Push to protect family assets
Rapid growth of wealth and bickering over inheritance spur need for better security
A SPATE OF courtroom dramas played out in Hong Kong as families went to war over inheritance issues has triggered growing demand for the creation of watertight private trust agreements.
HSBC Private Banking Asia head of global wealth solutions Bernard Rennell said the sheer pace and scale of economic growth in the region, which was creating savvier and more international wealthy individuals, was another driver of interest in setting up trusts.
But it is the court drama that has caught the most attention of Hong Kong's old wealth.
Henry Lam, executive director and head of wealth planning for UBS Wealth Management in Hong Kong, said: 'In the past six to 12 months what we have increasingly encountered among our clients is concern over the protection of family wealth and values.'
'This may be because of reported family disputes being litigated in local courts and reported in the media but it seems a lot more of this is going on, not just among high net worth families but [less affluent] families as well.
'Previously, these matters were settled privately. But now a lot of publicity has been given to the cases and that has prompted people to consider how to prevent this and what tools can be used.'
That is where the creation of trusts comes in. Developed historically to allow the separation of the ownership of assets from the beneficial enjoyment of the income and capital of the assets, trusts could also ensure this outcome was sustained across generations, so that on the death of the original patriarch who controlled the family fortune, no transfer of assets arises where they are held in trust.
This has quarantined the assets from attachment in the event of bankruptcy or divorce, or from profligate offspring waiting in the wings to get their hands on the family fortune to spend it on Ferraris rather than education.
Mr Lam said another trend to be discerned was the increasing attention given to philanthropy and trusts as a way of protecting wealth and family values.
'If you look at the high-profile cases of charitable endowments in Asia and America, you see the donors take the view that there is no point in giving $10 here or there but giving in an effective way and then seeing evidence of contributing to some changes - which is why we have seen some of these bigger donations which also achieve the outcome of preserving the family name.'
That trend was noted by Michael Troth, head of global wealth structuring, Asia-Pacific and the Middle East, for Citigroup Private Bank
'A lot of clients are seeking guidance on how best to structure their charitable giving. High-profile cases included Warren Buffett whose donation went to the Bill & Melinda Gates Foundation,' Mr Troth said.
'Of course, there have been others in Hong Kong as well and I think this whole idea is now exercising the minds of wealthy people who want to make sure that a portion of their wealth goes to support a charitable foundation and how they can achieve that so that their legacy continues when they are no longer here.
'It is not just a question of securing the right legal structure but the whole area of governance - that is, how can I be sure it is going to the right cause and how [can I] benchmark the money I am giving with the outcomes I expect.
'So it is a professionalising and institutionalising of this whole area of philanthropy,' he said.
'There are a number of individuals who have built and run hospitals, and fund those with their philanthropic endeavours. And then there is an area regarding how to give money to children in different ways - building facilities and schools tend to be major themes.'
HSBC's Mr Rennell said, philanthropy apart, the internationalisation of business had new wealthy individuals concerned about how they managed the increasingly cross-border spread of their assets.
'Wealth is growing exponentially in the region and emerging economies now account for half of world GDP. This means wealth is growing rapidly not just in terms of the numbers of wealthy people but the size of their wealth,' Mr Rennell said.
'Wealthy families are also becoming increasingly international. Whereas once it would not have been uncommon for a Hong Kong wealthy family to have all the family members in Hong Kong - and most of their assets and wealth - these days the families are spread around the globe.'
Children are educated or working in high-tax jurisdictions such as the United States, Canada, New Zealand or Australia. In addition, their assets are international and their operating business tends to be international - with assembly, for instance, taking place in low-labour-cost economies such as Indonesia or India.
'So, combine these things and what you have is a rapidly increasing need, if not demand, for the sort of services we offer,' Mr Rennell said.
PricewaterhouseCoopers tax partner John Wong said the core components of most trusts settled in Hong Kong were succession planning, asset protection and wealth saving techniques.
To ensure services are tailored to clients' needs, the first issue to be investigated is the tax domicile, then the nationality of beneficiaries, and the location and status of the assets.
'Apart from those core principles, there are a lot of non-tax issues that we have to be careful about in relation to succession planning, which means examining whether there is an operating business and who will take it over,' Mr Wong said.
Bill Thompson, Brisbane-based tax and trust specialist for Australian law firm Minter Ellison, said the Asian experience was little different to the issues that exercised the minds of delegates to the international forums that he regularly attended - the most recent being the International Bar Association conference in Chicago.
'One issue under the spotlight includes resolving disputes that arise in relation to the administration of offshore trusts and the mechanisms that might be used to resolve the disputes,' Mr Thompson said.
'Then there is the question of the duties of the trustees in circumstances where they have grievances expressed to them, and what the rights of the beneficiaries are to express those grievances.'
Importantly, he said, when a person established a trust offshore with independent trustees, questions to be asked included how was control exerted over those independent trustees in a real way and if something went wrong - say, the trustee ran away with client assets - what remedies existed?
'Another issue that is regularly explored at such forums is the increasing reporting and disclosure obligations that the more developed countries are putting on their citizens to disclose what their interest in trusts might be - not just for reasons of tax policing, but also arising from the anti-money-laundering focus pursuant to international agreements to deal with crime and organised terrorism,' he said.
'So the objective of putting money into a trust offshore and it being hidden away from the view of regulatory bodies and tax authorities is becoming increasingly difficult to achieve.'