Ensuring a smooth transition

PUBLISHED : Sunday, 20 April, 2008, 12:00am
UPDATED : Sunday, 20 April, 2008, 12:00am

Many of the new class of high-net-worth individuals, created by the Asian economic boom, are all too aware of the historical examples which show one generation of a family making a fortune, the next spending it, and the third having to start all over again.

Therefore, those who now find themselves with 'new money' are paying particular attention to succession planning. Whether their fortunes are from directing commercial empires, building up family-run businesses, or simply riding the wave of stock and property market gains, they realise that watertight structures are needed to carry out their precise intentions, while avoiding tax or unnecessary penalties for heirs and dependants.

'Issues of transfer of wealth across generations can be very challenging,' said Christian Stewart, managing director and head of the Asia-Pacific wealth advisory group for JPMorgan Private Bank.

'Clients in Asia often have cross-border connections, with family members perhaps holding a United States or Australian passport. The complexity comes from the tax rules and the changes going on in those countries, so most of it is offshore.'

He explained that since Hong Kong had no estate duty and no tax on worldwide income, any succession plan involving purely 'local' elements was relatively straightforward, at least in terms of setting up the legal and financial provisions.

But if, as an example, one intended beneficiary is a US passport holder, all manner of different implications comes into play. Most significantly, that person will be liable for tax on their worldwide income and tax rules will effectively limit their scope for investing in non-US private equity and hedge funds. 'It may be that the parents are not US citizens, but the children are. Just one connection with a foreign jurisdiction can force you to structure the trust in a certain way,' Mr Stewart said. 'You also need to monitor legislative change and know how to react in terms of which assets to put where.'

Rodney Allen, global head of wealth structuring for Barclays Wealth, emphasised that effecting a smooth transition required legal and banking expertise, but also a high level of interpersonal skills.

It is necessary to discuss with clients their expectations for their children and grandchildren, and maybe to see what it will really take to maintain a family business as a going concern far into the future. A successful entrepreneur, for instance, may have three children - one with the talent to run the business, another with less talent but more ambition, and a third with neither.

'You need to be smart about addressing this,' Mr Allen said. 'We have to look at the beneficiaries and the totality of the wealth in terms of property and portfolios. There is then a whole spectrum of taxes and potential creditors to plan against.'

He added that older clients, particularly entrepreneurs, often hated surrendering control, which a traditional trust obliged them to do. One alternative, though, is the concept of a private trust company.

This can be set up in different jurisdictions and is an opportunity to have a legal vehicle with a family-controlled trustee. As such, the entrepreneur or high-net-worth client can still exert influence over the use or disposal of assets in the trust. 'It allows the entrepreneur and the family to retain quite a bit of control, and there is the comfort of not turning over 100 per cent of decisions to the trustee.'

He pointed out that a private trust company was often run in conjunction with a family office, which took charge of day-to-day decision making.

'Our role is then to make sure all appropriate considerations are taken into account, by providing vision and guidance and articulating complex ideas fully,' Mr Allen said.

JPMorgan's Mr Stewart noted that, in recent years, charity and philanthropy had come to play a bigger part in plans for wealth transition. Overall, high-net-worth clients are taking a more organised approach to making donations. They are less bound by the cultural bias or 'dynastic' views which previously dictated that money should be kept strictly within the family, and passed down via traditional lines of inheritance.

'You now see larger amounts going into the private foundations,' he said. 'While clients are either charitably inclined or not, we try to present the idea of a family foundation and explain that, in making wealth survive for multiple generations, philanthropy can be part of the blueprint. We might give examples like Ford, Hershey and Warren Buffett, but if the client is not interested, we will not push it.'

Among other concepts included in succession plans, Mr Stewart has been seeing greater use in Hong Kong of incentive trusts. Already quite common in the US, their purpose is to encourage children to attain specific goals in life, usually related to either work or study.

Typically, distribution from a trust may be linked to earning a degree, or to match whatever is earned as annual income in a steady job. In other cases, there may be a series of '10 commandments' spelling out family expectations up to, say, the age of 40. Only if those are met will the beneficiary be eligible for greater distribution from the trust.

'A lot of our clients are business-owning families and you can more or less predict how long the wealth will last by the health of the family system,' Mr Stewart said. 'They want to encourage their kids to keep working and to live in line with the family values and mission.'