Protecting family wealth has long been a challenging subject that can cause even the most candid and free-spoken families stress and concern, writes Alice Quek, head of private and client services in Asia for Hawksford Group.
So, how do you avoid your wealth destroying your family, or your family from destroying your wealth?
The generational difference
The way families are dealing with their fortune is rapidly changing, and so is the number of ultra-high net worth (UHNW) families seeking wealth management advice from reliable trust management services in protecting their wealth.
Through the rise of successful entrepreneurs in economies such as China, we are now beginning to see a group of families who are considering what the transition of wealth might look like as it moves into the second generation.
The next generation of wealth owners tend to be highly entrepreneurial, seeking new business opportunities, and are more mobile internationally, some holding more than one passport or have multiple tax residencies.
Their investment philosophies may also differ to what we have seen before and are increasingly looking for sustainable investments to sit alongside more traditional investments. They recognise that in the era of social media, there are more opportunities to make mistakes plus a higher visibility for scrutiny which means it is critical to get investments right the first time around.
The often risk adverse wealth holders of the past, sought simple and straight forward management with one key point of contact for their trusts. They are now balancing the task of protecting their family wealth, whilst taking on board the opinions of their more risk-taking, emboldened children.
What’s reassuring is there has been an accompanying attitude shift emerging from wealth owners, who recognise the increasingly sophisticated nature of wealth management, and seek tailored expertise to formalise their inheritance plans.
As with all family relationships and dynamics, differing values and priorities can often become a source of conflict, especially when wealth is involved, so navigating these challenges are key in ensuring the longevity of the family fortune.
Laying down the rules of the game
To avoid and better resolve conflict between family members with differing attitudes, it’s always advisable to lay down a framework and common set of rules for those connected to the wealth.
One of the best ways to ensure full-asset-protection of ultra-high-net-worth families, is through a family trust run as part of a single family office (SFO). The SFO manages the family’s assets as a custodian, to ensure the wealth’s longevity and acts as a trusted, impartial advisor and mediator to navigate conflict.
Most SFOs manage assets totalling over $200m (£151m, €177m) and involve bankers, asset managers, lawyers, and tax advisers to work with the family to enhance and protect their wealth across generations.
A trust with an SFO structure can support families in defining and executing a long-term plan.
This route is often favoured by UHNWs because you can consolidate all the family’s wealth and investments and manage these through a single point of contact. An SFO is highly complementary to a trust: allowing you to both preserve and transfer your wealth.
The process of arranging a family wealth succession plan though an SFO may typically look like this:
- Establishing the family’s objectives, purpose, and intentions for their wealth
- Identify who the beneficiaries are; family members only or anyone else?
- What assets they hold; are they in a company, estate, investments, or holdings?
- The family will then be linked to the right tax advisors and experts in the jurisdiction(s) of choice to establish a family office and set up any relevant trusts or structures
- Work will also begin with the family to draw up a family charter. This defines any specific requirements for family members and others linked to the family wealth, around what they need to fulfil in order to access it, the rules to enter and exit, and ‘who gets what.’
Moving forward, in unison
The key to ensuring family harmony in matters where wealth is concerned is to remain transparent and ensure individuals and their needs are recognised and considered.
Protecting the family fortune is a collaborative process where accepting different views, values and priorities becomes paramount. Recognising the complexities and challenges, seeking professional advice, going to a law office, and educating the next generation early on lays a firm foundation to ensure the smooth transfer of wealth between generations.
Identifying and establishing shared rules to mitigate risks such as divorce, introduction of outside beneficiaries and the processes around entering and exiting the family office which is equally important and should be drawn up and known by all.
Family relationships are complex and family wealth is no different. There is simply no one size fits all solution to apply, but when done right, an SFO helps protect the harmony and wealth of the family it represents and can ensure its longevity for generations to come.
This article was written for International Adviser by Alice Quek, head of private and client services in Asia for Hawksford Group.