Some time ago, there was a piece of news that exploded suddenly in WeChat Moments. Hong Kong billionaire, Mr. Poon, had put his assets in an offshore trust a few decades ago. He, his wife and children were all beneficiaries of the trust. Decades later, when the couple got divorced, the wife took the husband to court in Hong Kong in order to divide the assets in the trust. The court eventually supported the wife’s claim that the assets in the trust were the communal property of both spouses, and they were divided equally between them.
In this case, there are two points worthy of attention. The first is that the court adopted quite an innovative view that's been introduced in recent years in the Crown Dependencies in a few divorce cases involving discretionary trusts, on the debate of whether trust assets can be isolated from matrimonial assets (“the court looks at resources, not just at ownership”). The second is the consideration and planning of matrimonial assets by high-net-worth individuals before setting up a trust. A more thought-provoking question is whether trusts are the only elective tool for achieving family prosperity and family inheritance. Besides trusts, what needs to be done to achieve family wealth transfer and inheritance?
Another well-known case is that of Anita Mui Yim Fong (Anita Mui). She studied art as a young woman and has been in the entertainment industry for decades, creating a vast net-worth. In order to prevent her mother from squandering her inheritance, she set up a trust before she died, and poured most of her estate into the trust through a will, and agreed that the trustee would distribute HK$70,000 from the trust every month for her mother’s living expenses. After the death of her mother, the remaining assets would be donated to the New Horizon Buddhist Association Limited.
However, Mui’s mother was not satisfied with the arrangement, so she filed multiple lawsuits against the trustee of the trust, Anita Mui’s attending physician, and New Horizon Buddhist Association Limited. Eventually, Mui’s mother faced bankruptcy because she could not afford to pay the high legal fees, and the expenses incurred by the trustee in response to the lawsuit had to be spent from the trust property. The series of lawsuits depleted the liquid assets in the trust, and the trustee had to auction Anita Mui’s physical estates. Anita Mui’s personal reputation has also been affected during this series of lawsuits.
The question is: Is Anita Mui’s trust successful or unsuccessful? Personally, I think it’s both successful and unsuccessful! What’s successful is that the trust structure is flawless, and Anita Mui's mother couldn't break through the trust from various angles; what’s unsuccessful is that Anita Mui's mother was too obsessed with her daughter’s huge estate, and the trust lacked adjustment mechanisms, so the trust established by Anita Mui did not meet Anita Mui’s dying wish to “guarantee her mother a decent life”. Mui’s mother was still down and out in the end. This reflects the problem that high-net-worth individuals must face in matters of family inheritance: the importance of Family Governance.
From the Rockefeller family’s “one’s self is only the custodian of wealth” to the “altruistic concept” of the Taiwan Advantech Family (one of Panhe’s clients), these values are intangible but will bring everlasting and inexhaustible energy to the two families. As a devout Buddhist, Anita Mui paid attention to alms-giving (donating her remaining property to the Buddhist Society), but failed to carry out an important spiritual alms-giving (the influence of intangible property) because of her sudden death, and didn’t have a chance to transmit the Buddhist value “anatman” to her family.
At the moment, more and more families have completed their initial accumulation of wealth, and now they are beginning to face the problem of the second generation’s cultivation and inheritance. After going through numerous hardships in wealth inheritance, they gradually realize the importance and urgency of intangible wealth inheritance, and they begin to pay attention to “Family Governance”. Good Family Governance should be an all-around system — from the induction of Family Values to the forming of the family regulatory framework, including Family Constitution, Family Congress, and Family Councils, to emotional expression during family gatherings to enhance family cohesion. In addition to organized professional planning and implementation from the family office, family members’ intentional participation is indispensable. Family Governance has never been accomplished overnight.
There is such a Chinese family; they may not be the richest, but they must be famous overseas. That is the Pei family in Suzhou. The Chinese architect Pei Yuming, who is renowned at home and abroad, comes from this family. The Pei family has never interrupted its development in the 500 years since the Ming Dynasty. This is a famous family which has thrived for 15 generations. The reason for this is that the family’s ideological inheritance is really engraved on every generation’s mind, namely: “It is better to bequeath descendants the virtue than to bequeath descendants the property; it is better to bequeath descendants the public property than to bequeath descendants the exclusive property.”
Mui’s, Rockefeller’s, and Pei’s families all made plans for inheritance. Two of them have included family wealth into trust and used properly the legal tools developed in Europe for hundreds of years. Another aspect is passing on the family spirit from generation to generation, in line with the old saying: “If the children have talent, why worry about the children’s wealth”.
There’s no right or wrong about these two inheritance methods; the two can be complementary to each other. After hundreds of years of case law accumulation and development in Europe, trust law has become an effective and systematic method for the protection and inheritance of family wealth. It is an important tool for the sustainable planning of family property by high-net-worth individuals. But, if a family wants to inherit and prosper from generation to generation, family trusts alone are far from enough. The key to “Taoist principles and tactics” in traditional Chinese ideology is that three elements must form a trinity in order to lead to a happy ending. In recent years, there have been many asset dispute cases among rich families. How can we avoid and overcome these disputes? Effective and in-depth “Family Governance” is an indispensable key factor.
The scope of family governance is very wide. A good family governance mechanism should at least integrate family members’ emotions, health, investment, charity, and career into the same system. The Constitution is usually considered as the fundamental law for many countries; likewise, a family also needs to have such a Constitution, which provides guidance for the future development and planning of the family. Under the Family Constitution, the Family Councils emerge as required, to be responsible for the decision-making and implementation of important family affairs. Taking the “Family Emotion Council” as an example, many people may be very unfamiliar with such a council in the family, and not know the meaning of its existence or how to operate it.
This council, however, has the most important mission in family inheritance. The larger the family, the more entangled the interests of all parties. How can one resist the temptation of wealth? In the face of difficulties, how do family members stand together regardless? The significance of the existence of the “Family Emotion Council” is to remind family members of the family’s original aspiration whatever the situation is, and to let them always remember that their family founders endured great hardships in their pioneering work. This is also a question that many high-net-worth families need to think about deeply at the moment.
Ancestors always want to leave the best things for their children and future generations. Wealth, in their opinion, is the most secure and useful thing. But is it helpful just to inherit wealth? Family Governance is to achieve family members’ collective strength through the comprehensive cohesion and integration of a family. If you want to achieve inheritance from generation to generation, family governance is indispensable.
