Business Times – 14 Apr 2008
RISING ASIA
Estate planning is today becoming a complex issue that requires professional help, says CHEN HUIFEN
FOLKLORE and parables tell of diminishing wealth over generations. In the holy book, there is one of a prodigal son who squandered away his inheritance and had to work in a field to feed the swine. In Brazil, there is a popular saying that ‘the grandfather is rich, the son is noble and the grandson is poor’. Closer to home, the Chinese are known for their proverbial adage that ‘wealth does not last three generations’.
Such teachings remind today’s rich that the passing of wealth to future generations can be fraught with plenty of challenges. The high failure rate was pointed out in a 2006 Insead study on Asian families and their emotional aspects in wealth transfer and inheritance. Only three in 10 family businesses survive into the second generation, and one in 10 made it to the third, according to the study.
East vs West
As much of the Asian wealth is created in the last few decades, the concept of preservation tends to be newer than in the West. ‘From that perspective, this may be the first generation in a particular family that has even had to consider the issue,’ said UBS wealth planning consultant Bill Lexmond.
But the issues that emerge in their succession planning are not vastly different from what their counterparts face in the West, or even the Middle East.
Said Wendy Yeo of ABN Amro Private Bank Asia’s international estate planning division: ‘Very often, we come across questions like ‘How can the family wealth be passed to the next generation in an orderly manner? How the second generation can be equipped to manage and preserve the family wealth? What can be done to prevent children from overspending? How to manage conflicts among different stakeholders?’.’
In other words, the general concerns of preservation with a long-term view, control, access to benefits and taxes are universal, although the approach used in addressing them may be different.
‘They (high net worth families in Asia) usually prefer to retain beneficial interest in their assets during their lifetime, with their wealth passed on to the next generation only after their demise,’ said Credit Suisse head of private banking for South-east Asia and Australasia Francois Monnet.
‘They are also concerned about potential dilution of family wealth as a result of marital disputes, and generally also do not include spouses of their children/grandchildren as beneficiaries of their estate planning structures. Although this is not unique to Asian families, high net worth families in the West are probably more inclined to transferring certain assets to children during their lifetimes.’
Most of the private banks that BT talked to also noted a strong inculcation of traditions and culture among wealthy Asian families. Even as the next generation of successors may be educated in the West, family values are regarded as important guiding principles for them and a foundation to create cohesiveness and a sense of purpose among family members.
This is also reflected in their attitudes toward philanthropy. ABN Amro’s Ms Yeo noted that many high net worth individuals are apportioning their wealth to charity.
‘Many have recognised that by so doing, they are also able to leave a legacy for their family and it also serves as a means to bond the family together, which gets progressively more difficult with each successive generation,’ she said.
The trend is observed by UBS as well. ‘If you look at families in Asia who have gone beyond the traditional third, fourth generations, they would say that one of the key elements they have are values that were put into the family and then each generation, shared and made into part of the family culture,’ said its Asia-Pacific head of philanthropy services Terry Farris. ‘Now philanthropy is one of the easiest tools in creating value succession.’
Giving back to community
Although charity giving by high net worth families from Asia has always been in existence, their generous acts have not always gathered as much limelight as contributions made by those from the West. This is because philanthropy tends to be very private and low-key affairs, and sometimes ad-hoc, in this part of the world.
‘The decision would usually be made by the leader within the family and driven by relationships,’ said Fortis Private Banking Singapore vice-president in philanthropy services Desmond Lum. ‘The concept of engaging an outsider consultant to discuss family wealth and outsourcing philanthropic services to professionals are concepts that are likely to take time for greater acceptance.’
But that could change with the setting up of more charity trust foundations, indicating the desire for a more thoughtful approach in giving back to society. HSBC Private Bank senior philanthropy adviser Cynthia D’Anjou-Brown said that the strategic approach would also ensure a more transparent, accountable and organised process in altruism.
She added: ‘Increased media exposure and heightened interest and awareness of professionally structured foundations, such as the Bill & Melinda Gates Foundation, no doubt have also helped inspire many wealthy Asians to follow in their footsteps.’
The popular charity causes centre around education, basic needs and religion. On the other hand, Fortis noted that less than 10 per cent of the money Americans gave to charity addressed basic human needs such as sheltering the homeless, feeding the hungry or caring for the sick.
‘Ethno-centricity also comes into play when opportunity arises for cross-border contribution as the Asian culture tend to keep in mind the source of their success, just as the Chinese proverb says to ‘remember the source when one has drunk the water’,’ said Mr Lum.
Preparation
From seminars for children to inter-generation forums, private banks are quick to offer ideas to help their Asian clients prepare for the succession of wealth to future generations. Experts said that estate planning is becoming more complex with the multitude of offerings – from trusts to family offices to foundations – and the stricter compliance and reporting regimes.
UBS is of the view that everyone should have a plan regardless of their net worth. This can be in the form of a simple will. When there is no plan, then the assets would have to go through probate, which means they are frozen under estate planning laws under the jurisdiction and can only be accessed by the family or descendents when the courts grant permission at a later date.
It is difficult to put a dollar value on the minimum size of assets required before one should seek professional help in estate planning. Obviously there is a balance to strike between the cost of establishing and maintaining a more sophisticated estate planning structure and the benefits that can be accrued from it. Most of the bankers suggest that clients with a minimum net worth of US$2 million should certainly consider having a structure in place.
‘If you fail to plan, then effectively you plan to fail,’ said Mr Lexmond of UBS. ‘If someone doesn’t participate in the design, that doesn’t mean nothing will happen. There will be something that occurs although it’s more likely to be chaotic.
‘If a family decides to move forward to put a structure in place, the beauty of it is that it allows all the family members to relate to each other. In other words, the patriarch or matriarch can act as mentors to provide the wealth of their experience to the benefit of the next generation in a fairly controlled environment.’