortunes. She says: “We are now seeing a lot of clients in their late 20s, because of the boom in Silicon Valley, and those people have finished college, started early and had some success in the technology and life sciences industries. They might be renting an apartment or own a condominium. They are probably single and unlikely to have children.” That means that when it comes to managing their wealth, these first-generation high net worth individuals are far less concerned with leaving assets to their offspring. Stephen Foster, director of international solutions at RBC Wealth Management in San Francisco, says: “We see a lot of people looking at maintaining wealth for philanthropic reasons, and not just to give to their kids.

Indeed, there’s a lot of people on the West coast who think that providing an education for their children, healthcare throughout their life and a home, is enough. They genuinely don’t want to burden their children with too much wealth.” Just take a look at Mark Zuckerberg, who gave US$1bn in Facebook stock to a charity last year in what was the largest donation in the US in 2013, and made the Facebook founder and chief executive the youngest-ever philanthropist to top the Chronicle of Philanthropy’s annual list of donations. He’s not yet 30. Jim Cody, managing director of estate, trust and philanthropy services at wealth planning firm CTC Consulting|Harris myCFO, a part of BMO Financial Group, says: “There’s a significant amount of excess wealth that is committed to philanthropic endeavours.” Donations are usually done via donor-advised funds, with the wealthiest and most sophisticated philanthropists using private foundation structures.

California dreaming: West coast billionaires see things differently

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The Golden Gate Bridge, San Francisco

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In terms of structures, offshore trusts and other international trust structures are popular with foreign clients relocating to the West coast, Foster says, or for Americans wishing to consolidate overseas assets. He says: “For a US taxpayer, an offshore trust structure offers no US tax benefits, but if half of their assets are around the world, it maybe makes sense to manage those assets from one place, and that may be in the Caribbean, particularly to maintain privacy and keep a low profile.”

Infinite Loop, Cupertino, Home of Apple, Silicon Valley

One of the biggest worries for California’s high net worth individuals is not so much wealth growth as wealth preservation. Long, as an insurer, focuses on helping the rich protect their assets. She says: “Business owners might find themselves in their mid-50s, having purchased insurance when they bought their first home, and then renewed automatically every year. At no point have they reviewed their policies.

“These people think about insurance from a catastrophic standpoint. They are quite happy to self-insure, and cover their own losses to a certain level, but they want to be sure they are covered for worst case scenarios.” Often that leads them to umbrella insurance, which pays out in excess of specified other policies, and covers losses not covered elsewhere, such as injured third parties, employee accidents or unintended effects of goods. The wealth being generated by IPOs such as Facebook (US$16bn), LinkedIn (US$6.8bn) and Zynga (US$7bn) means one in five ultra wealthy Americans (worth more than $30m) now lives in California. That’s the country’s highest concentration of millionaires; when it comes to wealth management requirements, they are in a league of their own.

Contributors: “We have some of our very large clients who, in addition to making gifts of appreciated stock, are also giving away significant amounts of cash,” says Cody, “because every year they don’t give away that income they are paying more tax, whereas if they give it to a private foundation they aren’t paying as much tax and the charity gets the additional benefit.”

/Wealthy Americans from New York and the West coast are said to be moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska/

One of the main issues for people in California is taxation, according to Foster: “If you are resident in California, in addition to federal tax you are also paying California state income taxes, which amounts to about 50% of income for high net worth individuals. People are asking whether they should be moving to somewhere else in the United States where taxation is going to be lower.”

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Wealthy Americans from New York and the West coast are said to be moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska.

Tech-savvy The other concern for California’s new breed of high net worth individuals is protecting their privacy. Cody says: “These clients are often very astute regarding what technology might do in terms of invading their privacy. They may be the ones who built the technology that allows people to find things through the internet, but we help clients protect their assets and protect their personal privacy through anonymous LLCs that hold their assets and make it harder to search out ownership through registries.”

Privacy and risk LLCs can be formed in each of the states of the US, he says, so often rich clients will form an LLC outside of California to purchase a Californian property, making it more difficult for the press to report on their new home. Cody adds: “They use LLCs for privacy, but also to isolate risk within a particular entity, so they may form a specific entity for each individual piece of property that they acquire.”

Hollywood Boulevard at sunset

Holly Long

Vice President Private Client Services ABD Insurance & Financial Services California

Stephen Foster

Director International Solutions RBC Wealth Management Washington

Jim Cody

Managing Director CTC Consulting|Harris myCFO California

/With order books now filling up again, and more options for international registrations outside the United States, Humphries predicts a modest return of people buying aircraft/ Private jets Now may be the time to buy »

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Private Jets Contributors: Alasdair Whyte Brian Humphries Brian Johnson

now may be the time to buy

If there was one market that came down to earth with a bump as a result of the credit crunch in 2008, it was sales of private aircraft. In 2008, jet manufacturers had huge order backlogs and were producing record numbers of aircraft for businesses, high net worth individuals and corporate executives around the world.

At the time pre-owned jets were trading at a premium, and changing hands above their value because buyers were willing to pay more to take delivery sooner, rather than endure the three-year wait required for a new aircraft. But things have changed: “Now is a fantastic time to buy a pre-owned aircraft,” says Alasdair Whyte, the editor of industry publication Corporate Jet Investor. “There are lots available and the prices are very reasonable compared to what they were.” He adds: “Owners of jets don’t tend to hold on to them for more than five years before they look to trade up. The market is only now picking up for new aircraft, but for pre-owned, there’s aircraft you can get for half of what you would have paid in 2008, and that makes an acquisition quite attractive.”

Weathering the storm When the credit crunch hit, the business jet market took a battering, with some manufacturers reporting order numbers dropping by two-thirds between 2008 and 2010. Chief executives with jets on order quickly cancelled for fear of shareholder revolt, and the market for small and mid-size new jets still hasn’t recovered. Indeed, 2013 saw the lowest delivery numbers in the industry for a decade despite a boom in large jet sales. But that creates a fantastic opportunity for new buyers to pick up bargains, and the profile of those acquiring jets has changed. Whyte says: “Before 2008, about 70% of jets were bought by North Americans, and since then there has been a flurry of international buyers. China has started to open up since 2010, and Russia was already a fastgrowing market but is still there, such that now only about 50% of the buyers are American, and 50% from the rest of the world.” Brian Humphries, CBE, is president of the European Business Aviation Association (EBAA) and ran Shell’s aviation department for many years before that, having trained as a pilot with the Royal Air Force. He says private jets are becoming more and more attractive: “They enable you to get to your point of business quicker than anybody else, and in better shape. I was 17 years with Shell, and we just couldn’t have managed without corporate aircraft. The airlines only serve a few major hubs so if you want to go to smaller locations, or you need to make changes in your itinerary, you need a business jet. We could quite often do in three days what would normally take more than a week on commercial aircraft.”

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As the take-up of private jets has diversified internationally, with growing numbers of buyers emerging from places like Malaysia, the Philippines, Nigeria and Indonesia, so those owners have looked for new locations to register their aircraft. There are attractions to registering offshore, not just for tax reasons but also because many acquirers like to have their assets in a neutral location.

New registries Historically the Caribbean regional registries in Bermuda, Aruba and Cayman were the registries of choice for owners of private aircraft. There are now over 190 private aircraft registered in the Cayman Islands, and more than 300 registered in Bermuda in both the public and private categories, many of which are owned by multinational companies or high net worth individuals. In 2007, the Isle of Man Aircraft Register became operational, and its European location, neutral registration prefix, favourable tax regime and the efficiency and quality of the island’s register made it a great success for private and corporate aircraft. It has already registered over 650 aircraft, and in 2013 Guernsey followed suit with the launch of its aircraft registry, with Jersey due 2014.

Uptick in Russian registrations Brian Johnson is Director of Operations for Appleby Aviation, and before joining the firm in 2011 was the Director of Civil Aviation for the Isle of Man. He says the Isle of Man, Cayman and Bermuda have all experienced an increase in the number of registrations made on behalf of private and corporate Russian clients, largely as a result of the relaxation of Russian customs limits on Western-built equipment, as well as significant fleet growth.

/With order books now filling up again, and more options for international registrations outside the United States, Humphries predicts a modest return of people buying aircraft/

“Many Russians use a BVI company when buying an aircraft, however, when the aircraft is required to operate freely within the EU this is not necessarily the best option,” says Johnson. “The Isle of Man offers a distinct advantage for aircraft owning structures, it forms a common area with the UK for VAT, customs and excise purposes, and has a business-oriented Customs Division with high service levels, allowing for the speedy processing of VAT registration applications.”

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The fact that it has done so well indicates there are opportunities for Guernsey and Jersey. Johnson, a veteran of the UK Civil Aviation Authority, is now advising Jersey on its launch. All three Crown Dependency registries are exclusively for aircraft being used privately, and so owners cannot operate commercially or charter their jets out. Whyte says: “The Isle of Man did incredibly well considering that the total number of new deliveries has fallen at the same time as the Isle of Man registry has taken off. The customer service levels are phenomenal, and so the lawyers, financiers and manufacturers find it a pleasure to deal with.” With order books now filling up again, and more options for international registration outside the United States, Humphries predicts a modest return of people buying aircraft. A further attraction is the growth in the availability of airports for private jets, with London serviced by a ring of locations, for example, including London City Airport, where about 10% of traffic is now business aircraft.

“The industry is helping itself by building some fantastic facilities,” he says. “This is an exciting market that will grow, because demand will grow. It is all about the speed of doing business, and the quicker you can get to a meeting overseas, the better you can do the deal.”

Contributors: Alasdair Whyte

Editor Corporate Jet Investor www.corporatejetinvestor.com

Brian Humphries CBE

President European Business Aviation Association (EBAA)

Brian Johnson

Director of Operations Appleby Aviation Isle of Man

Why Should You Register Offshore? • Privacy The identity of the aircraft owner can remain undisclosed, an important factor for high profile individuals. • Flexibility In the Isle of Man for example, your unique M-registration can be transferred to future new aircraft. • Secure Mortgage Registry Offshore jurisdictions offer a secure mortgage registry to facilitate the financing of aircraft where required. • Stability and Neutrality The main offshore jurisdictions and their aircraft registries are considered politically neutral – an important consideration when travelling in sensitive parts of the world. • Lowered Operational Costs Favourable taxation regimes offered by offshore jurisdictions can significantly lower ownership operational costs. • VAT The Isle of Man is the only offshore centre that is within the EU for VAT purposes enabling ownership structures to register for EU VAT, yet still allowing them to benefit from a zero direct tax regime. • High Regulatory Standards The Crown Dependencies of Guernsey, Isle of Man and Jersey offer the same regulatory standards as the United Kingdom’s familiar “G” prefix. • High Service Standards Offshore jurisdictions are experienced in dealing with international organisations and different time zones of the international business traveller.

Why Own A Business Jet? “Operating a business jet makes practical business sense. Long haul, two-day airline ordeals can be turned into an efficient in and out journey, enabling business travellers to go direct to international markets faster and more frequently. Business jet travellers can also benefit from time-saving, schedule flexibility, efficiency and security.”

/historically, art was only expected to change hands in the event of death, divorce or debts, “the 3-Ds”/ Investments of passion: fine art wins favour »

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Contributors: Tom Christopherson Christine Steiner

There are those who describe acquisitions of fine art as investments of passion, and others who would argue that buying expensive artworks just isn’t investing at all. Certainly art is not an investment comparable with any other, even if the art world is increasingly attracting a new breed of high net worth individuals.

Investments of passion: fine art wins favour Tom Christopherson is head of Art and Law Studies at the Sotheby’s Institute of Art – London and formerly European General Counsel at Sotheby’s. He says: “The traditional advice has been to buy something because you like it, and that’s less glib than it sounds. Art is not an investment comparable with other investments; each object is to an extent unique so you don’t have direct comparables when it comes to valuation and the market for that object will be relatively illiquid, with transaction costs comparatively high alongside regularly traded investments such as equities or bonds.” In the aftermath of the financial crisis, some art dealers and other advisers have pushed the benefits of art’s dependability as a safe haven for assets or as a new and alternative investment. Christopherson reflects: “The people who are buying ”trophy art” — the kind of art that becomes world famous and breaks world auction records — may be thinking more in terms of a hedge when returns on traditional investments have been depressed. As an alternative place to put your money in the longer term, art can be very attractive, with the ability to buy and sell anywhere in the world and the opportunity to participate in a global market which has bucked some of the trends of recent years for more traditional investments. They may, of course, also have been buying to enjoy the art work, and to

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enjoy being the only person to own and display that unique object having outbid their competitors for the privilege.”

Record-breaking growth Acquiring and collecting art comes with its own unique risks, but it has nevertheless experienced significant growth in recent years, particularly from emerging markets. In one week in New York in May last year over US$1 billion of post-war and contemporary art changed hands, smashing records left, right and centre. In London over two weeks this February, auction sales for Impressionist and contemporary art reached £709.5 million (US$1.2 billion), London’s highest aggregate sales on record.

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Historically, art collectors built their portfolios as they amassed their wealth, starting off with small acquisitions before gradually moving up to the big-money artworks. That’s changed, says Christopherson: “Nowadays collectors are as likely to come in right at the top rather than work their way up the art scale. We are seeing new buyers from new parts of the world coming in right at the top from scratch. Branding may have something to do with it; if they see something that’s by Picasso or Bacon and everyone is raving about it, that’s what they want.” These new buyers are attracted to the auction houses to find their art, simply because the process allows them to see other bidders chasing the same targets, with the price being set in real time, in a way that private sales do not. Whether buying from a reputable dealer or an auction house, due diligence is vital. Christine Steiner is a special counsel at the law firm Sheppard Mullin in Los Angeles, specialising in the art market. She says: “Buyers must thoroughly investigate the provenance of the seller and the work. The main issues when you acquire art revolve around uncovering theft, fakes, multiple claims to ownership, or export or import violations that could lead to seizure.”

/historically, art was only expected to change hands in the event of death, divorce or debts, “the 3-Ds”/

Here the best advice is to buy from reputable sources because relying on their ability to spot issues helps mitigate risk, and also provides some fallback should problems appear later. Even so, the case of the Knoedler & Co art dealership in New York – one of the most prestigious galleries, which closed in 2011 amid a fakes scandal – proves due diligence is all. Steiner says: “Do your due diligence: consult catalogues, see if there are any gaps in the provenance, make sure you understand exactly where the work has been, get reps and warranties, and have some kind of real warranty that you can execute on if you need to.” Owners of fine art then need to concern themselves with adequate insurance, and considerations such as regular appraisals, conservation, storage issues, and the legal issues that arise when loaning artworks to exhibitions.

Musee D’Orsay Clock, Paris

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Finally, there is the transfer of possession phase, when owners may look to realise a return on their investment. Historically, art was only expected to change hands in the event of death, divorce or debts,

“the 3-Ds”, Steiner says, but now there is more trading: “We are seeing more sales for largely investment reasons, with collectors trading in, up or out. Then you need to decide whether or not to sell by auction or through a gallery.”

Increased transparency While the art world has always allowed for maximum privacy on the part of buyers and sellers, it is no longer as opaque as it once was, not least as a result of anti-money laundering legislation. Christopherson says: “Anyone participating in the market needs to bear in mind that a degree of disclosure is required; people can make that hard for themselves but they don’t need to. If you go to an auction house and say you have five levels of ownership in a completely opaque structure, that will be a red flag and make people wary.” He says: “Sellers have got to be prepared to provide information to intermediaries such as auction houses, such as the location and beneficial ownership of relevant trusts – particularly if they are looking to combine a financial transaction with an art sale or acquisition. Confident bidding and prices achieved reflect the trust in that kind of due diligence.” The biggest issue for newcomers to the art world is to buy wisely. Steiner says: “What I’m seeing most is issues of theft, fakes and other impairments of title. Because the success of the art market depends so much on the authenticity of the artists’ works, auction houses are hiring provenance experts, and they aren’t accepting works if they’re not sure. In many ways that makes it easier for a new buyer to get into the art world, because there are more thirdparty advisers and there is more transparency.” There are certainly those that argue against art as an investment, given that its value is in truth so arbitrary, but it is nevertheless an asset that continues to find growing favour with the world’s wealthiest individuals. Contributors: Tom Christopherson

Head of Art and Law Studies Sotheby’s Institute of Art London

Christine Steiner Special Counsel Sheppard Mullin California

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ABOUT APPLEBY Appleby is one of the world’s largest providers of offshore legal, fiduciary and administration services. We have around 800 people, including 68 partners, operating from 12 offices around the globe. This includes the key offshore jurisdictions of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and the Seychelles, as well as the international financial centres of London, Hong Kong, Shanghai and Zurich. Together, our teams service clients based all over the world. We advise global public and private companies, financial institutions, and high net worth individuals, working with them and their advisers to achieve practical solutions, whether in a single location or across multiple jurisdictions.

For further information contact: Farah Ballands Group Head | Fiduciary & Administration Services, Partner — Jersey fballands@applebyglobal.com Carlos de Serpa Pimentel Group Head | Private Client & Trusts, Partner — Cayman Islands cpimentel@applebyglobal.com

CONTRIBUTORS With thanks to our contributors to this inaugural edition of Wealth Structuring 20:20 Alastair Whyte Andrew Terry Brian Humphries Brian Johnson Christine Steiner Elizabeth Henson Filippo Noseda Hal Webb Hélène Lewis

Holly Long Hubert Tse Jim Cody Justin Greig Lele Modise Richard Hay Richard Pease Stephen Foster Tom Christopherson

©A  ppleby Global Group Services Ltd 2014. All Rights Reserved. “Appleby Aviation” is the trading name of Appleby Aviation Limited. Company No.006577V of 33-37 Athol Street, Douglas, Isle of Man IM1 1LB, incorporated in the Isle of Man.

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Appleby Wealth Structuring 2020 (Mar14)