High net worth individuals (HNWI) today are more likely to take a long-term view of wealth, focusing more on perennial growth over generations than short term gain. This forward-looking perspective is characteristic of second generation HNWI’s, who now comprise a much larger proportion of wealthy families than ten years ago. Choosing to sustain wealth over generations means prioritizing stability and confidentiality. Wary of the inherent risks associated with asset classes and markets, wealthy families now seek out customized financial instruments to underwrite their provident measures.
Family trusts provide the strongest protections to assets under any circumstance, and ensure long term privacy. Family trusts essentially mean transferring assets from settlors to independent trustees in the interest of the beneficiary, and a properly set up, well funded trust could potentially sustain the process over an indefinite period of time. Assets held within a trust often include real estate, credit derivatives, shares and bank deposits. The process of asset transfer can be complex, involving, for example, the trust purchasing property via financing from the settlor, who then deals with the outstanding payment in different ways, depending on local tax rules and regulations. There are many such processes involved in converting personal wealth to trust funds and assets, without which they would remain exposed to unforeseen circumstances and liabilities. It is vital that the trustee covers all the legal and financial ground involved in properly funding the trust at the outset.
Once a family trust is properly funded and the assets secured, it can be nurtured through low risk, low yield investments, resulting in a self-sustaining financial vehicle that scales in value over time. With accrued value, such holdings can pay for the education of future generations, protect inheritances from any external claims and ensure that designated property stays within the family’s legacy.
According to a 2017 survey of Ultra High Net Worth Individuals from China, family disputes are the most likely reason for estate planning to fall apart, while the most common misconception is that professional wealth structuring means a loss of control over family finances. Working with an independent trust provider does not necessarily mean giving up control over the trust. Most families are concerned about retaining the ability to make decisions over their property and legacy. The best services focus on professional trust administration and management in the best interests of the beneficiary, acting on the client’s stated priorities (by way of letter of wishes) and protecting their confidentiality. The role of the trustee is to assist clients with their understanding of the complex legal processes surrounding trust setup and structure the trust according to the settlor’s preferences. This involves working closely with clients and drawing up bespoke services, rather than seeking mass market services.
Family Trusts set up with the clients’ stated preferences preclude disputes before they arise via the legally airtight structure of the trust. Any claims, whether from family members or outsiders, will not be applicable to assets held in the trust regardless of liabilities a beneficiary may incur in the future.
Globally diversified investments, assured compliance
Younger HNWI’s, particularly from China, seek overseas investments to minimize risk and seek out the best opportunities. Due to strict foreign exchange controls, the P.R.C often lacks domestic options compared to the variety of investment possibilities found overseas.
It is crucial to ensure compliance with Common Reporting Standard (CRS) requirements, which requires an in-depth understanding of cross border financial structuring in order to be proactively mindful of any potential reporting requirements, particularly as governments continue to overhaul their tax rules and carefully scrutinize investment based immigration applications, particularly with regard to property ownership.
A world of options- where to set up your trust
There are a wide range of jurisdictions to choose from to set up a family trust. Setting up a trust in Hong Kong ensures its validity for an indefinite period of time, because Hong Kong’s trust laws do not mandate any expiry on a trust’s validity. Incorporating a trust in some jurisdictions may require measures to extend the trust once its period of validity concludes. With its world class financial infrastructure, renowned legal system and depth of professional services, Hong Kong has always been a popular trust jurisdiction. Hong Kong is also the only jurisdiction that uses Chinese as the underlying language to prepare underlying trust documents.
There are options, however, particularly for those seeking offshore solutions with the unique benefits they bring. Guernsey, Jersey, the British Virgin Islands and Cayman Islands are alternative jurisdictions with a long precedent of serving as tax neutral regions for trust set up, with various advantages unique to each region. Generally speaking, there are no currency exchange controls, inheritance taxes, capital gains taxes in any of these regions, and trusts are generally tax free as long as the beneficiaries do not reside locally and the trust does not own land or conduct business in the region. However, taxation might be applicable when transferring assets from other jurisdictions, so all decisions should be made with advance preparation.
Choosing the region of trust set up is not a decision directly related to residency arrangements- it is traditionally unimportant to be resident in the place where the trust is set up. However it is important to consider the extent to which confidentiality and tax neutrality are prioritized over investment infrastructure. These are highly individual considerations that depend on individual circumstances, requiring informed decisions and planning every step ahead of time.
According to a 2019 global survey of High Net Worth Individuals, most wealthy clients feel that their advisors do not know them well personally, with many complaining of a lack of empathy and overuse of technical jargon. In light of current social and economic instabilities, it is unsurprising that many people worry about a lack of options as they don’t feel understood by their service providers.
At Fung, Yu & Co., we can promise something different. Working with us will not involve dealing only with a liaison who works separately from analysts that only see numbers without people. We heavily explain on service – speedy response in plain simple language. We know we are here to help our client, not to confuse them.
Our fiduciary services bring together our experienced trust practitioners, accountants and tax advisors to work on developing integrated platforms, customized for each individual client according to their needs. We are highly sensitive to the cultural context of this vital aspect of wealth structuring, and we can guide clients through complex international environments with a clear understanding of individual priorities and concerns. Succession planning is the most important financial decision people make in their lives, the gravity and complexity of which calls for understanding the clients, while helping them understand the circumstances surrounding their holdings. We feel that Family Trusts are about sustainable, stable growth through informed investment decisions made together with clients, with deference to their perspective. We pride ourselves on having worked closely with our clients for over 50 years, helping to set up and structure their businesses and finances, and we bring the same dedication to bridging legacies forward.
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