Perils of letting patriarch hold all the assets
Trusts have many uses, even in a low-tax regime like Hong Kong. They can be effective for long-term wealth planning and can provide assurance that assets and wealth will pass intact to the next generation.
One of the best ways for wealthy families to appreciate the value of holding assets in a trust is to look at the consequences of not doing so, says Jonathan Hubbard, head of wealth planning in the region for UBS Wealth Management.
These families often not only have financial assets and investments in many countries around the world, but also relatives and younger generations living abroad. Typically, says Hubbard, in today's international world, they have gone overseas for education, or decided to work and make their homes outside Hong Kong.
Problems arise with succession when the assets remain in the name of a sole owner, often the patriarch, with family members and assets in different countries with different tax regimes. When the main owner of the assets dies, the first challenge for his or her successors is to get control of those assets and if they are held in a sole name, there will be a process in each country to prove title, Hubbard says.
Depending on the jurisdiction, this can be protracted and complicated and making a will is only a partial solution. If someone leaves a will, there's some certainty as to who owns what, but there is still the probate process, which is an application to court for the right to title to the assets.
'So in its simplest form, we say don't own assets yourself. Make sure you structure assets in a way so that the ownership is separate from the 'control and enjoyment' of those assets,' he says. A trust is a good vehicle for this.
'The family needs to understand that they don't have to actually 'own' the assets in order to have control and enjoyment of them,' he says. The trust structure can also help control where the money ends up in modern situations such as divorce and where, for example, the wealth owner does not want everything to go to his widow; often preferring to leave her with enough to live according to the standards to which she has become accustomed.
As a family gets older, there may be worries as to who is going to look after the financial affairs if the head of the family or the widow cannot do so. 'We tend to assume people go on for ever here in Hong Kong, particularly the men. There is almost an assumption they are never going to die,' says Hubbard.
That raises another often thorny issue - who starts the conversation about succession planning? Often it's the second generation who have much more reason to start the dialogue. They are the ones who realise they may have a problem in future, which can be avoided if their parents make adequate plans, he says.
The purpose of a trust is very simple. It's designed to look after assets for other people. These days, succession planning is not just a simple transaction - it's a long-term relationship with different generations. 'For us to do our job properly, we have got to know the family well, he says. That can be an issue if the family don't like outsiders knowing too much, but someone has to stand back and understand their circumstances.
The family may have Asian roots, but the generation differences between them and the extended family abroad may be huge. The tax issue is much less important in Asia, but the overseas beneficiaries will have concerns about tax planning because they may live in less friendly tax regimes such as the US.
'It's important to ask if you can improve their position? Maybe you can. Maybe you can't,' Hubbard says. 'Everyone's terrified about the US, but if you do the planning properly, you can save US families significant amounts of tax over 50 years.'
Even then it may be a compromise. 'They may pay tax on the fruits, but they don't lose the forest,' he says, adding that it can be better to pay tax on the gains while keeping the capital intact.
Being a good private banker becomes a partnership with the clients.
'You are on a long-term journey together, which requires careful planning from day one and long-term management and knowing where the beneficiaries are in a rapidly changing world.'