Keeping crucial assets all in the family
Increasing number of high-net-worth individuals are preparing early with special solutions for a smooth transfer of wealth to relatives
Private trusts are growing in popularity and many people consider them an ideal way to retain greater control over their assets while maintaining the integrity and validity of the trust structure.
Shirley Ong, head of fiduciary services division, private wealth management Deutsche Bank, said 10 years ago high-net-worth individuals were looking for account secrecy and transfer of wealth in a discreet manner.
However, with increasingly sophisticated investment needs to protect and preserve family businesses, these individuals are looking for tailored solutions. She said these included setting up their own private trust companies, special purpose trusts or limited liability partnerships to provide people with options of controlling their operating companies and ensuring an orderly transfer in the event of unforeseen circumstances.
'Wealthy individuals and families are beginning to realise that cookie-cutter solutions may not adequately provide for their needs and customised planning at the early stages is paramount.
'Typically, a trust company or fiduciary services provider will assist in the creation of an appropriate plan and ensure its maintenance during and after the lifetime of the [high-net-worth individuals],' Ms Ong said.
She said when setting up such vehicles, individuals should be satisfied of the independence of the trustees or the administrators of their fiduciary structures.
Investors needed to inquire into the capabilities of the trustees in managing their trust assets after their death, whether in the area of investment capabilities, asset allocation strategies or corporate governance.
'Sometimes trusts may not be the solution, especially if the planning involves individuals with residencies in the United States or Europe.
'Private placement life insurance policies have been used as an alternative to trusts with potentially favourable tax consequences in some situations,' Ms Ong said.
Christian Stewart, head of wealth advisory group, JPMorgan Private Bank, said if a trust involved a business with considerable assets, every effort should be made to involve family members in the setting up of the trust.
'The initiator of the trust can pave the way for future family harmony by building collaboration among the wider family members. These are issues crucial to preserving family assets and family unity,' Mr Stewart said. He said problems could arise when trust beneficiaries did not know, or have contact with, their family's adviser, had no way of communicating with each other or they were concerned about finding a suitable role in the family enterprise.
The process of transferring a company to the next generation can stir up emotions and issues that have nothing to do with the business itself.
One common example occurs when a company owner fails to designate an heir because he is afraid his other children will 'disown' him.
As a result, control of the family enterprise becomes a tug of war among the siblings after the owner dies.
According to the Kellogg School of Management, 60 per cent of the time when a family business fails, the problem can be traced back to succession issues.
Michael Troth, managing director and head of global wealth structuring Citi Global Wealth Management Asia-Pacific, said with the correct planning a trust could act as a platform to legally avoid tax and other complicated issues.
As individuals become more global with their investments with family members domiciled in different jurisdictions the benefits of establishing a trust are becoming more apparent.
'Greater sophistication and international awareness are two areas that are driving the benefits and effectiveness of setting up a trust,' Mr Troth said.
Complications could occur when property and investments have been made in jurisdictions that have legal and tax structures that impede the smooth legal transfer of assets.
He said a properly structured and managed trust could avoid expensive legal challenges such as those involving the estate of the late Chinachem chairwoman Nina Wang Kung Yu-sum.
Mr Troth said helping clients understand the function of a trust and the responsibilities of the different parties involved was key to forming a successful long-term relationship.