Wealthy Chinese must bridge serious gaps in their understanding of succession planning or risk costly legal battles and needless public squabbles.
Family wealth can sometimes be more of a burden than a blessing, as discussions around wealth distribution can weaken family relationships. Wealthy family disputes in Asia resulting in negative headlines and open court hearings have drawn a lot of public attention. We have seen a number of high-profile cases occurring across Asia.
In our recent survey, “How to service Chinese wealth as it goes global”, we found that family disputes weigh heavily on the wealthy as they consider succession planning. It is essential for wealthy families to seriously consider succession planning and realize how gaps in their understanding of it can lead to complex legal battles.
Knight Frank’s most recent wealth report indicated that the number of ultra-high-net-worth individuals (UHNWIs), with net assets of US$30 million or above, grew 10 percent in China last year. This number is expected to expand by 140 percent in the coming 10 years. With this exponential growth rate of high-net-worth individuals (HNWIs) and UHNWIs, wealth structuring and transition will become increasingly crucial.
However, our recent research reveals that there is a gap for Chinese HNWIs and UHNWIs in familiarizing themselves with wealth structures and addressing succession planning issues.
There are two main reasons for this. First, wealthy individuals on the mainland are younger than in other countries and so might not have the same urgency to plan for a generational shift. The second reason is the challenge to select overseas investment opportunities due to a lack of local products.
They must understand that wealth preservation isn’t just about investing assets. It can also be a part of developing a succession plan and getting the next generation involved.
According to a wealth report by the Williams Group wealth consultancy, 70 percent of wealthy families lose their wealth by the second generation, and a surprising 90 percent by the third generation. To preserve their wealth, wealthy families will need a well-considered succession plan even though it can be a thorny issue to address, but one that will not go away.
The misconception of loss of control is one of the main reasons that hinders Chinese wealthy families from building a wealth structure for their assets.
In Asian cultures, privacy remains fiercely guarded when it comes to one’s personal wealth. In China, the first generation of HNWI family members and even the entrepreneurs are often still alive, meaning that they will be hesitant to cede control of their assets since they were the ones who accumulated it and controlled it initially.
Another gap that needs to be addressed by wealthy families is selecting trusted professionals to manage their finances. The reluctance to seek professional wealth manager’s advice appears to be based around a real or perceived fear of loss of control.
To address this gap and the fears associated with it, we believe wealth management advisers should be targeting the next generation in these wealthy Chinese families. This is because these individuals have usually received education overseas and tend to be more open-minded around letting outsiders into their inner family circles.
It is important to help the next generation understand that wealth preservation should go beyond investing assets, and needs to be part of developing an overall business succession plan.
That being said, succession planning should happen slowly with both generations involved in the overall process. This will help to create a smoother transition as the next generation will have been on board from the beginning.
Complying with global regulation standards
Chinese HNWIs have increased their overseas investment mainly to diversify investment risks, to capture market opportunities of overseas investments and to migrate. According to the China Private Wealth Report 2017 published by Bain & Co. and China Merchants Bank, the percentage of HNWIs with overseas investment has risen 56 percent in 2017, up from 19 percent in 2011.
The lack of domestic products has also prompted them to select investment opportunities overseas. Additionally, the increased scrutiny of overseas transfers will create more obstacles for them to move money from the mainland.
The implementation of the Common Reporting Standard (CRS) and other reporting requirements, as well as increased restrictions on capital flows, and reforms to immigration programs and property ownership taxation rules (such as in the UK and Australia), have led to a need to adapt and comply.
For example, from 2018, under the CRS, China will start receiving information from overseas tax authorities about Chinese residents that hold certain financial accounts outside China. To ensure Chinese wealthy families do not break any laws, they should seek out wealth management advisers who are experienced in managing cross-border wealth in line with the latest global regulatory standards.
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