It takes more than trusts to iron out family feuds
Trusts and foundations can provide stability at a time of transition in family businesses but need to be paired with effective family governance
Trusts and foundations can help keep a family business together as ownership passes from one generation to another, but in and of themselves, they are not the solution, experts said.
“A trust is part of the answer when dealing with issues of succession planning, but to be successful, it needs to be paired with the right family governance,” said William Ahern, founder of Ahern Lawyers, which specialises in tax and succession planning for families.
John Ashwood, managing director in Hong Kong at trust specialist Zedra, agreed.
“A trust by itself isn’t enough. When putting together a trust, you need to sit down with the family and with lawyers and other professionals to make it work.”
Succession is one of the most significant challenges for family businesses.
Joseph Fan, a professor at the Chinese University of Hong Kong who specialises in family businesses, researched the performance of listed family businesses in Asia over eight years before and after leadership passed from one generation to another and found that on average their value shrank by more than 60 per cent.
Since Hong Kong abolished the estate duty in 2006, the role of trusts changed. Prior to this, they had primarily been used as a vehicle for avoiding estate duty, but since then have become more commonly used as part of a network of structures governing how a business is owned and managed.
“If a business is not left in a trust, then it would be passed on to family members in a will, which means it would have to go through probate and could potentially be challenged,” Ashwood said.
However, when a family looks to pass a business from one generation to the next, there are a number of challenges that cannot be resolved simply by structures.
“There are some unique and intangible assets that are not transferable from one generation to the next,” Fan said.
These include personal ties between the owner of a business and political or business figures, and relationships within an organisation.
“Professional managers might only be loyal to the past generation of leaders and not the current one, or even within the family. If the father or mother is gone and the siblings don’t love each other any more, the way in which decisions are made becomes difficult,” Fan said.
Formalised structures can also cause problems in later generations if it is not possible to change them.
“What is also important, but very often lacking, in the transition road map of Asian business families is a way for shareholders to exit from the family business,” said Thomas Ang, head of family office services for Asia-Pacific at Credit Suisse.
“With each passing generation, the number of family shareholders will usually increase while the connection to the family business will decrease. Hence the desire to cash out will be inevitable with time.”
The original legal structure that holds the business either does not provide such a covenant or provides little guidance for an orderly and structured exit. This will create two extreme outcomes. Either everyone stayed together indefinitely or the business had to be forcefully broken up, which would lead to the eventual demise of the business, Ang said.