Concentrated Stock, a US Beneficiary and Overdue CRS Reporting
The Okonjo Family Trust is a Guernsey discretionary trust with a corporate trustee. The settlor, a Nigerian national, settled £5 million in 2018. The beneficiaries are his three adult children: one lives in London, one in Texas and one in Lagos. The trust holds £2.8 million of shares in a single unquoted Nigerian logistics company, £1.2 million in a UK balanced portfolio and £1 million cash. The US beneficiary, Ada, has asked for a distribution of £400,000 to buy a house in Austin. The trustee's investment policy statement requires diversification and says any single holding above 25% needs a written review. The Nigerian company has no audited accounts and pays no dividend. The trust has not filed a CRS return for 2023. The UK beneficiary is a basic-rate taxpayer. The trustee is considering borrowing £400,000 to fund Ada's distribution rather than selling shares. The trust deed permits borrowing and distributions to beneficiaries. The trustee has no US tax advice.
1. Analyse the investment and fiduciary issues, including whether the trustee should sell shares or borrow.
Read the worked answer
The trust is badly concentrated: £2.8 million of £5 million, or 56%, is in one unquoted Nigerian company. That breaches the investment policy statement's 25% review trigger and raises the trustee's duty to diversify. The lack of audited accounts and the absence of dividends make the holding difficult to value and illiquid. The trustees must review the holding in writing, obtain a valuation and consider whether the concentration is in the beneficiaries' best interests.
Borrowing £400,000 to fund Ada's distribution is not obviously prudent. It increases the trust's liabilities and leaves the concentration untouched. If the trustees sell shares, they may realise cash but may depress the price and trigger Nigerian tax or exchange control issues. If they borrow, they must have power to borrow, consider the cost, security and repayment source. A distribution funded by debt effectively shifts risk to the remaining beneficiaries. The trustees should consider a smaller distribution, a sale of part of the holding, or a loan to Ada instead of a distribution. They must also consider the UK and Lagos beneficiaries, who may have different interests. The decision should be minuted with independent investment and legal advice.
2. Explain the cross-border reporting and tax issues for the trust and for the distribution to Ada.
Read the worked answer
CRS: Guernsey has CRS obligations. The trust may be a reporting financial institution, or the corporate trustee may need to report the trust as a trustee-documented trust. The trustees must identify the controlling persons and reportable jurisdictions. The US beneficiary is also a US person for FATCA; the trust may have a Guernsey FATCA classification and reporting obligation. The 2023 return is overdue and should be remedied voluntarily with advice.
The distribution to Ada: Guernsey does not tax distributions, but the US has complex foreign trust rules. A distribution of capital may be treated as a gift or as a distribution with throwback rules; Ada may have Form 3520 and 3520-A obligations. The trustee should not advise her on US tax but should require her to take US advice and provide the trust's accounting. The UK beneficiary is a basic-rate taxpayer; a capital distribution from a discretionary trust is generally not income, but an income distribution would be taxable. The Nigerian beneficiary and company raise local tax and exchange control issues. The trustee should consider treaty and residence issues before making the distribution.
3. Discuss the accounting and valuation issues for the unquoted shares.
Read the worked answer
The unquoted shares must be carried at fair value under the trust's accounting framework, not at cost. Because there are no audited accounts and no dividend, the trustee needs a valuation: earnings-based, net asset or discounted cash flow, with a lack of marketability discount. The valuation should be refreshed for the 2024 accounts and for the distribution decision. If the company's performance has deteriorated, an impairment may be required.
The accounts should show the shares as an investment at fair value, with gains or losses in the statement of changes in equity or income statement as appropriate. Any borrowing should be disclosed as a liability. The trustees should also disclose the concentration and any related-party issues. The distribution to Ada should not be recorded until it is properly authorised and paid. If the shares are sold, the gain or loss must be calculated and any foreign tax considered. The trustee should ensure the accounts are prepared on a consistent basis and that the auditor or independent examiner can rely on the valuation evidence.