Date
17 October 2017
Family wealth can be successfully handed down across generations. In the family trust business, service providers offer more than wealth preservation advice. Photo: China Merchants Bank
Family wealth can be successfully handed down across generations. In the family trust business, service providers offer more than wealth preservation advice. Photo: China Merchants Bank

Why money talks in the family trust services business

China’s first generation of entrepreneurs is approaching retirement age. Hurun Report, a wealth and market research firm, estimated in a report last year that the nation’s high net worth individuals with disposable assets of 1 billion yuan (US$161 million) or more have turned 50.

In the next five to 10 years, more than three million medium to large private enterprises will pass from their founders to the second generation or professional managers.

Needless to say, this trend is a gold mine for wealth managers, private banks and other providers of tailor-made services.

In the past, the primary interest of wealthy mainland entrepreneurs and factory owners included some form of tax-saving arrangements or takeover advice.

Today, they’re interested in solutions for a whole set of issues from emigration, children’s education, avoiding sibling rivalry and succession, Crystal Jiang, partner of Hong Kong-based Donglin Family Office, told Southern Weekend.

Also, media reports say academics from Tsinghua University’s PBC School of Finance, the only business school in the mainland that offers family business management courses, have been giving lectures to VIP customers around the country for up to 30,000 yuan for a two-day workshop.

Their clients include Minsheng Bank (01988.HK, 600016.CN) and China Merchants Bank (03968.HK, 600036.CN).

The baseline for the bespoke service is 100 million yuan in total net assets. Many of the target families are in coastal areas. Ningbo, for instance, has more than 100 families above that level.

Preserving family wealth is a major goal of the service, ensuring a smooth succession another.

But senior executives may not be happy working under a successor who may be younger than the company. Some may decide to leave but others could try to usurp authority.  

A well-trodden solution is a family trust in which a company founder and other family members can transfer their shareholdings to a designated beneficiary, in most cases a son or daughter of the founder, to maintain control of the enterprise and its subsidiaries and ensure a smooth transition.

Senior executives can be given shares of these subsidiaries as limited partners.

Such arrangement can be useful in avoiding conflict between inheritors and preventing legal wrangles over extramarital affairs or divorces that could impede the business.

One example is Longfor Properties (00960.HK). Chairwoman Wu Yajun, the mainland’s wealthiest businesswoman, had the foresight to set up two independent family trusts for her husband and herself through HSBC International Trustees before the company’s flotation in 2008. Since then, the trusts have been the largest shareholders of Longfor.

Both parties agreed to terms and conditions on splitting the family wealth. When the marriage broke up, the couple’s HK$57.7 billion (US$7.44 billion) in assets was secure and the event hardly created a ripple on the stock market.

Providers of family wealth services can earn commissions up to 2 percent of the value of a family trust plus a 20 percent dividend on any net earnings from investments or acquisitions.

With so much money to be made, some service providers are said to go the extra mile to please their clients. Think giving hush money to a mistress is above them? Think again.

– Contact the writer at [email protected]

RA

EJ Insight writer

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