Family fortunes - a wave of Asian tycoon wealth set to pass to next generation | Article – HSBC VisionGo
Week in China talks to an expert from HSBC about estate planning – she explains why the coronavirus has generated more conversations for her team
With the death of Macau casino mogul Stanley Ho in late May, the subject of inheritance and estate planning once again became a topic of conversation in Hong Kong. With four wives and 17 known children, the 98 year-old’s death was likely one of the more complicated exercises in wealth transfer in recent memory. And with some of Hong Kong’s other tycoons in their nineties, there is a sense that a substantial amount of family wealth will soon pass to the next generation.
This is also a common theme among aging business founders in mainland China, who have also started to think about estate planning. To understand more about some of these issues WiC spoke to Cynthia Sze Wing Lee, HSBC’s head of Private Wealth Solutions in Asia. As an expert in the field with over 26 years of experience, she says the number of enquiries about estate planning has surged in recent months – in part driven by concerns over Covid-19.
How much wealth do you estimate will be transferred by Asian families in the next 10 years or so?
In the next 10 years, our research shows that Asian families will pass on wealth of around $1.9 trillion to the next generation.
Is estate planning quite straightforward in Hong Kong compared to some other parts of the world, thanks to its lack of inheritance tax rules?
A successful transition of family, business and wealth across generations is the key motivation for estate planning, and clarity over inheritance tax rules in Hong Kong is what has made estate planning in Hong Kong more straightforward. For instance, Hong Kong abolished estate duty in 2006, and its simple territorial tax regime and wide tax treaty network helps to simplify planning.
What do families try to achieve with estate planning?
Families generally look for a number of things, from an orderly transition, business control and management decisions to ownership or simply having the right successor in place to help manage the family wealth for the generations to come.
Secondly, protection. This could mean shielding the family from poor investments, credit risks, matrimonial disputes or other forms of risks within their business or within the family. In this regard, there needs to be consideration of the form of the structure to be put in place to ensure that family wealth can be passed on to the intended family members.
Finally, another trend that we have seen and have been actively working with is families looking to build their legacy. For instance, it could be a philanthropic endeavour designed to make the world a better place such as poverty relief, building schools or infrastructure, as well as doing their bit to support their community in Covid-19 relief efforts.
What are the tools that clients can use in estate planning?
There are a variety which can be employed for the purposes of estate planning. They can range from utilising various legal structures and arrangements such as wills, trusts and foundations, or family offices to achieve the goals of the family.
Aside from transferring wealth, many families also want their family values and heritage to be passed on. This has a lot to do with education and the grooming of future heirs. Families are also increasingly deploying funds for common activities which support their values and identity, as well as do their part in society.
What are the difficulties that inhibit estate planning?
Procrastination. I’ve been in the industry for 26 years now and what I’ve observed is that estate planning is not something that people will come to think about regularly or early on in life, as confronting their own mortality is difficult.
Estate planning is important but not frequently seen as urgent. People tend to think that they have an entire lifetime to plan for it and that there’s always more time. However, the process of organising wealth accumulated over a person’s lifetime and involving the next generation takes time and careful consideration, and is a much lengthier exercise than most would imagine.
Taking the initiative and seeking expert advice is key. At first, this can be a daunting task with a lot of moving parts, most likely generating more questions than answers. Part of our job is to help prioritise this thinking and these decisions for our clients. There can always be chances to adjust the plan as time goes on and as the family dynamics change – estate planning can be as flexible as you want it to be.
HSBC has over 70 years of experience in acting as trustee for international families across multiple generations. We understand that it is difficult to have each and every detail contemplated on day one. We typically encourage clients to prioritise short, medium and long-term objectives and tackle them accordingly. Given we are in a world of constant change, flexibility is key
A lot of tycoons from mainland China send their offspring to international schools in Hong Kong. Is it similar with their estate planning? Do they try and do more estate planning here increasingly too?
In its simplest form, a trust is a common law contractual arrangement between a Settlor and a Trustee. However, jurisdictions such as mainland China, Japan and Germany operate on a civil law system.
As Chinese families and businesses grow, they naturally develop footprints offshore. This could be through transactions in the international capital markets where families find themselves operating under different legal regimes. If it’s a common law regime, the estate planning tools discussed above could be considered.
Is estate planning more difficult for high net worth individuals in mainland China than in Hong Kong?
Ultimately, as I have explained, families approach estate planning for a number of reasons and objectives, the primary one being to achieve an orderly succession.
The primary challenge of estate planning has more to do with soft factors than the legal regimes and their implications. These include, for instance, the choice of successors; ownership control and management of the family business and wealth; and decisionmaking and conflict resolution frameworks.
I would think that these issues would be common across the board, regardless of where families are situated.
At HSBC we work with families through the thought process, strategising and implementing frameworks that embrace the family values and provide a way forward for everyone, drawing from the expertise of local advisors as and when appropriate.
What about inheritance taxes in China?
Currently, there is no inheritance or gift taxes regime in China. An inheritance tax has been proposed since 1994, but has not been enacted.
Are life insurance policies popular as an estate planning tool?
Insurance is commonly used with wealth and estate planning. It is a flexible tool which can be used to increase the estate, equalise beneficiary distributions, diversify the investment portfolio, and for liquidity planning.
Let’s say a Chinese citizen is looking to purchase a UK property, where there is 40% inheritance tax. It is not uncommon for people to get insurance policies from international insurance carriers so they can settle that tax bill with the death benefits, rather than having to potentially sell that property to raise the liquidity to cover the tax.
We can work with clients to determine the optimal combination of various wealth planning tools, such as insurance and trusts, to help address specific client scenarios and needs.
We also have clients looking to fund their foundations with their own life insurance policies to ensure continuity of funding beyond their lifetimes, so as to continue the legacy, the goodwill and the projects that their foundations are committed to.
At HSBC, we have a dedicated philanthropy advisory and charitable services team that works with families across generations to achieve their philanthropic objectives and give back to society.
Has the pandemic generated more conversations for your team and prompted people to think more about these issues?
We’ve seen soaring demand since late February when the pandemic spread more widely and quickly. The number of meetings that our wealth planners have gone to has more than doubled since March, notwithstanding the difficulties brought about by Covid-19 in having face-to-face meetings.
Some clients have come to us to ask for help with putting their wills in place, which could be the first step in any form of wealth succession planning. Some realise that their trusts need revisions made as the asset profile has changed and the risks facing them and their businesses might have increased.
Basically the pandemic has provided a window and some downtime for people to really think about their plans as a family. It has also made some clients reflect on mortality. Many clients come to us for a comprehensive review of their wealth planning arrangements and we are glad that we are able to support them from a number of aspects, from wills and probate services, insurance needs, trust administration, family governance and family office advisory, to philanthropy.
Is one of the reasons why people “procrastinate” over estate planning because they anticipate arguments between family members?
I tend to think from the contrary perspective. It’s exactly because we want to avoid those conflicts and tension and arguments in a family that we do need to plan. It is human nature to shy away from things in life that we find challenging to deal with. We appreciate that no one has the answer to everything but what is really important is to be able to draw on the experience learned from similar journeys that other families have gone through. In this respect, a neutral third party could help de-conflict emotionally-charged discussions and help to bring a rational balance between individual needs and wider family objectives.
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