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Passing your business and wealth to the next generation

Thursday, June 30, 2016 - 17:42
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By Lee Woon Shiu, Head of Wealth Planning, Bank of Singapore

AFTER working hard to build one’s business and personal wealth, it is natural for business owners to next think about how the business can be successfully transferred to the next generation of leaders and beyond, to carry on the family tradition.  After all, it is every business owner’s wish to see his hard work outlast as many generation as possible. If we see the family business succession enterprise as a track & field relay competition, it would make no sense to start well on the first leg, but to totally ignore training and coaching the subsequent runners who may not be strong enough to finish the race well.     

Unfortunately, very few Asian family businesses see the importance of having proper business or personal wealth succession plans. This is partly because succession planning is closely associated with the eventual demise of the founder, which is a taboo subject in Asian culture.  Another key reason is a reluctance, on the part of the founder, to let go of the business as they often focus on merely finishing their own race well and fail to see the family business enterprise as a continuum.  It is not uncommon to find immensely successful entrepreneurs in their 60s, who are reluctant to cede control to their children because they continue to play significant roles in driving growth of the business.  In fact, by the time they pass control to their progenies, many of these founders would be in their 70s.

This preference to have direct control and ownership till the very last minute often has repercussions.  By then, either the patriarch has become physically or mentally weak or conflicts would have arisen, with various family members bickering or having devised ways to get a share of the family wealth. Successful families often assume that existing harmony among the family members will perpetuate across the different generations, and this leads them to think that making detailed estate and succession planning is unnecessary. As Benjamin Franklin once said, “by failing to prepare, you are preparing to fail.” Procrastination or failure to plan for the future may result in loss of wealth, as your wealth can be jeopardised by multi-jurisdictional claims such as offshore taxes and claims or challenges arising from family disputes. Through this plan, the patriarch is able to tell his family how he wants his affairs and finances to be handled after his demise. It provides clear instructions on how to distribute the patriarch’s assets, including the business, money, property and other possessions. It will help to also ensure that the estate is divided according to the patriarch’s wishes, rather than a third party’s wishes, which often results in disputes.

As an analogy, by writing a will, a patriarch leaves a ‘road map’ for his family and the law courts to deal with his assets according to his wishes and preferences. Without this ‘road map’ no one can accurately second guess the patriarch’s preferences and the courts will have to fall back on intestacy laws of the domicile country to settle asset distribution.

Estate and succession planning however goes beyond writing a simple will. It is a holistic exercise typically involving one’s accountant, private banker, wealth planner and lawyer. As part of the estate planning process, this team would have put together a GPS-based navigation system to guide the client towards achieving the optimal fiscal benefits from his corporate and private investment activities as well as ensure that an effective wealth planning scheme utilising trusts, insurance and collective investment fund solutions is put in place to address his family’s needs. To be meaningful, the discussion is likely to be intensely personal and more than one meeting will be needed. Clients will have to be prepared to share on key issues such as the family business, an inventory of assets, and their needs and wishes in terms of provision for family members. The client must identify the capital he has amassed – financial as well as human and intellectual capital. The client can also specify the core values that he hopes to perpetuate in his family business as well.  For example, if he wishes that his future generations continue to support the needy, he can specify that a percentage of the company’s annual revenue be given out as scholarships to give disadvantaged students a fair chance to pursue tertiary education. It follows that the exercise is aimed at educating successive generations of the family to look beyond merely whether the company is paying good dividends to preserve their financial futures, but pursuing more long term social and economic needs of the family.  The patriarch must also identify the most competent successor early on. Trying to divide the business equally among family members makes the business more vulnerable for takeovers, especially if the business is not sizeable or if there are many children involved. To distribute wealth to other children involved in the business or members who are not active in the business, patriarchs can use trusts. Trusts are useful succession planning instruments that enable a patriarch to dictate how his money is to be managed and distributed, and by whom, during his lifetime, or after death. This could include systematic instructions on how heirs can benefit, including imposing pre-requisites which they must comply with before they can receive their funds. A patriarch can also include a dispute mediation mechanism in the trust to dictate how key disagreements in relation to the use of the trust assets are arbitrated. With comprehensive legal advice, a trust is also a means of protecting wealth by mitigating the tax exposure that is triggered by cross broder asset acquisitions or the multiple nationalities/residences of the family members.

Regardless of the tools and number of discussions a patriarch can use or have, a successful estate and succession plan should start early with the first generation, when the patriarch is still in charge. He must put the right framework in place for the family as heis in the position to set the ground rules for every successive generation – for wealth sustainability and for family harmony. In the same way that the first runner of a track and relay competition has to start well to win the race, so too must the patriarch lay down the vision and embed the DNA of his family enterprise to ensure a successful legacy transfer. 

And the key to achieving the full benefits from wealth and succession planning lies in the execution. The best estate and succession planning strategies will still need a dedicated team with a wealth of local experience an on-the-ground expertise to ensure seamless execution of the client’s objectives. Very often we come across Asian families being serviced, for example, by trustees located in distant tax havens with no local knowledge of the needs of Asian clients or appreciation of the Asia methodology of dispute mediation. Bank of Singapore’s wealth planning specialists, on the other hand, are all accredited Asian estate practitioners with decades of experience and an acute knowledge of the nuances and sensitivities of Asian families. These enable us to proactively suggest action plans to the family taking into account evolving family dynamic and needs, thereby avoiding escalation of family tension and confrontations where possible.