I Families and Family Inheritance
The so-called family is a group of people connected by blood or marriage, and the development from individuals to a small family (and then a big family) can be a complicated and long process. In order to be called a big family, the grouping mustconsist of at least two small families. Sometimes they are composed of a dozen small families after more than three generations of continuous development.
While it’s the wish of any family leader that his family prosper and flourish, the joint efforts of all family members and an effective inheritance from one generation to another is also necessary.
What are we talking about when we say “family inheritance”? Well, in this regard, people's opinions vary from person to person. Some people argue that it’s family culture or family spirit, while others point to family wealth (referring in particular to material wealth, hereinafter the same) or bloodlines. All of these opinions seem to be more or less right. In particular, inheritance viabloodlines should not be controversialbecause without inheritance viabloodlines, there is no point in talking about inheritance at all. For this reason, we will not go into detail about this type of inheritance in this article.
Regarding the relative importance of family culture, family spirit, and family wealth, different people have different views, and there are endless debates surrounding this topic. For me, the inheritance of family wealth is more important than the inheritance of either family culture or family spirit. Metaphorically speaking, without the skin (family wealth), how can the hair (family culture or family spirit) stand?
It’s fair to say that family culture and family spirit exist in all families, no matter how big or small they are. Even an ordinary family has its behavioral values that are passed down from generation to generation,and which ultimately constitute a portion of mainstream social culture. However, without the inheritance of family wealth, the members of the family will slowly drift apart, and it will be very difficult for a family to maintain cohesiveness, especially in this era of the information explosion and individualized cultural diversity.
I have conducted several experiments on different occasions. When asked to say the name of their father or grandfather, almost all the respondents can do so accurately. However, when it came to the name of their great-great-grandfather, none of them raised their hand. The next question was “If your great-great-grandfather had left you a lot of money, would you remember his name?”, and upon hearing that, everyone looked around with knowing grins. Someone even said that he would hang a picture of his great-great-grandfather on the wall in that case. This is really what we mean when we say that theeconomic foundation determines the superstructure.
Some people may raise objections by citing the example of some remote villages, where generations of relatives – although they are not wealthy – live together, have a common family culture, follow the same code of conduct, and form a big, stablefamily. In some cases, they even have common family wealth and a generally accepted patriarch. Is this the result of the inheritance of family spirit and family culture?
No. It is in fact a typical case of the inheritance of family wealth. It is true that families like this are not wealthy compared with others. However, in relatively isolated and undeveloped regions, they are relatively wealthy, and have gradually become the wealthiest groups and most important controllers of resources in these regions through generationsof inheritance and accumulation. In cases like these, each member of a big family receives continuous help and support from the family, and can thrive only under its protection. Thus, the increase in the number of family members testifies to the prosperity of a family thanks to the successful inheritance of wealth. On the other hand, the expansion of a family gives rise to increased contradictions and disputes, and in order to sustain the continuous and balanced development of the family, it has to develop its own rules, culture, and spirit, with which all of its members comply.
Social and economic development offers more opportunities for wealth creation and career development. Mobilized by these opportunities, some members of a united big family choose to leave, and make a living outside the family. As a result, families with less appeal to their members will gradually fall apart. In this case, neither family culture nor family spirit has gone through any fundamental change, and it is the change in family wealth that has weakened family cohesion. One after the other, they leave their big old family behind, and the members of these families become strangers in no more than three generations.
In this sense, family wealth, including accumulated wealth and the ability to create wealth, is the core of a family, while family spirit and family culture are essential elements that help to maintain family health.
II Formation of Modern Families
The Chinese mainland has a long-standing history of family culture. However, because of unique historical reasons after liberation, private wealth was almost entirely put under public ownership, and large, traditional families were almost all replaced by independent small families and loose kinship. Thus, family inheritance at that time was the inheritance of family culture and family spirit only, as there was no wealth left to inherit.
Since Reform and Opening-up in 1978, some people got wealthy first; with the continuous accumulation of personal wealth and the vigorous development of personal careers, these successful first-generation entrepreneurs changed overnight. On the one hand, the huge amount of wealth brought to them all kinds of preferential treatment and honors; on the other hand, they suddenly found themselves being surrounded by relatives who used to be distant and were now serving as helpers and managers in their enterprises. As a result, modern families based on these first-generation entrepreneurs began to take shape, presenting to us the phenomenon of modern family remodeling.
With the same story of family reshaping taking place all over the country, such families began to interact with each other, and form all kinds of cooperative and competitive relationships. To enhance family competitiveness, it was necessary to strengthen family construction, which further led to the birth of family culture through the setting of family vision and the cultivation of family spirit. Some families with great foresight even prepared a family constitution, and established a family committee.
Shenzhen, a city representative of China’s Reform and Opening-up, has just celebrated its 36th birthday, and these successful first-generation entrepreneurs in China have successively entered their twilight years. As creators and controllers of huge wealth (regardless of whether they are leaders of big families or heads of small families), they naturally hope that their immediate family members can unite as one and concentrate on expanding their families and family businesses on the solid foundation they have laid, and that each of their successors can have a successful career and a well-off life.
People say that “wealth iswater”, because water is a resource indispensable to human survival. However, while a suitable amount of clean water is a necessity of human survival, an excessive amount or any toxic dose may cause disastrous consequences. The same is true of wealth. According to conventional thinking, leaving the majority of the wealth accumulated through hard work (excluding normal expenditure and some used for social welfare) to descendants is a natural choice for the purpose of wealth inheritance. In this case, different wealth inheritance patterns yield different results, and this pattern selection has a direct bearing on the rise and fall of a family. The true test of the wisdom of each family descendant is knowing how to put family wealth under reasonable control through rational wealth inheritance planning and the effective allocation and use of wealth.
III Selection and Application of Family Inheritance Patterns
As discussed above, the inheritance of family wealth is the metaphorical skin, while that of family spirit and family culture is the hair. That is to say, the inheritance of family spirit and family culture is meaningful only when there is a proper inheritance of family wealth, and the mutual promotion between them helps to effectively strengthen family cohesion and sustain family development. In this sense, the inheritance of family wealth is accompanied by the inheritance of family spirit and family culture, and talking about the latter without paying close attention to the former means that family inheritance ends up being no more than nominal.
To take a panoramic view from ancient times to present society, family inheritance patterns have differed in their details, but on the whole, they can be classified into four categories: free-style, church-style, dynasty-style and incubator-style.The following is a detailed interpretation of the characteristics and applications of the above four varieties of family inheritance.
1.“Free-style” family inheritance pattern
This type of family inheritance pattern is the most common. Under this, the progenitor does not make any special arrangement regarding the wealth that he leaves, and the allocation of wealth (or lack of allocation) is a decision to be made by his successors. This is probably out of an understanding of and trust in his successors on the part of the progenitor, that is, he believes that they can do better in this regard; or this is because the progenitor passes away before giving any thought to this or making any arrangements. In the former case, usually there will be a proper arrangement; however, in the latter case, inheritance disputes are unavoidable.
A free-style family inheritance pattern is favored by a majority of families, as it is the simplest and requires no prior arrangement by the progenitor. In some cases, the progenitor does intend to make some prior arrangements, but later gives up on the intention, either because he has no idea about how to handle it, or because he believes that any such arrangement may put family relationships in jeopardy and that it’s better to leave it to his successors.
This free-style family inheritance saves the progenitor the trouble of making arrangements, but leaves a lot of troubles to his successors. This can very easily lead to inheritance disputes and family dissensions, or even big fights and the exposure of family scandals, unless all of the successors involved are open to reasoning and are willing to make compromises.
Even in the absence of inheritance disputes, this means of family inheritance only succeeds in dividing wealth left behind among various inheritors; as for what they are going to do with their respective portions (such as giving it to others, investment, entrepreneurship, gambling or squandering), it is none of anyone’s business. As a result, the so-called family no longer exists in this case. For an enlightened and open-minded progenitor, letting nature take its course is a choice, and thisfree-style of family inheritance suits him.
A common expression used by people adopting this free-style family inheritance pattern is “Your own children and grandchildren have their own good fortune!”
2. Church-style family inheritance pattern
A church-style family inheritance pattern is characterized by common belief and pursuit, and collective ownership of all properties, as priests are not allowed to own property.
Under achurch-style family inheritance pattern, the progenitor has equal and infinite love for his children, and expects them to jointly manage the family business, equally share family wealth, and always stick together through thick and thin. Regardless of what his successors may think, the progenitor never allows them to break up the family and live apart, not now, not ever.
What the progenitor emphasizes under this pattern is family solidarity and the sharing of common prosperity. This pattern applies to families with harmonious relationships among successors, which complements the situation. However, if his successors have difficulties getting along with each other, a system that arbitrarily ties them together may lead to a crisis. To say the least, even if they can get along with each other temporarily, it is still difficult to predict whether this harmonious situation can be sustained into the future.
It is true that a suitable legal framework of family trusts can fulfill the will of the progenitor, but, if his successors are not suited to running a business together, this arrangement will lead to intensified contradictions and internal strife, which will ultimately weaken the competitiveness of his family.
KwokTakSeng, founder of Sun Hung Kai Properties, invested his shares of Sunny World Group entirely in his family trust fund, and listed his spouse Mrs. Kuang and his three sons as beneficiaries; his wish was that his sons would pull together to develop the family business. In 2008, the three brothers turned against each other, and the strife was finally stopped by Mrs. Kuang by disqualifying the eldest son,Walter Kwok, as a beneficiary; however, the whole family was negatively impacted as a result. The root of this disaster was that Mr. Kwok selected a church-style family inheritance pattern.
A common saying among people adopting a church-style family inheritance pattern is: “Great things can be achieved, if we all work together!”
3. Dynasty-style family inheritance pattern
In ancient times, an emperor would usually select one of his sons as crown prince, i.e., the inheritor of his throne. When the crown prince ultimately became the emperor, the whole country would fall under his control; in turn, he would select one of his sons as crown prince when he got old. In this way, the other princes could only serve as lords, whose power could be removed by the emperor at will if they behavedbadly. This system guaranteed the successful inheritance of the dynasty and gave rise to the prosperity of the crown prince’s lineage, but other princes and their successors became vassals.
In a business context, a dynasty-style family inheritance pattern means that the progenitor has so profound a love for family business that he is willing to sacrifice anything (even marital happiness and the personal interests of his children) for the prosperity of the family business. Usually the progenitor selects the most capable child as the successor of the family business and pays close attention to the child, while neglecting other children who cannot make substantial contributions to the family business. When the progenitor passes away, the main assets of the family business are inherited by the designated successor, while other children only receive economic compensation.
Through the passage of time, the child inheriting and controlling the family business becomes stronger and stronger, while other children are gradually marginalized in the family. On the surface, a dynasty-style family inheritance pattern appears tofacilitate the inheritance of family wealth, or even carry the family business forward; however, for first-generation entrepreneurs, the family as a whole has failed to receive balanced development, and not every child can equally enjoy the family’s resources, which is a pity. For this reason, it is not family inheritance in its real sense, but only an inheritance of the family business or family business’s brand at best.
Some time-honored families in China have selected a dynasty-style family inheritance pattern. Their inheritance has lasted for more than three generations, but what’s been inherited is only the family business’s brand.
One expression that is common among people adopting a dynasty-style family inheritance pattern is: “What arewe without our company?”
4. Incubator-style family inheritance pattern
According to the definition in Baidu Encyclopedia, “incubator” refers to the equipment for artificial hatching of eggs. Since its extension to the economic field, it means to provide funds, management, resources, planning and other support to a businessduring the start-up phase or difficult situations, thus helping to expand or transform it.
An incubator-style family inheritance pattern involves the progenitor designing a reasonable inheritance plan that considers both the prosperity of the family business and the personal interests and capabilities of each successor. That is, the family incubator, by providing proper growth and entrepreneurial support to each descendant, not only sustains the continuous cohesion and solidarity of the family and the individualized development of each family member, but also achieves the inheritance of family spirit and family culture. It can be described as perfectly satisfactory.
An incubator-style family inheritance pattern does not pursue the inevitability of a family business’s inheritance. Many first-generation entrepreneurs have realized the accumulation of wealth through business operations, so they have special feelings for the family business, and wish that the businesses they started could be passed down forever. This is a simple wish on their part, but whether this wish can be fulfilled depends on several factors.
A.Development prospects and the family business’s ability to develop sustainably. Only a family business with development prospects or sustainable development ability is worthy of being inherited.
B.Whether the family business has been listed. For a non-listed company, it is necessary to assign a suitable family member as manager of the family businessso as to guarantee its continuous operation. Such managers can be a successor or descendent of the progenitor, or a professional manager under supervision by family members.
C.Whether the children of the progenitor are interested in business management and have related management skills. The inheritance of the family business cannot be effectively realized in the following three circumstances: the children are interested in the family business but have no management skills; the children have management skills but no interest; the children have neither interest nor management skills. In this case, it’s best that the family business be cashed out as financial assets for ordinary inheritance. On the other hand, the shares of a listed company pose a completely different issue.
For a family business thathas inheritance value and a suitable successor, it’s as if the progenitorhas won the lottery as he can appoint this person as the primary successor of the family business. As for the other children, they can develop their careers according to their interests and capabilities by receiving the same financial and resource-based support.
However, while the above arrangement has facilitated the successful handover from first-generation entrepreneurs to second-generation entrepreneurs, it is not really what we call family inheritance. The children of the progenitor may go broke, experience a marriage crisis, or die young. In addition, the way they may choose to arrange their wealth is also a factor to be taken into account by first-generation entrepreneurs in preparing inheritance planning. Thus, family inheritance in the real sense must give due consideration not only to the allocationto the second generation, but also to the third, fourth and further generations to come, so that all descendants can receive help and support from the family. In this regard, an incubator-style family inheritance pattern is no doubt an ideal choice.
One of the most prominent characteristic of an incubator-style family inheritance pattern is in the fact that it does not allocate family wealth entirely to children; instead, it sets aside a portion as family assets, and establishes a family fund in the form of family trust. This family fund is prepared for future descendants, and independently managed by a third-party credit institution for wealth management and value-added investment.
Upon the birth of a new family member who is related by blood, the family trust fund provides a certain amount of growth, education, health, and marriage funds for the new family member according to the allocation rules agreed upon. When this new member has reached an age suitable for entrepreneurship, the family fund offers another considerable amount of entrepreneurial funding, so that he or she can develop a career in their personal interest (as long as it passes an audit by the family trust fund’s auditing committee and does not violate any rules set by the client). In addition, a family member undergoing significant difficulties can also receive life insurance and re-starting support from the family fund.
The family trust fund is like an incubator for the growth and entrepreneurship of new family members, and it offers support to them during growth and entrepreneurship without compelling them to carry on running a business started by their progenitor. That is, they can pursue their own interests due to the support offered by the family trust fund. Personal interestsare the best teacher and a constant source of motivation, so successors that fall within this arrangement are more likely to build successful careers.
Traditional inheritance patterns tie all successors together onto the same big tree, the health of which has great bearing on everyone involved. In contrast, an incubator-style family inheritance pattern not only retains the business started by the first-generation entrepreneur by giving due consideration to the traditional demands of inheritance of the family business, but also offers continuous support to every new family member by establishing a family trust fund, so that more family members will start more new family businesses. That is to say, while family members are still arguing over the original tree under traditional inheritance patterns, an incubator-style family inheritance pattern has helped successors effectively build a forest and truly realize sustainable family prosperity.
In addition, a family trust fund not only offers growth and entrepreneurial funds to family members, but also supports the education, health, culture, charity, entertainment, and other functional expenditures of the whole family; it is the unifying aspect for all family members. Under this arrangement, no matter how far family members are away from each other, they can always be gathered together by a series of family activities, and can enjoy the honor and pride of the family.
In this regard, Li Ka-shing’s approach is very representative. While choosing the more conservative Victor Li as the primary inheritor of the family business, he has also helped his second son Richard Li build a digitaltelecoms kingdom with equal amounts of funds and resources, so that both of his sons can have the best arrangement to suit their personalities. In addition, he has established a family trust fund (which holds a considerable proportion of shared family wealth) to meet the demands of the family. Ancestral temple culture in ancient China also has the nature of an incubator-style family inheritance pattern.
A common saying of people adopting an incubator-style family inheritance pattern is: “Home is the warmest shelter in the world.”
IV. Conclusion
With more and more first-generation entrepreneurs reaching or exceeding their retirement age, combined with the advent of inheritance tax on the Chinese mainland, inheritance is becoming a topic of great concern for many families.
So, what can you inherit, and how?
Inheritance must not only protect the status and authority of first-generation entrepreneurs within the family, but also give due consideration to the capabilities of second-generation inheritors, the possibility of marriage change, the risk of debts, the possibility of squandering, and the possibility of family estrangement due to improper allocation, as well as the interests of more generations to come. After all, these are all generations related by blood – and therefore equally important – to first-generation entrepreneurs.
As the creator of family wealth, a first-generation entrepreneur enjoys an authority no one dares to challenge in the family; however, if the planning and arrangement made by him cannot be effectively implemented after his death, all his efforts will be wasted. For this reason, the arrangement of inheritance issues must be made using the law as a tool, especially family trusts. In fact, family trustsare a tool widely used by successful businessmen and wealthy families all over the world for the purpose of wealth protection and inheritance, and a secret weapon highly favored by many notable families, like the Rockefellers, the Kennedys, the L'Oreals, the Nobels, etc.
According to the provisions of the Trust Law of the People's Republic of China, after a client dies, the trust shall remain valid as long as there is a beneficiary. In other words, the arrangement of family wealth and the restriction on beneficiary behavior by the client through the provisions of family trust shall be protected by law even after his death, and be implemented by the entrustee according to law under supervision by the supervisor; there is no deadline and, in case of a violation, legal sanctions shall be imposed.
Family inheritance means the inheritance of wealth, culture and spirit, and more importantly, the inheritance of responsibilities and love. Regardless of the specific pattern selected, to ensure family inheritance, it is always necessary to prepare a careful plan, and guarantee the thorough, continuous, and faithful implementation of the will of the progenitor.
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(Author: Li Wei, Founder of Milan Bella Family Office and Chief Advisor of Family Wealth Protection and Inheritance)
