Jonathan Hubbard, head of wealth planning at UBS Wealth Management in Asia, explains how high net worth (HNW) individuals in Asia should view and use trusts.
Date: Dec 23, 2011
What are an individual’s motivations for estate planning and inter-generational wealth transfer?
The starting point for anyone is to think of the basic concept of what happens to their estate if they don’t have a will. This is especially relevant for HNW individuals in Asia, who are accumulating wealth, probably in more than one country, for example for their children when they move abroad.
However, the vast majority of HNW individuals in Asia don’t even have a will. This means that after they pass away, they will have to rely on the law and intestacy – which is, frankly, a blunt instrument, which might not benefit people as one might expect.
Plus, dealing with the estate is a very time-consuming process. For example, it can take around six to nine months in Hong Kong to go through the court process, during which time the assets are effectively frozen and not available to the family. The family then has to go through a similar process to prove their title in every country where there are assets.
In such situations, not only do families suffer the trauma of the death of a loved one, but they face complex and time-consuming challenges in taking control of assets which the deceased would likely have wanted them to have.
So what’s the next step after an individual decides they do want a will or trust?
From this fundamental starting point, the most important thing to think about is who the client wants to be implementing the decisions about their estate after they pass away, and how their assets should be distributed.
In terms of trusts, not only are these effective tools for making decisions at an early stage, but they make it possible to build in timeframes for children, or even grandchildren, by specifying through the trust how they can be protected from having too much money too early in their lives.
Other reasons for using trusts might be, at least for entrepreneurs, the ability to plan for some more specific benefits, including protection from creditors.
Further, while recent evidence in Hong Kong suggests that trust planning cannot always protect a wealth owner settlor embroiled in matrimonial proceedings, trusts created by parents and grandparents could protect wealth in the event of children and grandchildren getting divorced in the future.
To what extent do or should tax considerations influence a client’s decision to set up a trust?
Although these are not driving decisions for families based in Asia, there can be advantages for beneficiaries if they end up living in high-tax jurisdictions in the future.
For example, if children end up living in the US, when they pass on their assets, 30% of the entire capital will be taxed (at current tax rates), so for non-US parents or grandparents to embark on planning early to minimise or eliminate such charges in the future is critical. So, even though the children and grandchildren might end up paying income tax on the annual return from the capital, the capital itself is preserved for the future.
What do some clients overlook, or perhaps do wrongly, when setting up trust structures?
In some cases, settlors rush into setting up their trusts. In Asia, entrepreneurs are used to making fast decisions, which is how they made their wealth in first place.
In addition, people have to be very open about their family circumstances. For example, it can often be the case that they don’t disclose that a child has a foreign passport, but this can be a significant disadvantage to all family members, not only those in foreign countries.
Something else that settlors overlook is that while they might spend a long time thinking about what benefits they want and then putting in place the relevant structure, they tend to not focus on the ongoing administration or they don’t pay for taking care of it properly. It is like buying a brand new car which is exactly what you want but not doing anything to maintain it over the next few years.
How can people try to avoid some of these pitfalls?
HNW individuals need to choose carefully who to partner with and who to rely on for the administration of their assets. This means finding an institution which will be around for a long term and can anticipate these sorts of issues.
At the same time, the role of the wealth planner is not simply to say yes to everything a client asks for – but rather to create a structure that gives the client what they want for the long term.
So how should private clients view trust structures in general?
HNW individuals need to be able to understand what a trust is and what it can do, and not think it is a panacea to cure all ills.
In some cases, the structure might be relatively straightforward. For example, where there is a simple family structure with three or four children, and maybe including provisions for grandchildren to benefit, a discretionary trust can be used with all children to benefit equally.
However, as soon as more complex assets are involved – for example businesses, large commercial property, or a significant family property such as a holiday home – there needs to be a framework for family governance.
Settlors also assume they lose control when they set up a trust, but there are now many ways in which they can often retain some control without there being difficulties.
What trends do you see in how Asian HNW clients are considering estate and succession planning tools?
With the world getting much more complicated from a regulatory perspective, and most countries looking to raise their tax revenues to pay off debts, clients are more and more aware that planning needs to be done carefully, and with a long-term view of where their beneficiaries will be located.