Christian Stewart of Family Legacy Asia assesses the use of trusts as part of wealth planning for families, and explains the most effective way to use this tool in this succession process.
Date: Apr 2012
Tags: Wealth planning, Estate planning, Trusts, Succession planning
While there are certain advantages to trusts, such as preventing ownership fragmentation in terms of Asian family businesses, Stewart said there are also pitfalls to using trusts as a tool for wealth planning for families, as they can create a false sense of security.
For example, family wealth might fail as a result of family conflict, and putting the business into a trust won’t automatically protect against this, he explained. The danger with trust solutions, therefore, is that they might be too simple.
Viewing trusts in the right way
According to Stewart, the first rule about using trusts as effective succession planning tools is to be transparent with the entire family about setting up the trust.
In many cases, the said he trust expert often only talks to the patriarch or founder, so only gets their perspective and ideas on how succession will play out, and on how ownership should be structured in the future.
However, said Stewart, there is often no testing in reality with the family about whether this is acceptable.
It is therefore crucial to have family meetings involving the wealth manager, lawyer and business founder, to identify the structure in the future and whether this will work in practice.
Other lessons to be learned
The common characteristic about those Asian family firms which have lasted for 100 years is usually some sort of consolidation of the share ownership, said Stewart.
As a result, when looking at a trust structure, many trusts set up in Asia are discretionary, he explained, meaning that nobody has any legal ownership interest in the income or capital of the trust.
This poses questions, said Stewart, about how to exit from this trust and concentrate ownership so that only those beneficiaries who are interested in the business are beneficiaries under the trust, and that family members who are not interested in a management role in the business can exit the trust.
Exit plans will help support continuity of business over the long term, he explained.
A further lesson, said Stewart, relates to third-generation families, and how many people this actually refers to, given that this might involve anywhere between 20 and 30 different individuals.
Without a trust, one of the issues relates to how these people can make decisions together, he said. And even if the family business is put into a trust, which might be the sole shareholder in the business, there could still be 20 to 30 beneficiaries and the mechanism for them to make joint decisions is still missing.
There is still a need for some kind of governance structure, therefore, for all these beneficiaries to work together, said Stewart.
Trusts as a relationship
A new idea in Asia, said Stewart, is the role of a trust as a relationship. So the trust is designed and set up by the settlor and the beneficiaries are educated about their role and what is expected of them, as well as the role of the trustee and how the overall relationship is meant to work.
