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Is “clogs to clogs in three generations” an unbeatable curse?
Not necessarily. There are many wealthy families in the West, like the Rothschilds from the finance industry, the Rockefellers in the oil business and the Guggenheims in Mining that have passed their wealth down to the younger generations for over 150, or even 200 years. Through family motto, formation of trusts, well estate planning and philanthropic work that help preserve the legacies from generation to generation.
Now, let’s look at the Chinese nation.
- The deceased Hong Kong diva Anita Mui set up a testamentary trust with her hundred-million HK dolllars assets through a professional trustee to ensure that her mother can receive a monthly allowance of HK$70,000 until she passes away.
- The deceased Hong Kong entertainment mogul Sir Run Run Shaw had put most of his wealth into The Sir Run Run Shaw Charitable Trust, which serves as a family trust as well as a charitable trust, and it would support community projects and prevent family discord.
- The married couple Wu Yajun and Cai Kui set up their own individual family trusts through HSBC International Trustee Limited before China Longfor Properties went public in 2008, and transferred their shares of the company to the trusts. The arrangement help avoiding the share price of Longfor Properties being affected when the couple divorced in 2012.
- Wang Yung-ching and Wang Yung-tsai, founders of Taiwan Formosa Plastics Group, keep the ownership of Formosa Plastics Corporation, Nan Ya Plastics, Formosa Chemicals & Fibre and Formosa Petrochemical within the family through offshore Shareholding Trust and Cross-shareholding. Through the Chang Gung Medical Foundation and five offshore trusts established in America and Bermuda since 2001 to ensure that the shareholdings and control of the companies are to be the best interest of the family and the sustainability of the group.
It is believed that the trust concept was first introduced in the 11th or 12th century when many English cavaliers departing for the war entrusted their wealth with someone trustworthy before they embarked on their unpredictable journey. The trustee had to protect the assets against the prying eyes of the government officials until the male successors of the cavaliers came of age. This practice of “trust” offered the soldiers a protection against uncertainties.
Trusts have been playing an important role in the inheritance, estate planning and protection of wealth in countries adopting Common Law, such as the U.K. and the U.S. According to a trust deed executed under the trust law, a settlor will transfer the title to his assets to a trustee, who will then perform his duties according to the settlor’s terms and conditions in the deed for the benefits of the beneficiary. Assets entrusted to a trust may include cash, bonds, properties, stocks, high-value insurances policies or yachts, and the transfer and registration of assets are subject to the laws and regulations of the countries at where the assets are located. Trust is not a legal person but a relationship. In order for the trust to be valid and protected, it is crucial that the premise where the offshore jurisdiction governing an offshore trust has a comprehensive legal system on trust law, clearly stipulates the obligations of the trustees and protect the interests of the settlors and beneficiaries. Therefore, it is important to choose a suitable offshore jurisdiction with a sound legal system, tax neutrality, robust regulation and good reputation.
A trust is primarily set up for the following purposes:
- Asset protection: Generally, after transferring his assets to a trust, the settlor ceases to be the owner of such assets. The trust is thus serves as a “firewall” that protects the assets from the claims of creditors. However, trusts cannot be used for debt and tax evasion; otherwise the asset protection feature will be invalid.
- Estate planning and succession: A well-planned family trust will clearly define the ownership and beneficial interest of the family wealth to avoid the lengthy and costly process on probate.
- Confidentiality: due to the structure of the offshore trust, details will not be registered and disclosed in the public record. This helps to maintain the privacy of the family asset comparing to a direct inheritance from the family..
- Risk management: A trust protects the assets from country-specific, political, legal and employment risks, as well as risks caused by family issues, such as any inheritance fights and future marital relationships.
- Consolidation of global assets and effective tax planning: In an increasingly globalized investment world, trusts facilitate centralized management of family assets, allow for an effective capital and performance monitoring system, and support a comprehensive tax planning.
- Sustainability of family businesses: By transferring the equity interest to a trust, the successors may continue to operate the family business if they want, or engage an external manager to ensure that they, as the beneficiaries of the trust, can enjoy the returns generated by the family assets without getting involved in the operations.
- Philanthropy: The family assets can be persistently contributed towards the community under the supervision of the trustee.
While many entrepreneurs still choose to manage their wealth themselves, they should start considering a succession plan as they are getting old. A trust tailored to meet the family’s specific needs can indeed help preserve the hard-earned wealth for the future generations. Will your wealth sustain for three generations and beyond? It all depends on your next step!