Families are amassing unprecedented trillions in Asia. Preserving these assets as they are passed down from generation to generation calls for astute planning.
“富不过三代 (Wealth does not last beyond three generations)”
While the Chinese adage has almost become a cliché, similar phrases exist in other cultures, from the Japanese to the Spanish. The wealth curse is real and universal, and the statistics bear this out. In a seminal study conducted over two decades that observed 3,200 families, succession planning consultancy The Williams Group found that seven in 10 lost their fortune by the second generation. By the third, only a paltry one in 10 retained their money.
The Covid-19 pandemic, which has driven unprecedented affluence towards the one-percenters, has once again thrust the intergenerational wealth transfer and preservation conversation into the limelight.
Forbes reports that the rise in public offerings, cryptocurrencies and stock prices has increased the combined wealth of the billionaires it tracks by 64 per cent year-on-year, reaching US$13.1 trillion (S$17.9 trillion) this April.
And the centre of gravity is shifting towards Asia. While the US still boasts of the largest billionaire pool at a count of 724, second-ranked China at 698 is closing in, with third-ranked India contributing a further 140. This will further fuel Asia’s intergenerational wealth transfer, which is already up to the region of US$5 trillion pre-pandemic, according to Asian wealth management observer Hubbis.
A significant portion of this burgeoning Asian wealth is concentrated in family hands. Bloomberg reports that Asia’s 20 richest families control assets worth US$463 billion as of last November. (The study excludes first-generation wealth and, as a result, all mainland Chinese families, whose fortunes are relatively young. The true figure is expected to be significantly higher.)
Founding generations who have toiled to amass fortunes are united in their concern with wealth preservation, and seek to ensure that successive generations do not squander the family wealth.
Yet, succession planning, with its overtones of death and favouritism over asset division, has remained largely taboo in Asian culture. But to avoid the wealth curse, wealth management safeguards and solutions are paramount.
Ultra-high-net-worth (UHNW) individuals setting up family offices in Singapore have hogged the headlines since the pandemic’s onset, including Haidilao restaurateurs Zhang Yong and Shu Ping, appliance maker Dyson’s founder James Dyson, tech giant Google’s co-founder Sergey Brin and South African diamond magnate Nicky Oppenheimer.
These hot financial vehicles are structured to handle the investment and wealth management for rich clients, and may serve a single family or multiple families.
They are useful, for example, as a repository for shares in the businesses, whether listed or private, that the family owns. In this fashion, the shares do not have to be distributed among family members, especially to the younger generations, who may not yet be financially literate or prudent enough to handle such wealth. This removes the temptation to sell shares and squander the money, and avoids diluting control of the businesses, which could lead to squabbling factions within the family. The charters of such family offices can also be customised to articulate management and investment principles, as well as governance regulations.
Family offices are also usually professionally run. Apart from the obvious benefits of such a set up – which for larger family offices, can rival that of a private bank – it also serves as a boot camp for younger family members being groomed to take the helm, through working alongside an experienced team.
Family trusts and foundations
A family trust is a relationship set up by a “settlor” (usually the founding patriarch or matriarch), who gives a “trustee” the right to hold, invest and administer assets for the family members’ benefit, distributing the assets or proceeds from their investments according to the terms of the trust deed and guided by the settlor’s wishes. Typically, a trustee is a licensed professional trust company or a specially incorporated private trust company.
Separating control and beneficial interest allows the trust to be proficiently administered, accords the assets legal protection and locks wealth from wayward offspring.
Most family trusts are “discretionary”, giving the trustee substantial autonomy in determining how to allocate distributions to each member. Not clearly defining what each member is entitled to at the outset shields assets from claims, such as from creditors or divorcing spouses. Settlors who wish to retain some flexibility and control over their assets can opt to reserve investment powers to themselves or to their chosen investment manager. The settlor may also maintain some influence by writing “letters of wishes” to the trustee communicating his or her requests as to how trust assets may be distributed, managed or otherwise dealt with.
The law imposes significant checks and balances on trustees. For instance, it is obliged to act in the family members’ best interests and to account for the trust assets. Most trust deeds also provide for mechanisms to replace the trustees. These legal safeguards help instil confidence in UHNW families looking to use trusts as an effective wealth and risk management tool.
Many UHNW families have additionally set up foundations to institutionalise their philanthropic efforts and to inculcate the value of giving within the family. These organisations are generally run by a dedicated team charged with the responsibilities of evaluating the programmes and projects to which the foundations contribute.
In a recent report by Soristic Impact Collective, four of the top 10 philanthropic foundations in Singapore were set up by tycoons.
Family prenuptial agreements
To ring-fence family assets from divorcing spouses, UNHW families are increasingly looking towards adopting a standard family prenuptial agreement (or “prenup”) for their descendants.
The garden variety prenup is well known; it is a contract signed by a couple prior to marriage that would set out how shared assets would be managed during the marriage and, in the sad event of a divorce, how they would be divided.
However, prenups can be tricky to navigate, all the more so under the context of lovebirds planning a happy event – the marriage. Adopting a standard family prenup helps dispel negative notions that any incoming spouse is being suspected of being a gold digger, since it applies to anyone joining the family.
A prenup’s terms can guide the courts when considering how to divide matrimonial assets justly and equitably, although such agreements are not directly enforceable. Prenups may also record the respective assets acquired by the couple prior to the marriage, and serve to demarcate such assets from matrimonial assets acquired after marriage, thereby insulating such assets from division in a divorce. However, how the couple behaves after walking down the aisle could skew things. For example, the Family Justice Courts recently declined to give full weight to a prenup, on the basis that the couple failed to behave consistently with the terms of the agreement during their marriage.
Even though a prenup is not watertight, it creates a layer of protection if properly drafted and implemented. A prenup is frequently adopted in tandem with a family trust as a secondary safeguard to divorce-proof family assets.
Singapore as a wealth hub
With close proximity to immense wealth – and bolstered by its reputation for professionalism, stability and rule of law – Singapore is set to further cement its status as a leading global wealth hub; it already manages S$4.7 trillion in assets as of last year, based on a Monetary Authority of Singapore (MAS) survey.
The escalating US-China geopolitical issues, Hong Kong political unrest and Taiwan tensions will only continue to drive many Chinese to seek safe havens in which to invest and reside. The potential new wealth taxes, governmental curbs on “excessive” income and focus on promoting “common prosperity” in China are also likely to be growth catalysts for Singapore’s wealth management industry.
In March 2019, the MAS and the Economic Development Board (EDB) jointly established the Family Office Development Team (FODT) to boost the country’s competitiveness as a global wealth management and family office hub. The FODT aims to enhance the operating environment for family offices, deepen capabilities of family office professionals and service providers, and build a stronger community of family offices.
More recently, the MAS and EDB, together with the Wealth Management Institute, have supported the establishment of the Global-Asia Family Office Circle as a platform for family office industry players to exchange ideas and develop initiatives to grow the ecosystem in Singapore.
Singapore has regulatory and tax frameworks in place to encourage the setting up of family offices, such as MAS’s licensing exemptions for single family offices, and the Inland Revenue Authority of Singapore’s tax exemption schemes. Under the Global Investor Programme, qualified family office principals would also be eligible for permanent residency. With the creation of these favourable policies, new single and multiple family offices set up in Singapore have grown exponentially from 22 in 2018 to 221 last year.
To conquer the wealth curse, tycoons and the newly wealthy will still have to consider for themselves how to structure their wealth holdings and succession for the future, but they now have many a tool at their disposal.