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How Do (Crazy Rich) Families Keep Their Wealth Beyond 3 Generations!

A proper wealth transfer plan takes into considerations a myriad of issues and is a mix of tax planning, wealth protection, estate planning and business succession planning.

Wealth Planning For Rich Families

You may have heard of the old proverb, “from shirtsleeves to shirtsleeves in three generations”. Indeed, reports have shown that approximately 70% of wealthy families lose their wealth by the second generation, and an incredible 90% by the third.

A study has shown that 60% of the time, the biggest factor is due to communication breakdown amongst family members, with 25% of the time being a lack of effective wealth planning.

Communication breakdowns often stem from basic primal issues such as the unwillingness to deal with sensitive topics revolving around, inter-alia, death, incapacity, divorces, or the unwillingness to give up control and/or bringing younger generation into the decision making process and this is often exacerbated by the lack of a clearly defined family constitution or imparted family’s mission or values.

To align the family and business values, family members may need to cover various parameters (not meant to be exhaustive) such as:-

• the roles and responsibilities (e.g. what are the consequences for family members not operating in the best interests of the business?);
• the board composition (e.g. should independents be appointed?);
• what is the overarching vision/family strategy?;
• what are the exit strategies in place (e.g. how should assets be transferred to the next generation?)

Definitely, the first step is building communication channels at home. This means family discussions and meetings and proactively engaging with the heirs. Coupling that with sound financial education would properly equip potential heirs with the skills, values and direction needed in handling a sudden and significant amount of wealth. This in turn would go a long way in ensuring the sustainability of the family wealth across future generations.

However, what the beneficiaries finally do with their new-found wealth is a variable that, while possible to adequately prepare for through solid communication and formal training, may ultimately surprise us in the end. To address this, we enter the realm of wealth planning.

Wealth planning

According to a recent report by an international bank, only 31% of wealthy families interviewed said they had a proper wealth transfer plan in place, which explains why generational wealth transfers have not been sustainable beyond 3 generations!

A proper wealth transfer plan takes into considerations a myriad of issues and is a mix of tax planning, wealth protection, estate planning and business succession planning.

It bears noting that often times the assets owned by the family may span across various jurisdictions. Therefore, from the onset, careful consideration needs to be given as to what type of legal vehicles (e.g. partnerships, private company, etc.) should be chosen to hold the assets and in which jurisdiction(s) should they be setup.

From a tax angle, an optimal family holding structure may offer a more favourable withholding tax rate at source, perhaps due to a tax treaty in place between source country and the intermediate holding entity. Following from there, the tax regime of the jurisdiction in which the intermediate holding entity is setup may provide favourable tax treatment on certain type of income derived and for the subsequent repatriation of profits to the ultimate holding company. Thought should also be given as to whether there are potential exposures to adverse regulatory changes in the chosen jurisdiction and/or whether the jurisdiction has an investor-friendly regulatory framework.

Notwithstanding the above, the family should also consider whether the holding structure is optimal for passing the assets to the next generation. For example, whether are there any estate and/or gift leakages or are there any public disclosure requirements that may create unnecessary attention?

Last but not least, the family should consider whether the legal mechanisms are set in place to protect the family wealth against depletion by unwise use (it takes an average recipient of an inheritance 19 days until they buy a new car!), divorce, creditors and/or litigations.

Our team of dedicated private wealth specialists work closely with family businesses to address these issues and help with the development and implementation of an appropriate estate plan customised to the needs of the family. Please do not hesitate to reach out to us if you find yourself in a conundrum!

 

CONTACTS
For more information, please contact:

Edwin Leow
Director, Head of Tax
edwinleow@nexiats.com.sg

Shaun Zheng
Tax Manager
shaunzheng@nexiats.com.sg