Trusts Using Trusts to Safeguard the Family Crown Jewels By Christian Stewart, Family Legacy Asia (HK) Limited, Hong Kong rusts are often marketed in 2.The type of trust that would most T Asia as a succession planning device, and as a tool that can help keep wealth in a family for more than three generations. The purpose of this article is to consider the typically be used in the Asian context is a discretionary trust, revocable while the settlor is alive and that would become irrevocable upon the death of the settlor. A discretionary trust means pros and cons of a trust structure to hold that the family members would be and preserve the family “Crown Jewels”. In named as discretionary beneficiaries. this article, the Crown Jewels refers to the 3.The typical scenario is one in which core asset of the family, often the family the Crown Jewels are situated in one owned business.<1> or more countries within Asia. The In Chinese, there is a saying that wealth trust structure however would be set cannot stay in a family for three up in one of the traditional offshore generations. In fact, this is a universal finance centres. The trustee would proverb. So the question then is whether a hold the shares in one or more trust can be used to hold and to preserve offshore investment holding the family Crown Jewels for three or more companies, which will then invest into generations, overcoming this proverb. Are shares in an onshore holding company trust structures to hold the Crown Jewels that directly or indirectly holds the really the kind of “total solution” that they Crown Jewels. are sometimes marketed as being? 4.Who is the trustee of the trust? Most Clearly there are certain benefits of likely in an Asian context, the trustee using a trust structure that tax and trust would either be a bank affiliated advisers can articulate for their clients. trustee company, or it would be a However, in the world of the family-owned private trust company (a PTC) set up business there is a different perspective on specifically for the family. In this article the challenges of sustaining a family it is assumed that it will be an business or other forms of family wealth. It independent bank trustee. is suggested that if a trust structure is being 5.Who are the discretionary set up for the purpose of owning and beneficiaries of the trust? Let us preserving the family Crown Jewels, then assume that while the settlor of the that structure needs to be examined trust is dead, there is a surviving through this specific family business lens. spouse who is not active in the business. Assume that in the second The Trust to hold the Crown Jewels generation, there are three sons who We first need to consider what a are all active in the business, and two typical trust structure would look like, if daughters, who are not. Assume also the purpose was to hold and preserve the that there are nine members in the family Crown Jewels. third generation. This would give a 1.The settlor of the trust would be the current family population of 15 people first generation entrepreneur who excluding spouses of the children and founded the family business. In the grandchildren (which is the typical following example, let us assume that Asian way). What is not so obvious the settlor set up the trust, but has however is that it would be usual to passed away, and that the Crown Jewels draft the definition of beneficiaries are now being managed by a sibling under the terms of the trust to also partnership. include any other issue of the settlor OI 190 • October 2008 19 Trusts born before the expiration of the forced heirship laws, the trust can allow increasing number of family members who maximum trust period. the family substantially greater freedom are in the ownership circle and a smaller 6.Who makes the distribution decisions? than those forced heirship provisions and smaller number of family members Most likely the bank trustee would be would allow for. The trust structure who are in the business management responsible for making discretionary provides confidentiality for the family circle. distribution decisions, guided by a non- members. In many Asian countries, this is The three circle model, says that binding letter of wishes provided by an important consideration for a wealthy where a person is located in the three the settlor. family. Discretionary trusts of course are circles has a significant impact on their 7.Who would act as the custodian, noted for their flexibility. perspective. A family member who is in the having the legal ownership of the Depending on the domicile of the ownership circle, who is not involved in Crown Jewels? This would be the bank family and the residency or nationality of the management of the business is going to trustee in its capacity as trustee of the the beneficiaries there may be tax benefits, have a very different view from a family trust. and the trust structure might be helpful in member who is both a shareholder and 8.Who makes investment decisions for avoiding estate taxes. The offshore trust who is on the inside of the business. the trust? If it is a bank trustee, they structure might even be helpful in Therefore, another challenge for the will not know how to run the family providing some degree of protection family-owned business is managing the business, so they will not want to take against political risk in the home country divergence that will occur between the on that role. In practice, there will be where the Crown Jewels are located. views of “inside shareholders” with those some form of investment committee These are all benefits that the family’s of the “outside shareholders”. A simple mechanism created under the terms of trust lawyers and tax advisers can fully example of this is that an inside the trust instrument. The trust brief them on. shareholder may see the benefits to the instrument will contain lots of language business of accumulating surplus profits for that will say the bank trustee has no Family Business Theory reinvestment, while an outside shareholder control over the Crown Jewels and no There is an often quoted statistic that in the same family business may only be responsibility for them. The bank only one third of family-owned businesses interested in maximising dividend trustee has to keep its hands off the will make it into the second generation payments. Crown Jewels, and is not responsible and something like a 10% chance of The family-owned business literature for any investment decisions. The flip survival into the third generation. The says that in order to successfully sustain a side of the coin is that the trust theory of family-owned businesses helps family business over the long-term it is instrument will be drafted to say that to explain these statistics by reference to a important to make sure there are healthy the investment committee is fully “three circle model”, which says that a boundaries between the family, ownership responsible for making all investment family-owned business is made up of three and business systems. There need to be decisions, including deciding how to overlapping systems. The first system is the separate forums created so that ownership exercise the voting rights on the management or business system. The and family issues can be discussed outside shares in the family business; the second system is the ownership system. of the boardroom. investment committee is responsible The third system is the family emotional If we are to determine whether a trust for supervising and safeguarding the system.2 structure can be used to keep the Crown value of the Crown Jewels. The When you look at the overlap Jewels in the family for three or more investment committee exercises its between the family circle and the business generations, isn’t it going to be necessary powers by giving written directions to management circle, many times, family to compare the characteristics offered by the bank trustee which the bank dynamics and family behaviours will be the typical Crown Jewel trust structure trustee must strictly comply with, inconsistent with sound business against the three circle model and other under the terms of the trust management practices. Family values (e.g. family business theories? instrument. all family members are equally valued) 9.Who is on the investment committee? often clash with business values (e.g. we The Three Circles & how a Trust Let us assume that the investment only hire the most capable). Family can help committee is currently comprised of dynamics (e.g. sibling rivalry) may be played Clearly there are some ways in which the three sons from the second out in the boardroom and impact the kind of trust structure that has been generation, who are active in the negatively on the business system. This is described is going to be helpful and will fit business. one set of reasons why sustaining the neatly within the three circle model. family business across generations is a very 1. An ownership forum is created in the The Legal & Tax Benefits of a Trust significant challenge. form of the trust investment Clearly, the trust structure will confer Some families will declare themselves committee. certain benefits. The discretionary nature as being committed to taking a “business 2. The trust structure can help to create of the trust means that none of the first” philosophy to problem solving, and maintain a voting block. It helps to beneficiaries has a proprietary interest in whenever there is a conflict between prevent the family control over the the assets comprised in the trust fund. family values and business values. Other Crown Jewels from being diluted. This means the family members can benefit families will declare themselves as 3. In practice, the exercise of setting up from the trust as beneficiaries without preferring a “family first” philosophy when the trust should allow the perfect having any legal or beneficial ownership of faced with such a value conflict. The opportunity for clear rules to be the Crown Jewels. In general terms important thing is being clear and explicit written into the trust instrument as to therefore, this arrangement will protect about the approach the family will take how the investment committee will the Crown Jewels from any third party when problem solving. vote and what is the mechanism for claims against one of the beneficiaries. The When you look at the overlap dealing with any deadlocks. trust may also help to protect the Crown between the ownership system and the 4. It is also an opportunity to write clear Jewels in the event of the divorce of one of business management system, the trend as rules into the trust instrument spelling the family members. The trust will avoid a family transitions from the first, then to out how one qualifies for membership probate proceedings should a beneficiary the second and then to a third generation to the investment committee, and how die. If the family is from a jurisdiction with family is for there to become an ever succession to the investment 20 offshoreinvestment.com Financial Duties Trusts committee is dealt with. As such, clear which hat, for example, the setting up the trust structure is the father/shareholder/CEO is wearing In the context of investment duties perfect exercise to draw up a clear when he talks to his under a trust structure the duties are ownership succession plan. employee/shareholder/son. Family likely going to be purely financial in 5. Members can be added and removed decision-making becomes that much nature. Accordingly, the investment from the investment committee, harder because of the multiple hats committee is going to have legal duties to without having to change the involved. Sadly, by creating an always have to choose the option or ownership of the underlying shares, investment committee under a trust decision which is going to provide the which remain registered in the name structure, this means there is going to best financial return to the trust fund. of the bank trustee as a custodian. be one more hat for some family This legal environment may work 6. There is an opportunity to spell out members to wear. perfectly well for a family that has a very the role of investment committee, vis- Clearly, it will be important for clear “business first” philosophy. à-vis, the Crown Jewels. members who are on the investment However, this could represent difficulties 7. The trust structure means that the committee to be properly advised as to for a family that would like to take a members of the investment committee their legal duties as members of the “family first” philosophy. Putting family are acting as stewards of the family investment committee, so that they interests first may not be an option that a assets, rather than owners. know what they have to do when they member of the investment committee is are wearing this particular hat. allowed to consider. The Three Circles & how a Trust In our hypothetical example, we will complicate have an investment committee of three A Duty to Preserve On the other hand, a trust structure siblings, and a total group of 15 living Traditionally, trusts are also will also add some additional beneficiaries. As noted however, the structures set up to preserve and to complications, as described below. It class of beneficiaries will typically also conserve wealth. Trustees are supposed should be noted that the objective of this include the future unborn issue of the to be prudent and conservative investors. article is to identify potential issues where settlor. It is clear to see therefore that The legal starting point therefore must be there may be a conflict between “trust the investment committee has that the members of an investment law” and “family business theory”. Families responsibility for making investment committee on a trust structure should can then take these specific issues to their decisions for a group which goes find themselves in a similar situation i.e. trust lawyers who can identify whether beyond themselves. They are managing having duties to prudently and there are any drafting or structural assets on behalf of others. Most likely conservatively invest. From a multi- solutions, or not as the case may be. the investment committee members generational perspective, this may be just will have fiduciary, or trustee like, what the family wants. But if the family Creating an Exit Plan duties to the beneficiaries as a whole. members sitting on the investment One of the first tasks of a family committee want to have a more ownership committee is typically to create Being Even-Handed aggressive risk appetite or they wish to an exit plan, usually in the form of a family When it comes to administrative be more speculative in some of their shareholders agreement. The idea is to powers under a trust, like the power to business ventures, then there may be an have some mechanism that allows family control investment decisions, the inconsistency between their risk appetite members to gracefully exit if they do not members of the investment committee and the trust structure. like to be tied to the family business any should be under a duty to act in an more.3 If you have one trust structure even-handed manner and to act in the A Case of Anarchy that is holding 100% of the shares in the best interests of all the beneficiaries. Discretionary trusts are like a form of family company, and there are several This means they should not be allowed anarchy! What this means is that any different branches of the family to discriminate between different adult, discretionary beneficiary would represented under this one trust classes of beneficiaries or to give normally have the right to enforce the structure, how do you put in place a certain beneficiaries a preference over due administration of the trust and would shareholders agreement or an exit plan? others. Also, they should be precluded have rights to receive trust information. How do you quantify the financial interest from putting their own self-interest in In our example, while the investment of a discretionary beneficiary? front of that of the other beneficiaries. committee may be made up of three At a minimum, it would be more If a family member from the second members from the second generation of prudent to have different trusts for each generation, who is involved in the the family, one of the grandchildren from branch of the family. Different trusts for management of the family business, was the third generation and who was not different beneficiaries might then dictate to directly own shares in the family involved in working in the family business needing to have different trustees – or company, then they would be free to do could in theory, question whether the different investment committees – for what they like with their shares. They members of the investment committee each family trust to prevent conflicts of could make decisions having regard to are acting in accordance with their strict interest from arising should there be any what they consider to be in their own legal duties as fiduciaries. difference between the various branches personal best interests. They are free if of the family. It can quickly be seen that they like to only think about what is Trust Fund Babies suddenly it is not that simple any more. best for their own pockets. On the Another issue will be access to other hand, they are also free to make information.4 Every family will have its Managing your Hat Collection decisions which they believe are in the own philosophy regarding when and what One of the very difficult things best interests of the family as a group, it tells its younger family members about about keeping the Crown Jewels in the for example, with the goal of the size of the family wealth. What will family across several generations is that preserving family harmony. However, if the bank trustee do if it receives a the family and personal relationships you are a member of the investment request from one of the 18-year-old involved become very, very complex. committee under a trust structure, you beneficiaries in the third generation, Family communication becomes that are not an owner and this has to be asking to see a copy of the trust much harder because it's not always understood. accounts? OI 190 • October 2008 21 Important Tasks that still need to Trusts structure, there is no guarantee that to fall into the trap of thinking of a Crown be done the committee members are going to Jewels trust as representing a total solution When you look at family business talk to each other or can get along, or for all of the family’s succession and theory there is a list of critical tasks that a problem solve in a businesslike manner. continuity problems, which clearly it is not. family concerned about continuity and 4. The three circle model says that the www.familylegacyasia.com succession still need to attend to, regardless health of the family system is a good of whether or not there is a trust set up to indicator of the success of the own the Crown Jewels.These are tasks that ownership and management systems. END NOTES: have to be done and which will not The model says that the ideal is to find 1. It can also refer to a family held controlling automatically get done just because you ways to balance all of the three circles. stake in a listed company, as well as to the have a trust structure. Many of these tasks The conclusion is that the health of the liquid financial wealth of a family that has (but not all) are about addressing “soft”, family system is itself a very important cashed out, and that is perhaps organised “emotional” or “relationship” issues.5 task that is not to be overlooked. This around a family office. The following is not intended to be a might entail a family mission of helping 2. For example, see ‘Generation to Generation, comprehensive checklist, but it is intended individual family members pursue their Life Cycles of the Family Business’, Harvard to give an example of the kinds of tasks that own dreams. Business School Press, by Gersick, Davis, should be addressed by a family that is Hampton and Lansberg. Their three circle serious about continuity and succession. Drawing some Conclusions model is in fact a four dimensional model with • 1. The family will need to predict the The key conclusion must be that time being the fourth perspective. areas in which there will be a conflict families in business together should be 3. See ‘The Eight Practices of Successful Families’, between family members who are adopting the recommended “best by Amy Braden, a JPMorgan Private Bank outside the business and those who are practices” for family-owned businesses Advice Paper. inside the business and they should regardless of whether they have a trust or 4. Consider the example of Liesel Pritzker who produce written policies addressing not. You do not need a trust structure in sued her father and uncle for raiding her trust how these conflicts will be approached. order to set up a “family council”. fund. See ‘Knives Drawn for $15 Billion Pie’ – One example would be to prepare a Clearly trusts are a very useful and New York Times (11 December 2002). dividend policy. helpful tool, especially in relation to the 5. For a good example of a case where a family 2. The family council should ensure that ownership circle, but it must be realised trust that held over 90% of the voting control there is an employment policy. they will also bring an added level of in a family business media empire failed to 3. Work on improving trust and complexity. stop a brother and sister from fighting in the communication, planning, teamwork and For the family that likes to take a “family boardroom with devastating consequences for decision-making are all critical tasks. Just first” philosophy, maybe a trust structure is the family business, look at the often quoted because there is an investment not going to be the best solution. example of the Bingham Family from Louisville committee in place under a trust The biggest danger however would be in Kentucky, USA. 22 offshoreinvestment.com Family Legacy Asia The goal of Family Legacy Asia is to help families in Asia preserve their family wealth. But this is not an easy task. Only one in three family controlled businesses successfully pass into the second generation and only about 12% last to the third generation. In Chinese there is a saying that wealth only lasts for three generations. While the above statistics are well known, it would still be the exception rather than the norm to see a family in Asia with a written succession plan, a family shareholders agreement or a formal “Family Council”. While ultra high net worth families in Asia are starting to get more exposure to the concept of “Family Governance” and the advantages of having, for example, a written “Mission Statement” or “Family Constitution” getting help to implement these new concepts is still a challenge. Family Legacy Asia (HK) Family Legacy Asia was established to provide Asian families Limited with an independent alternative that is focused solely on helping ultra high net worth families plan and then implement best family governance practices. Clients We act for families that control a business or listed company, for family offices, and for private trust companies. Services Our services include structuring complex trusts (e.g. “incentive trusts” and “family banks”) and family foundations; helping to administer private trust company structures; facilitating family meetings; and providing families with advice on Family Governance. Models Frameworks and Tools The preservation of family wealth requires families to engage in an ongoing strategic planning process. We can provide families with the models frameworks and tools they need to get organized, to facilitate communication, and to plan ahead in an objective impartial manner. Examples Of Our Experience Our experience includes facilitating family meetings, setting up the family council, creating the family foundation, drafting family shareholder agreements, and drafting the family employment policy. Our Approach We believe that ultimate responsibility for long term strategic planning for a family lies with the family itself. Our approach is to advise the family as to the proper process and the key tasks they have to undertake. We play the role of the independent project manager and facilitator. Our perspective We aim to bring a wide perspective that is intended to make families think beyond the trust structuring, the asset management decisions and the business management decisions. Christian Stewart Christian Stewart founded Family Legacy Asia to help Asian families preserve their family wealth for generations, by providing them with independent and objective advice on good family governance. He has eighteen years experience in advising high net worth individuals and families on complex trust structuring, estate planning and succession matters, including fourteen years in Asia. Before founding Family Legacy Asia, he was a Managing Director and the head of the Wealth Advisory Team in Asia for JPMorgan Private Bank for six years. In that capacity, he has worked with some of the leading families and Family Offices in Asia on family governance, private trust companies, and cutting edge wealth structuring techniques. Founder & Managing Director Family Legacy Asia provides advice on family governance and Family Legacy Asia (HK) Ltd advice to business controlling families. It also specializes in trust and estate planning and private trust company (“PTC”) structures. Managing Director When he first joined JPMorgan Private Bank in 2002, its Asian Head of Wealth Advisory, Wealth Advisory team primarily focused on trust structuring. Asia Pacific Christian transformed the services and skill set of his team by JPMorgan Private Bank helping to bring to Asia JPMorgan’s US know how and expertise on charity and philanthropy, family governance and family owned business succession, and applying this expertise for the benefit of JPMorgan’s Asian clients. In his six years with JPMorgan, he grew their Wealth Advisory team in Asia from a team of 3, to a team of 8 professional Wealth Advisors. Tax Partner Prior to joining JPMorgan, Christian was a Tax Partner at Head of Trusts & PricewaterhouseCoopers in Hong Kong. In his eight years at Private Client Group PwC he helped found and lead its Trust and Private Client Group PricewaterhouseCoopers and helped PwC create a reputation as one of Hong Kong’s Hong Kong leading firms in the trust planning area. Tax & Trust Lawyer Christian started his career as a Solicitor in private practice in Private Practice South Australia. During his 4 years as a Solicitor, he helped Adelaide clients with tax, trusts, wills and estate planning work. South Australia Professional Qualifications He is qualified as a solicitor in the Australian State of South Australia, in England and Wales, and in Hong Kong. In June 2002, he was named one of the top ten tax advisors in Hong Kong by the International Tax Review in its annual survey of leading tax advisors.
Pages to are hidden for
"Using Trusts to Safeguard the Family Crown Jewels"Please download to view full document