How the wealthy are protecting their assets

THE Covid-19 pandemic has been a reality check on human mortality as well as the viability of certain business models. The risk of higher taxes is another reality confronting the wealthy as governments around the world try to plug massive fiscal deficits. The proposal to introduce a global minimum tax on corporates, now backed by the G-20, may materialise sooner than expected.

Many countries, including Singapore, are reviewing options such as wealth taxes as a means to bridge the inequality gap. There may be further backlash against aggressive tax planning and use of tax havens.

These developments have pushed wealthy families to reflect on their asset holding structures, risk management strategies and succession planning. A number of strategies are available to ring-fence these assets from potential risks.

It is common for wealthy families in Asia to directly hold assets including financial investments. When the asset size is significant, one would typically establish companies or other vehicles to hold investments. Asset-holding structures help ring-fence assets and also ensure smoother succession of a diverse portfolio of assets.

Asset diversification is a key tool to secure higher returns and sustained growth. Wealthy families in Asia are getting more exposed to alternatives, private equity or venture capital investments, and funds or higher risk assets such as cryptocurrencies.

Multiple investment holding vehicles can be used to ring-fence asset classes depending on the risks involved. For example, financial assets can be insulated from investments in startups or high-risk business ventures. Excess cash generated by an operating business can be transferred to other investment holding structures that are insulated from business risks.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

A number of zero-tax countries are available to establish investment holding companies. Wealthy families are now looking beyond the typical offshore tax haven in search of jurisdictions that are reputable, stable, established financial and banking centres, and compliant with international standards, while still being tax efficient.

Singapore checks all these boxes and has emerged as a popular investment holding and asset management base for wealthy families not just in Asia, but also in Australia, Middle East, Europe and the Americas.

Singapore is also emerging as a preferred base to establish family offices. It offers a licensing exemption for single family offices and tax incentives for investment holding vehicles managed by Singapore family offices that meet certain criteria.

Family offices help with institutionalising asset management functions and instilling discipline and accountability while investing assets and growing the asset base across generations. Several wealthy families in Asia are now focused on enhancing the infrastructure, governance and in-house investment expertise of their family offices.

Trust planning is an important tool for succession planning and ring-fencing of assets. There is a growing preference for establishing trust structures during one's lifetime rather than leaving assets to wills.

Trust planning involves transfer of legal ownership of the assets to a trustee who is required to hold and manage the assets for the benefit of the beneficiaries. Singapore is a popular base for establishing trust structures and one can choose from several licensed professional trustees.

Wealthy families in Asia are now using more sophisticated trust structures. Trusts are used to hold financial assets as well as shareholdings in operating businesses, both listed and unlisted. Separate trusts may be used to ringfence various classes of assets.

Private trust company structures are also becoming more popular among those who may want to exercise greater involvement in the decision making of the trust, especially when the asset base includes operating businesses or high-risk assets. Elaborate governance strategies such as family constitutions are also becoming more popular.

Trusts and investment holding structures can be designed to shield assets from various external risks ranging from future creditor liabilities to divorce claims. They also help address potential tax risks that may arise globally.

For instance, if a Singaporean living outside the US invests directly in US stocks and passes away, 40 per cent of the asset value (above a small exemption of US$60,000) would be payable as US estate tax. The estate tax exposure would not arise if the investments are made through an appropriate trust or investment holding structure.

Wealthy families often require the flexibility to shift residence to any part of the world depending on the need. They may obtain alternative or multiple passports and long-term residence permits for this purpose. In shifting or establishing residence in certain countries, there is a risk that global assets may be subject to high taxes. It is also possible that members of a wealthy family may accidentally become residents of such a country because of travel restrictions.

In several cases, trust and investment holding structures may shield assets from tax exposure in various countries where members of the family are resident. If not properly planned, the assets or income generated in the structure may still be taxed in the country. This may arise for instance if the holding company is effectively controlled by residents of the overseas country or has a permanent establishment in that country.

Life insurance products for high-net-worth families are also frequently used for ring-fencing assets. This includes private placement life insurance policies that can be used to shield various types of assets. Pre-nuptial agreements are also getting more attention among wealthy families in Asia who seek to protect premarital assets from future risks. In Singapore, pre-nups agreed by foreign citizens and valid under foreign law may be more easily enforceable than one signed locally by two Singaporeans.

The fallout from the Covid-19 pandemic reminds us that change is the only constant, and change always creates uncertainty. A number of options are available to shield assets from risks. It is important to continuously review these structures and strategies based on changes in the status and objectives of the family, global tax laws and the broader economic and geo-political environment.