This is a sponsored article from Morgan Stanley.
The pandemic has added a sense of urgency to the need for succession planning of Asian HNW families, with more families anxious to start earlier with their preparations for passing on wealth to the next generation. Morgan Stanley Private Wealth Management Asia shared with Asian Private Banker what makes a good succession plan.
Susanna Fung, head of asset planning group at Morgan Stanley PWM Asia, has been in the industry for nearly 20 years. Her team works with external professionals to help establish appropriate wealth planning strategies for family office clients.
Fung told APB that some clients have expressed the wish that their next generations are sufficiently cohesive and united to run the business. “They would love the future generations to participate early in all aspects — particularly in managing the family business and wealth in a more efficient way,” Fung noted.
She agreed that the next generation needs to have a greater involvement in investment management and the family business. To this effect, Morgan Stanley PWM Asia can draw on its vast resources and line up external experts to share specific market insights with the next generation leaders.
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Preserving family control and ownership
“The next generation needs to learn how to manage and allocate assets in the best interests of the family. Investments that are diversified — across industries, asset classes and jurisdictions — can help mitigate risk,” she said.
Unlike many European families who have already passed on their wealth to the fourth or fifth generation, many Asian families are only now focusing on the second generation, through learning and involvement in the family business, according to Fung.
Clients who are concerned that the next generation may lack the unity to manage the business together and who worry that future generations could sell off the family business to third parties, may consider placing their business under a family trust structure to tighten family ownership, she added.
“So even though patriarch and matriarch transfer the family business to future generations, through succession planning structures like family trusts, they can keep and maintain the control and ownership within the family through the structures and reduce the risk that the ownership will be passed on to non-family members,” Fung explained.
In some occasions, family members can use a combined strategy of shareholder’s agreement and insurance policy to safeguard the family ownership in the privately owned business.
Family office and family governance
HNW families should start to share more professional knowledge with the next generation — particularly regarding global taxation matters or tightening in global regulations — because these new changes will have an impact on the management of the family business and wealth.
“When doing wealth planning with families, in particular on business succession, we encourage them to involve the next generations and future leaders as and when they are mature enough. Some of the families may be in the process of setting up a family office and designing their own family governance structure,” Fung said.
“If a family has multiple siblings, each family member may carry different roles and have different rights, so the family governance structure can clarify the roles and responsibilities of different family members.”
To maintain family harmony, it is important for clients write their own family constitution, Fung pointed out. “If a client does not know where to start, professional advisors are the best experts to consult with. We can refer them to lawyers or professionals who can help draft the rules and guidelines for the families.”
Protecting the future leaders
Family trusts and insurance referral are two services which Morgan Stanley PWM Asia allows clients to consider for protecting family wealth against risks to the key person in the family business.
When passing on the wealth to the next generation, the original entrepreneur transfers the role of key person to the future leader, who then becomes the owner of the family business.
“This person will carry risks and has to be protected,” Fung said. “For example, the sudden death of the key person may cause the business to incur liquidity risk, or creditor risk. A potential divorce settlement may leave a spouse with half of the key person’s personal wealth.”
To protect the family wealth against these risks, the family needs certain structures, such as family trust, Fung said. “When a family settles their family business into a family trust, from a legal perspective, their legal ownership is segregated from their personal ownership,” she explained. “That can protect the personal wealth of future leaders against creditor risk or divorce risk.”
Regular review of wealth planning strategies
According to Morgan Stanley PWM Asia, it is not uncommon for the second generation in Asia to be tax residents of a high-tax jurisdiction, in which case a tax efficiency strategy needs to be in place for business and wealth transfer.
Morgan Stanley PWM Asia emphasises the importance of regularly reviewing and updating tax planning strategies, because tax regulations change all the time. “An ongoing review of tax planning structures with the family’s own professional tax advisors is essential,” Fung stressed. “Wealth planning structures are not rigid. It is a dynamic process. Regular review can ensure that the strategies remain efficient in a new environment.”
Fung is confident that Morgan Stanley PWM Asia provides the first class resources and wealth management support to the families and their future leaders.
Important information and qualifications:
This article has been prepared solely for informational purposes and do not constitute an offer to buy or sell any securities or instruments or to participate in any particular trading strategy. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory or accounting advice. You are responsible for making your own investment decisions after having given due consideration to your own financial circumstances, investment experience and investment objectives and you should consult your own legal, tax, regulatory or accounting advisors as you believe necessary.
This is a sponsored article from Morgan Stanley.