With the global spread of assets and relatives, many Asians seek protection of trusts to manage family fortunes Asia-based families have spent decades growing rich on the back of opportunity, circumstance and business acumen, but without proper management a family's carefully accumulated wealth could be wiped out in a single blow, industry experts warn. 'There is an old adage that fortunes are usually acquired, consolidated and lost in three generations,' says Bernard Rennell, head of private client services at the Bank of Bermuda. 'Unfortunately this is all too often the case.' The two greatest challenges facing a family's fortune are tax and the family itself. The so-called three-generation trap transcends boundaries and cultures. A poorly educated but business savvy individual creates a family fortune through hard work and traditional values. The second generation, better educated and sensitive to their patriarch's values and beliefs, consolidates and builds on that wealth. The third generation, still better educated and exposed to a much different world than their forebears, has less interest in family values and tradition, and proceeds to squander that wealth. It is so prevalent that every region has an expression for it and in Asia it is called 'from rice paddy to rice paddy in three generations'. History is littered with examples of great families that have got it right. Sadly, history is also littered with those that got it wrong. Barbara Hutton, 46 years and seven husbands after inheriting her US$40 million (the equivalent of $500 million today) Woolworth fortune, died with a mere $3,000 to her name. According to this year's Merrill Lynch/Cap Gemini Ernst & Young World Wealth report, the financial wealth of the world's high net-worth individuals grew 3.6 per cent last year. Compare this to the Asia-Pacific region with 10.7 per cent. 'Asia-based families still have a lot of their wealth tied up in the family business and that can create a lot of issues in terms of the effect of an inter-generational shift of wealth,' says Mr Rennell. 'This is because if all the children inherit shares in the business and they squabble, some are in the business and some aren't, or they sell their shares to a third party, the business can be broken up.' The beauty of a trust is that the grantor can specify just about anything he or she wants. They can provide for a certain percentage of the assets to be paid out at certain intervals - 25 per cent at age 25, 25 per cent at age 30 and so on. Or a certain amount must be paid out on the occurrence of some event. A popular product known as an 'incentive trust' specifies that a certain amount be paid out once children achieve a level of education or earn a certain amount of income on their own. The point is to keep wealthy heirs from losing their motivation to be productive members of society. With a 'spendthrift trust' the assets remain in trust and continue to be managed by a trustee. This is often used for children who may never be responsible enough to handle all the money at once. The trustee pays for the beneficiary's expenses and may distribute additional income at their discretion. With the bulk of the assets tied up in trust, they are protected from spendthrift heirs who have a propensity for 'Cartier orgies' and charming suitors who want to marry them for their money. Trust expert and certified accountant Teresa Tong of Teresa Tong & Co says a trust can protect the assets of a family and is far less offensive than a pre-nuptial agreement. She says it is usually the parents of the bride or groom that first seek advice. 'It is always the mother and father that come to me and say 'Teresa, we have some good news and bad news. Our son is getting married but we don't think it will last',' says Ms Tong. A private trust can also protect a family from that other great predator on hard earned wealth - tax. Two important trends are making the need for careful planning and structuring even more important. Firstly, the increasing internationalisation of Asian families (both in terms of jurisdictional spread of family assets and family members) is resulting in more complex succession and tax issues for families. Unforeseen estate and transfer taxes can quickly deplete a family's wealth. Secondly, increasing fiscal transparency and information sharing between tax authorities in different jurisdictions means the days of planning based on 'no-one finding out' are over. It is important any structure complies with all relevant tax and regulatory requirements. Selwyn Au-yeung, regional head of product development, global wealth solutions at HSBC Republic, says proper disclosure not only protects the client but also the benefactor.