Asiamoney.com, April 2011
Earlier this year the people of Hong Kong and Macau looked on with fascination as Stanley Ho sued five of his children, two of his wives and his banker over the holding company that controlled his fortune.
While few families have circumstances much like the Ho’s, it was a welcome reminder of the importance of estate planning. “There is undoubtedly a huge number of families who just haven’t prepared at all,” says Mark Smallwood, head of wealth management solutions at Deutsche Bank Private Wealth Management Asia Pacific. “It’s really surprising. I see some very wealthy families who haven’t even drawn up wills.”
Yet the circumstances of wealth are more complex than ever: one lawyer refers to a client with 220 British Virgin Island companies holdings his family’s wealth. And Asia is at a pivotal moment for wealth transition. It has been estimated that 80% of Asian wealth is due to pass to the next generation in the next 15 years. “In Asia we’re at that critical stage of this inter-generational wealth transfer,” says Michael Troth, managing director and regional head for Citi Trust Asia Pacific. “Some families have planned very well, wealth has been transferred successfully and you don’t read about it. But families where perhaps things are not in harmony – really they ought to be planning for that.”
The most straightforward advice bankers have is to do something. “If you haven’t done any planning, do some,” says Troth. “Give certainty to what you want to happen. And if you know there is going to be a problem, deal with it, and make sure your structure is robust enough to deal with the challenges.” As Smallwood says: “If you fail to plan your succession, then the state in its wisdom will do it for you.”
First step is a will: a clinically clear will, drafted by a lawyer, spelling out exactly what the drafter wants to happen and taking into account assets in multiple jurisdictions (which might require more than one will). But that’s only a start. “The will is an essential tool, but there are some drawbacks in relying solely on the will, in particular for high net worth families,” says Smallwood. First, where a will is in place, when the individual dies their estate is frozen until a grant of probate is executed by a court, which can take between three months and several years, he says. “Until it has been completed, the assets are frozen, liquidity is not there and possibly important decisions cannot be executed.” On top of that, probate is a public exercise, making the will available from the court – not something everybody wants to happen.
Both Smallwood and Troth recommend a family trust to hold liquid and bankable assets, and if necessary shares in operating companies or real estate, for example. “The trust has many features and attractions, particularly for families in Asia,” Smallwood says. For a start, a trust is a private contract between settlor and trustee, meaning there is no public record of the terms of trust. “The family’s privacy is maintained and the disposition of the assets to beneficiaries is kept from public scrutiny,” he says. There’s also no probate process and the individual can clearly instruct the trustee about what should happen if the individual dies or becomes mentally incapacitated, or if children are still minors at the time. It can also protect family wealth from future creditors.
In Ho’s case, there was no shortage of structuring involved; the furore included two British Virgin Islands (BVI) firms, Action Winner and Ranillo Investments, as defendants, since those two firms had control of Lanceford, which is the holding company containing most of Ho’s wealth. This is a common complexity. “Everyone walks around today flashing their Gucci bags,” says one banker, “but in the 90s in Hong Kong everyone was flashing their BVI companies. It was almost a status symbol to have a lot of BVIs.” Typically in Asia the family business has a holding company – sometimes domestic, sometimes tax-neutral offshore – with a range of shareholders, with the matriarch or patriarch often keeping the shares in their own name until they die and not passing them on to the kids until the very end. But what is often overlooked is that many of these asset may lead to BVI or other tax-neutral companies, and the transfer of shares in those companies to the next generation may not have been addressed. This ties in to the growing international nature of family assets. “As the second generation is getting involved, people are diversifying assets out of core holdings in the family business, and spinning them off into bankable accounts, private equity and real estate and so on in London, the US, Switzerland and Singapore,” says Smallwood. “Often the various holdings do not flow into an organised structure so it’s susceptible to problems when they die.”
The nature of families themselves adds to the challenge. “Families are much more global, both in terms of where the beneficiaries and family members are and where they are investing,” says Troth. “If all you did was invest in your own country, and all your beneficiaries and heirs were there, that would be simple. Once you’ve got family members with a passport or PR or residency somewhere else, or international investments, that’s where you’ve got the dimension of other countries’ tax and legal systems.”
Smallwood says there is “nothing at all wrong with using an offshore tax neutral structure”, provided there’s a clear mechanism in place for the transfer of wealth. “A lot of families have a BVI and sign a share transfer but leave it undated, and leave the name they’re transferring it to blank, because they don’t want to pay for a simple trust. That piece of paper becomes a bearer share and whoever controls it can potentially control very significant assets. There’s a tremendous opportunity for fraud and family disputes.”
Troth adds: “The BVI is a great jurisdiction. It crops up more because there are more companies incorporated there than anywhere else, but regardless of which jurisdiction and structure you use, the ground rules are the same: set it up properly, for legitimate purposes, with robust structures and good corporate governance. The old days of trying to hide some money – that’s gone, the world has changed.”
Historically, one challenge has been that private banking in Asia has been seen more as a source of investment advice than estate planning. One banker grumbles: “In Asia people don’t want to pay for service, and that is the problem with succession planning: it requires people to sit down with qualified lawyers and bankers to formulate the plan and the various mechanisms within it.” But there is a sense of changing attitudes. “In the families I deal with, I’m seeing people much more willing to get engaged in a discussion about succession planning,” says Troth. “There’s been a sea change, in fact.”
In essence, estate planning is an attempt to bring order to the unpredictable. “It’s not just a simple of matter of: when I die, it all moves to so and so,” says Smallwood. “There are a lot of what ifs: the first is you don’t know when you’re going to die, and all sorts of things can happen between now and then.” In particular, families themselves get more complicated, and run to more generations: the main controlling group of India’s Tata conglomerate, for example, is now in its fifth generation of stewardship and is understood to involve more than 110 companies and subsidiaries and at least 40 different family members or groups. “But most of the wealth in Asia has been created in the last 30 or 40 years,” says Smallwood. “That first generation are now in their 70s and 80s and they are passing on. So we are at the take-off level of a J curve, where there is going to be this enormous transfer of wealth. Families need to be prepared for it.”