ealth cannot be passed beyond the third generation". This perception of difficulty in passing on wealth across generations is widespread. In fact, inter-generational inheritance itself is not difficult. The development of modern family trusts has entered the stage of a family office with richer content.
Almost all the modern and traditional elements of family heritage and governance have been well integrated into this structure, making it an important tool in breaking this urse
Although we e long heard that industry insiders complain that Chinese clients were illinformed of and resistant to overseas trusts and private foundations, but there is room for optimism. If China continues its reformation and opening-up policy, regardless of the pace, as long as it marches ahead, Chinese capitalists, with global visions and a keen understanding of China, will accept the concept of family trusts faster than the affluent people in any other place. They will have a profound impact on this industry.
Untying the Chinese Peoples Knot
Compared with the Cologne Cathedral, which took 300 years to build, most of China historical monuments were reconstructed in the Ming and Qing Dynasties although China boasts 5,000 years of history. Looking to the past, ancient civilization are only recorded between the lines of history books with only a few real treasures passed on. The side effects of China's rapid development are prevalent fetishism and impetuous people. There are statistics showing that the average time spent annually by Chinese people on reading time is only a percent of Israelis, the world's most active readers. Chinese architectural buildings and bridges often collapsed. A lack of long-term planning, combined with corruption, is also a reason. China has already become the world second largest economy and Chinese capital is rampant in overseas M&As today. The accumulated wealth of Chinese people is also astonishing. Protection of privacy, long-term planning and balance of internal relations are among the issues that are high on the agenda. However, it hard for Chinese people to accept useful tools to address these issues, which has surprised many overseas trustees. The reasons behind this may be only known to a few people proficient in Chinese and foreign cultures.
Is an Overseas Trust Reliable?
Forget the past. Today, the world's two largest commercial banks, Citigroup and HSBC, have laid their foundations between the late Qing Dynasty and the foundation of the People Republic of China. The excess profits came from the Qing government and the wealth of the Republic of China during the troubled times; at that time, both the government and the people had no better choice but, just like a lot of people today, transferred their wealth overseas and emigrated. In a society lacking trust, there no guarantee for the safety of wealth. Over a long period of time, due to the management structures of wealth for Chinese high net worth individuals, there has been no other choice except for the western trusts and foundations. In this context, learning to use the trust is indispensable. Is an overseas trust really unreliable? In fact, it just the opposite.
First of all, the trust is the natural development of the Western society. It started from church tradition with hundreds of years in legislative experience and has been evolving with growing and changing needs. Both authorities and private sectors respect such social rules. That just contrary to the situation in China where private rights are not well respected. In addition to supervision bodies and courts, trusts in many jurisdictions are backed by commercial insurance. The trust mechanism in the entire Western community is very mature and complete.
Second, trustees are professionals (mostly lawyers, accountants, and other licensed persons), and they have experienced many years of training and have undergone strict selections to obtain these qualifications. The trust companies they work for usually have the experience to manage the wealth for several generations. Working for the benefit of beneficiaries is the life of the trustees. As such, any dishonesty and breach of contract will cause irrevocable damages to the trust company and individuals who conducted the wrongdoings, which may in turn have their property frozen, face sentences in jail and even be spurned by the society. Escaping with clients money, which Chinese suspect their advisors are doing, is what a professional trustee wouldn imagine.
Judging from the history of trust practice, instances of trustees hijacking the wealth of beneficiaries are rare. So the risk of choosing a trust is hundreds of times smaller than that of not choosing a trust.
Facts speak louder than words. In recent years, the development of overseas trusts and family offices also confirmed the confidence of China high net worth individuals in developed jurisdictions and their recognition of the trust rules.
The Spiritual Core of the Family Office
Trusts and foundations do not only feature privacy, tax savings and asset preservation, but also can be used to establish pan-family offices to pass on the family spiritual wealth, which is the key to pass on family heritage.
In the past 30 years, the family office has become an upgraded version of the family trust. It not only stipulates the property's benefit rules, but more importantly has the family charter, which is spiritual code of family governance and Inheritance, making the spirit of enterprise, the essence of the family business, inheritable. Private companies, which were able to achieve intergenerational developments, all had clear family governance charters with the help of professional institutions and tools to get them implemented.
IKEA boss Ingvar Kamprad transferred his wealth to a Liechtenstein Foundation long ago and began to gradually distribute the management rights to three sons. The whole process took several years. The IKEA empire is still in its heyday. Just like IKEA, its founder Kamprad pursues a simple life but is keen on changes to make innovation accordingly. Such a concept helps IKEA become a leader in the home decoration industry.
Each successful story of wealth inheritance in the West is a wonderful spirit builder and is very impressive and thought provoking.
What Should China's HNWI do?
Differing materially from the affluent people in the West, China's richest individuals are often in their youth and prime and are aggressive in business expansion. Their family wealth is characterized by active investment based on business opportunities,instead of passive investment for heritage purposes. However, this does not mean the family wealth planning should be postponed. As Chinese enterprises have little experience in family succession, there is a lot of fundamental work that needs to be done. Now is the best time to build a structure and draft the family charter.
Based on my own experience and knowledge, I listed a few key considerations for China's high net worth individuals in terms of family wealth management planning. I hope they can be helpful to the readers:
Set up a family spiritual wealth file to develop family mottos and instill them in the family and the enterprise;
Establish trusts and foundations and put the wealth under control of a family holding company; gradually improve the family assembly system;
Learn trusts and foundations-related taxation and legal knowledge and try to fully understand and make full use of the rules over building structures and their governances;
Find appropriate professional consulting teams, such as lawyers, tax consultants, charitable consultants and other professionals;
Loving your children is not about giving them much wealth to enjoy, but fostering their ability to harness the wealth;
Focus on the education of children and family members, equip people with knowledge, wisdom and vision;
To cultivate, retain and manage people, offer sufficient incentives to professional managers, but still retain effective restrictions;
Let the children work from the grassroots level, and do not let them become irborne leaders
China has 9 million private enterprises, with annual growth rate of over 15%. The large group of entrepreneurs will face wealth succession issues in the next half century.
