Family Office services offered by RSM, the world’s number 7 in audit, are used by the richest families in all parts of the world, including the Czech Republic and Slovakia. Many of them have accumulated their wealth in the last hundred years. What do rich families need and how much wealth did they lose during the financial crisis? These and other questions are answered by Jean-François Cats, Partner at RSM Belgium.
How were rich families affected by the crisis?
They have lost a lot of money. However, those who did not risk much have already recouped their losses from 2008 and 2009. This can also be seen on the stock exchange. Too many big investors made too many investments for instance in Fortis (a Belgian-Dutch banking and insurance group) that almost went bankrupt. These investors lost a lot and have not been able to compensate for this loss to date. Others, whose wealth was optimally spread over real estate, stock exchange shares and their own business, have recovered from the 2008 recession. According to last year’s results, some even emerged stronger than they were closely before the crisis.
What services do you provide to these families?
These families have their businesses audited by Big4 firms (Deloitte, EY, KPMG and PwC). However, they need someone to manage their personal wealth – someone they can trust. They need one person that they can confide in and that is, at the same time, a professional. Most wealth comes from one particular man or female who has created something, got rich and is now very isolated. They need to have an opportunity to talk to someone.
So you are sometimes a priest rather than a business partner?
They tell me about their personal life, problems with their business and real estate. It is not a friendly conversation because they would never tell this to a friend. They would never tell anyone in their family. In short, they need someone from the outside they can trust, who listens, understands their problems and can give them advice – I would do this…, don’t forget to do this…
Why are they isolated?
Because everybody depends on them. Their family, their CFO, everyone in their community. Therefore they need someone who does not depend on them.
To some extent, you are dependent on them too. They pay you for your services.
I do not get paid in such situations – it is our relationship that matters. Yes, I am paid for my services but when we go to a meeting, for a dinner, to have a talk, it is a completely different thing and that, of course, is not charged.
How difficult is it to preserve family wealth?
Roughly one third of rich families lose wealth after the second generation. The wealth is built by the father or the mother but not available to their adult children. Probably more than a half of families lose their wealth after the third generation. The really big problem in such families is (financial) education.
Does this also happen to families who entrust their assets to professionals?
Yes. I know a man very well who had EUR 35 to 40 million some 15 years ago. At that time, he was fifty-something. Now he has nothing at all, not even a house; he lost everything, in mere 15 years. And there are many people like that. They got rich but they have no knowledge as to how to stay rich. And their families have absolutely no idea of this either. They still want more. When they have ten million, they want twenty; when they have twenty, they want fifty and then a hundred. They want a Mercedes, then a Porsche, then a Bugatti. Why? Because they compare with each other. And you always find someone who is richer than you. You can come from a poor or rich family, from a deprived or wealthy background. It is still about your values. I keep repeating to them: “You must educate your children.”
You mean sending them to a good school?
It’s not only about a good school but about passing on values and principles. Children are educated by their parents, not only by the school. For instance, there are situations when two children inherit property – one fritters it away, the other does not. It is not his money. The other child only spends what he himself acquires from it and passes the inherited money on to his own children. Then you can have another family where father and mother tell their kids: “This is what we leave you, this is what we built, go on with it together.” This is how you pass on values, show what money is, what it is to be rich as well as what your rights and obligations are. You must view the wealth as a blessing and answer the question “Why am I rich?”. If all is just a show for your pleasure, then you are bound to lose.
Can we protect our assets against irresponsible children by depriving them of the power to manage the assets and leave this up to professionals?
What we do not do is fund management for clients. However, we help organizing the funds and structure client assets. To this end, we need to know their family situation, which is often very diverse. Our clients often have a very complicated private life. They have more partners and children in two, three different families. You can have children with different abilities, such as a disadvantaged child, that you need to protect. You can have a very talented child who will manage the business one day, which is good. On the other hand, you can have another child that is unwilling to get involved in the family business. How are you going to deal with it? And what if, after many decades when your business is flourishing, the other child will blame you for not giving him the opportunity to manage the business. You can’t him them that his brother or sister is much more suitable for that.
How should you explain it then?
You must find a way of explaining that his sibling was paid for the job they did in the business, while he received dividends. When he tells you he could not work for the business, you should explain that it was his choice not to get involved and that his capital has increased since then. You must find time to discuss this with your children. In families we work for our aim is to organise a meeting of children with the head of the family once a year. There we try to explain everything to them. Children do not need to know everything all the time, but sooner or later they should have at least some knowledge as to what you have. This is also how I do it in my family. Once a year, I invite my son and daughter to tell them what I have arranged during the year, what I have put in place for their mother, for them, for myself.
Don’t children often know about their parents’ wealth from the prosperity they have lived in?
I met a client with a very complicated personal life. She was trying to get some money all the time. When she was nearly 60, her father died and she inherited a fortune. She said: “I didn’t know my father was that rich, yet he let me worry about money for so long. Now that I’m sixty, I don’t need it anymore.” Her father could not find a way of how to talk to his daughter, give her important information. This family is not rich any more. They have to pay high taxes because the father made no arrangements and did not have a succession plan in place. There are many situations like this.
What is the inheritance tax rate in Belgium?
Around 30 per cent. Imagine that if you do nothing, you lose one third of your inheritance. If you have two children whom you did not prepare for succession and left with three million, then one million will pass to the state and each child will be left with one million. If your kids want to increase the value of that one million again, it will take them an extremely long time. Moreover, due to inflation, the corresponding value in the future would be as much as four million. If you prepare for this, you can keep those three million in your asset structure. Legally, this can be set up to avoid any tax and to actually leave the children with three million. If they appreciate them together correctly, they will get ten million in time. This is the way of how families indeed become very rich. Providing that each generation increases the assets and works at it together.
Are there any contracts that would give family members a right of first refusal on the sale of another family member’s shareholding?
Yes. That is why organisation is necessary. Ask yourselves a question why the wealth disappears. Have you made a bad deal? This can happen to everyone. Your children were not educated enough and frittered the money away? They were not used to working, got a lot of money and did not know what to do with it? This is how money is wasted very quickly. All you have to do is to buy a big house, one, two, three expensive cars, a luxury yacht, a chalet in Switzerland, and the money is gone. Two or three wives, and that’s the end of it. Moreover, if you have many kids from multiple marriages, they fight and are unwilling to stick together. This is when you start to lose.
Do you clients want you to preserve the value of their assets or to quickly increase it?
They usually want to have more. When they contact us, it means they want to do something about it. They often come too late. I’ll give you an example. A month ago, a client of mine died of a heart attack. He was 64, he was really rich and I told him three or four times: “You are over sixty, we should organise things.” But he did nothing at all. Now this is going to cost the family a lot of money. His heirs will pay full tax, nothing has been arranged (in the business or elsewhere), he didn’t have time to talk to his kids. Only two days after his death did the children find out how rich their father was. But if he made the arrangements in time, no tax would have to be paid. If you give your children shares in your business, they can be tax-exempt, depending on the timing and structure of your assets. Everything is legal, of course. All can be set in this way, even though only because of the transfer to the next generation.
In very simplified terms, asset structuring is viewed as setting up a holding company in the Netherlands. Isn’t this related to Europe’s fight against tax fraud and isn’t it starting to be a problem?
You can have very many diverse structures and very many different needs. Some people don’t do it but you can still have an absolutely transparent holding company in Luxembourg or the Netherlands. You can be fully transparent in respect of your tax authority but you may be hidden from your family, for example. The key is to recommend a legal scheme. Otherwise, the client could not believe you.
What would be an illegal structure?
Black money. For instance, you set up a holding company in Luxembourg or another country in which you actually have no structure, it is a mere shell. If you do it, you create an illegal structure, in my opinion. You make the impression that your activities are located where they actually are not, and you pay and get paid for things you don’t do. We never do this, it would always backfire on you. What’s good today is not necessarily good tomorrow; you never know what will change.
How does Belgium combat tax fraud?
The government has decided to introduce a possibility of legalising money from abroad by paying 3, 7 or 10 percent of its volume. There’s one exception – it may not be income from prostitution, arms dealing and similar illegal activities. For instance, you inherit money in Luxembourg. You can legalise them in Belgium if you pay 3 to 10 percent. This percentage increases in years, now it is going to be as much as 15. However, by now, almost everybody has legalised their money obtained abroad. When the government combats tax fraud, it must have a door open for the money concerned. Otherwise, it would remain abroad and stay black.
When did money export abroad begin?
It was after the Second World War. People sent large amounts of money to Switzerland and Luxembourg only for fear of communism. You here understand what I am talking about. The 1950s, 1960s as well as the 1970s were very successful years in Europe. That is why many people sent money abroad. Not to avoid taxes but because they were concerned about the political situation and communism. This is how money legally went to Luxembourg. In 2000, billions were deposited in Luxembourg and Switzerland and were not coming back – what is once abroad has to stay there. Along with other colleagues, I tried to persuade the government to introduce legalisation of such capital. Eventually, we succeeded. This measure is called Déclaration Libératoire Unique (DLU).
Did it take root?
It was very successful. In ten years, a large amount of money came back from abroad. People paid a smaller amount to the state and when the money was finally back, they gave it, for example, to their children who could use it to buy a house.
But the parents could have bought them the house when they had money in the foreign structure.
Yes, but then the house would also be part of the structure. So, for example, in Slovakia where there is a lot of money abroad and the government wants it back, a procedure must be adopted to allow transferring them home legally.
Jean-François Cats is a partner at RSM Belgium, the world’s no. 7 audit firm, managing the assets of many of Belgium’s wealthiest families. He is the Honorary President of the Institute of Company Auditors, an adviser with numerous chambers of auditors, and the Regent on the Council of Regency of the National Bank of Belgium.
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