Asian clients frequently invest a lot of time putting legal structures around traditional assets such as cash, bonds and property, but luxuries like fine art, racehorses, antiques, wine and watches rarely have any structuring in place, says Stuart Dowding, managing director for First Names Group in Hong Kong.
According to a Deloitte report, wealth is increasingly being held in alternative assets, which have enjoyed 7-8% returns – outstripping a low return environment in traditional equities.
In Hong Kong these alternative assets frequently add up to more than half of an ultra-high-net-worth (UHNW) individual’s legacy, creating a huge opportunity for wealth professionals, observes Dowding.
Though the Special Administrative Region levies low taxes on personally held assets, structuring remains highly beneficial as it protects assets for the next generation, for example against disputes over wills or from attack in divorce proceedings; two prominent concerns in Asia.
According to Dowding, the Hong Kong courts see too many cases of disputed assets, which either had no structuring or incorrect structuring in place, and he expects these numbers to continue.
“Many of our private clients in Asia are only familiar with structuring their financial assets and have been under the misconception that luxury assets cannot be held in such a way. Hence why this area of asset structuring is so often overlooked. It’s our duty to educate and mentor clients through the process of protecting their passion investments while ensuring they are able to enjoy them too,” says Dowding.
A typical structuring approach might involve the creation of an alternative asset trust, which has a 100% shareholding in a holding company and is administered by an independent trustee (such as First Names Group). The trustee would coordinate appraisers, insurers and storage of the assets as well as provide financial reporting.
According to Dowding, private foundations are also proving to be an increasingly popular alternative, owing to the greater level of control they provide. A private foundation allows parameters to be set for the use of an asset, and the benefactor can remain involved through appointment to the foundation’s council.
On top of the education challenge around luxury asset structuring, it is important to be aware of the fact that many Asian clients will have built fortunes in one generation and either haven’t considered retiring in favour of another generation or consider it tempting fate to plan for the devolution of assets following their death.
Dowding concludes: “As fiduciaries we have a duty to support our clients in implementing relevant, well-run structures that serve to protect the full spectrum of their wealth. As the popularity of alternative assets continues to rise, there is a significant opportunity for those advisers and service providers with luxury asset expertise who are able to assist UHNW individuals in adequately protecting these assets for generations to come.”
First Names Group does not provide legal, tax or investment advice and the commentary provided in this article should not be regarded as such.