Purchasing Precious Metals via a Trust
What are the advantages of buying and storing precious metals using a trust?
As the global economy emerges from an unprecedented shutdown, both policymakers and investors are operating in uncharted territory. According to the International Monetary Fund (IMF), USD12 Trillion has been pumped into global financial markets as governments and central banks worldwide have tried to stabilise the economy that was devastated by the COVID-19 pandemic.
Investors are now speculating that the fallout will be seen in higher inflation, especially when the economic activity picks up in the second half of the year. When prices rise and the value of the dollar falls, gold is often seen as a hedge against inflation.
To better understand investor strategies during this important transitional period, a World Gold Council study published this month found that growing demand for inflation-hedging tools is helping drive an expansion of allocations to gold, which investors also view as a valuable source of portfolio diversification and potential long-term, risk-adjusted return enhancement.
In his recent paper, ‘Bitcoin, Currencies, and Fragility’, published in late June, probability researcher and author of The Black Swan Nassim Nicholas Taleb, said that, in contrast to bitcoin, “gold and other precious metals are largely maintenance free, do not degrade over an historical horizon, and do not require maintenance to refresh their physical properties over time.”
But what is the best way for investors to hold their gold and other precious metals? Around 10% of our clients choose to purchase and store their gold and other precious metals via a trust structure. We have therefore asked Sovereign Group, one of the largest independent corporate and trust service providers in the world, to explain how a trust structure can assist clients from a wealth management perspective.
Peter Fenyves, a consultant with Sovereign Trust (Hong Kong) Limited, writes: Families have been using trusts to preserve and manage their wealth for the benefit of their heirs for centuries. Trusts provided people with a means of protecting their assets and controlling how they are used after they have been given away. Unlike corporate vehicles, the lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.
Although many of the tax benefits that were associated with trusts have been eroded in recent years by anti-avoidance legislation, they still offer great advantages – particularly for individuals who are changing, or planning to change, their domicile, residence or citizenship; those with families resident abroad; those seeking asset protection; and those whose principal motivation is not to avoid taxation but to dispose of their estate on death freely and without recourse to a lengthy and expensive probate procedure.
The concept of trusts
At its simplest, a trust is an arrangement whereby property or assets are transferred from one person (the ‘settlor’) to another person (the ‘trustee’) to hold the property for the benefit of a specified list or class of persons (the ‘beneficiaries’). A written document – the ‘trust deed’ – evidences the creation of a trust, sets out the terms and conditions upon which the trustees hold the trust assets and outlines the rights of the beneficiaries.
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries. For example, when the sixth Duke of Westminster Gerald Grosvenor died in August 2016, his 25-year-old son Hugh did not face an estimated £3 billion in death duties. This was because the £9 billion Grosvenor estate (and all its assorted businesses, land holdings and fine art collections) was held in trust. While the Grosvenors have access to the estate’s benefits, it is technically the trustees, not the Grosvenors, who own it. Inheritance tax is applied when there’s a transfer of wealth, but because the fortune belonged to the trust and not the late Duke, the assets did not have to be transferred.
It is essential that the trustee should remain independent and exercise proper control over the trust property. A trust could be deemed to be invalid if the settlor continues to exercise power over the trust assets by retaining benefit or control, or by giving directions to the trustees. Were that to happen, all the benefits of the trust would be lost
Those unfamiliar with the trust concept are often concerned by the idea of transferring ownership of their property to a trustee. This concern can be alleviated if the trust concept and the distinction between legal and beneficial ownership is properly understood and it is clear that the trust is governed by a reliable trust law that can be enforced in a reputable jurisdiction.
The role of trustees
Trust law imposes strict obligations and rules on trustees. They must follow the trust deed and are subject to very strict rules governing the way in which their powers and discretion may be exercised. They must act prudently in the management of trust property and at all times exercise their powers in the best interests of the beneficiaries.
In the case of a professional trustee, like Sovereign, the standard of care that the law imposes is higher. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustees will be liable to compensate the beneficiaries.
There is also a basic rule that a trustee may not derive any advantage, directly or indirectly, from a trust unless expressly permitted by the trust – for example, where a trust provides a professional trustee with the right to charge for its services. Full disclosure of the basis and amount of charges is required.
A trust can be established for a variety of reasons and a properly drafted and managed trust can confer numerous advantages and is most typically used for estate planning, tax planning, asset protection and preservation purposes, maintaining confidentiality or continuing a family business. A trust can also be used to avoid forced heirship – a civil law system that determines which heirs are entitled to receive the assets of a deceased person and in what proportion – or to protect weak or vulnerable persons.
As far as asset protection is concerned, in simple terms, assets transferred to a properly constituted trust no longer form part of the settlor’s property and therefore cannot be seized if a settlor gets into financial difficulties. A court may, under certain circumstances, order a transfer into trust to be set aside and the trust assets returned to the settlor, but a trust can form an important part of a risk-mitigation strategy.
Uses of trusts
Estate planning – Failure to plan your affairs in advance of death can mean leaving your estate in disorder, to be sorted out by your successors – often at great expense and inconvenience. Many people seek to order their affairs by making a will, but probate can result in lengthy delays, high administration costs and often tax liabilities. It is also a public procedure, which is entirely unsuitable for anyone wishing to keep details of their assets confidential. The best alternative to a will is for an individual to set up a trust during their lifetime. Not only does this avoid probate and inheritance tax (because the trust continues in existence), but it also allows settlors to make more nuanced arrangements such as providing a source of income, but not capital, for a spouse for life or making provision for the education of children but not letting them have access to capital until later in life.
Tax planning – Assets transferred into trust are no longer considered as belonging to the settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee(s). Different types of income from trusts have different rates of income tax. Each type of trust is taxed differently. Anti-avoidance legislation in the home country of the settlor or in the location of the trust assets may seek to counteract this outcome, but a correctly structured and administered trust can still offer substantial tax efficiencies.
Asset protection – Trusts can be one of the most effective ways of protecting assets. In simple terms, assets transferred to a properly constituted trust no longer form part of the settlor’s property and therefore cannot be seized if a settlor gets into financial difficulties. A court may, under certain circumstances, order the transfer into trust to be set aside and the trust assets returned to the settlor, but a trust can form an important part of a risk-mitigation strategy.
Avoiding forced heirship – Many civil law jurisdictions and countries of Islamic tradition have ‘forced heirship’ provisions, which create a legal obligation to distribute a certain percentage of a deceased’s assets to their next of kin and/or children. If forced heirship rules are at odds with your intentions, a trust will enable a wider or different distribution of the estate.
Preserving family assets – Preserving family assets, or growing them, is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst the heirs, but rather is retained as one fund to accumulate further. A trust offers a mechanism for preserving family assets while having the flexibility to allow payments to beneficiaries as the need arises. This can be further enhanced with a unified fund for investment/asset management.
Where to establish a trust?
There are a number of different countries worldwide that have enacted trust legislation, but the quality and suitability of that legislation can vary. When selecting the best jurisdiction for establishing a trust it is important that it offers:
• A strong tradition of enforcing trusts;
• An English common law system;
• An established reputation for trust business;
• Modern legislation, including contemporary trust concepts;
• Low or no taxation for trusts.
Some countries are not recommended due to legal or political uncertainties or because their courts or professionals have limited trust experience. Other jurisdictions, whilst being noted for their expertise, have not kept pace with the modern trust legislation that offers additional benefits and protection to trust assets. Other countries are unsuitable because of their high tax regimes.
Sovereign Trust (Hong Kong) Limited, Sovereign Trust (Isle of Man) Limited, Sovereign Trust (Gibraltar) Limited, Sovereign Trust (Guernsey) Limited, Sovereign Trust (Malta) Limited, Sovereign Trust (Mauritius) Limited and Sovereign Straits Trust Limited in Singapore are all fully licensed to act as professional trustees in their respective jurisdictions.
Trusts can hold a variety of assets on behalf of beneficiaries: intangible assets, such as shares, stocks, companies, intellectual property (IP) and equities; as well as tangible assets, such as real estate, art, jewellery and precious metals – including gold.
There has been greater interest in recent years for the use of trusts to hold physical gold, either as an investment class in its own right or as a ‘diversifier’ asset class that is less correlated with world stock markets. It can also act as an inflation hedge, since ‘real assets’ tend to rise in value while the value of money falls.
As part of an investment portfolio, physical gold offers:
• Stability – gold typically performs well when the financial markets are going down;
• 100% underlying asset – the client (the trust) retains full ownership;
• No counterparty risk – physical gold has intrinsic value without an issuer risk;
• Confidentiality – storage of gold bullion is more private because you can control who knows you own it.
The duty of care that trustees owe to beneficiaries extends to all asset types. As such, prudent trustees will be responsible for ensuring that physical gold is stored securely with a professional custodian. The quality of the asset will need to be tested and appropriate advice will need to be taken prior to the purchase or sale of the asset to ensure that beneficiaries are properly protected.
In other words, any gold purchased should be sourced from reputable refiners and the details of the products (bars and / or coins) will need to be shown in a manifest. It is therefore essential that trustees should work with partners that have a proven track record and an established reputation for providing superior execution services in respect of precious metals.
If you are interested in purchasing gold to balance your portfolio or in establishing a trust to hold your gold, J. Rotbart & Co. and Sovereign Trust have the knowledge and practical expertise to assist you. Please contact either J. Rotbart & Co. or Sovereign Trust to ensure that your wealth is managed by real professionals. We are always happy to be of service.