Is Asia's next generation ready for $2.5 trillion wealth transfer?
5 October 2023 | Applicable law: China, Hong Kong, Singapore | 4 minute read
It will certainly be a well-earned retirement. Entrepreneurs in Asia, particularly in India and the People’s Republic of China (PRC), have driven impressive economic growth over more than four decades1 and are now deciding how to pass down the substantial wealth they have created. However, with an estimated $2.5 trillion in assets to transfer by 2030,2 the question many are asking themselves is: are the next generation ready?
“It takes a long time for Chinese parents to feel prepared to give their children possession of assets,” says Jocelyn Tsao, who heads Withers’ family team in Hong Kong. “They know it makes sense to pass it on in their lifetime but many are still hesitant, feeling that assets are better secured in their own hands and their own control.”
Managing the family
That their adult children would appreciate more financial independence is not in doubt. While some have been brought successfully into family businesses, others are struggling to make their mark outside the fold. Reports show rising youth unemployment and falling consumer confidence in the PRC, with many Chinese millennials needing financial help from their parents to maintain the lifestyles in which they grew up.
The elder generation have been generous, funding properties, luxury assets and regular allowances, but needing to contribute may itself cause doubt that their offspring will be responsible custodians of wealth. For some, the antics of a few ostentatious “fuerdai” who flaunted Ferraris and designer watches on TV and social media in the 2010s, provoking widespread disapproval, are a cautionary tale.
“Often clients’ behaviour will be interpreted as controlling but when you discuss it with them in detail it really stems from the Asian mindset, where the collective is more important than the individual. The older generation will want to ensure that the family prospers and there is continuity, with no one breaking away,” says Daniel Yong, a Singapore-based partner in Withers’ corporate team.
As advisers to successful families across Asia, it is often the firm’s job to help successful clients achieve those long-term goals. One very popular solution is the family office. “Our offices in Singapore and Hong Kong are advising people all the time on the best way to set up a family office,” says Daniel. “It is becoming a very attractive source of funding and lending.”
The reasons behind the boom are myriad, but one major advantage is that a family office offers a structure within which the next generation can learn to manage wealth responsibly, says Daniel’s Singapore colleague Yong Sheng Hon, a private client and tax partner: “We work with some third-generation families where the grandchildren have been educated in the US and Europe and come back with a lot of ideas about ESG, venture capital and so on. For the parents and grandparents, putting a sum into a family office is like creating another university course where they can figure out how to make money.”
Whether through a family office, a trust or philanthropic foundation, Withers’ experience suggests that involving the next generation in managing the family’s resources early sets the scene for a smooth transition later. “We work with several prominent families in Singapore that have created family trusts with the parents on the investment committee,” adds Yong Sheng. “It is quite an enlightened approach: we go through the options and they say OK, let’s set it up and see how it goes. They are giving the next generation the chance to play around and seeing how they work together as siblings – and of course, the parents are still there to provide oversight.”
Love and trust
Finding the right moment to hand over control can be difficult, though. According to Jocelyn Tsao, even parents who believe their children are ready for a wealth transfer may be concerned about a potential future divorce . And rightly so, since a divorcing spouse is likely to be entitled to half of an individual’s assets, including inheritance, property and any shareholdings in the family business.
“We have seen cases where parents had transferred everything into their child’s name and then been forced to join divorce proceedings,” notes Jocelyn. “That’s a scenario that really worries people, particularly in relation to children who have not married yet. The questions that we hear a lot are, ‘What if they marry someone I don’t like? What if they get divorced?
One way Withers’ family team can help is by drafting prenuptial and postnuptial agreements that will safeguard assets. These offer reliable protection against much-feared “gold-diggers” but are not seen as foolproof in Asia, particularly if there has been a long marriage with a lot of changes in circumstances since the document was drafted.
“Here in Hong Kong, setting up a trust would be the best way to secure assets, but the settlor does need to part control because otherwise, the trust will not be seen as a family resource,” Jocelyn explains. “It can be a difficult conversation when a parent is trying to make sure they retain absolute control over funds and we have to explain that in order to gain that security, you have to give something up. You can’t have both.”
That said, a dynastic trust can be drafted to encourage following generations to follow the settlor’s wishes. Funds can, for example, be distributed upon certain events happening: perhaps when the beneficiary completes their education or gets married. Such detailed planning may sound draconian, but the elder generation would argue that their primary goal is to ensure that both the family and its assets are protected.
Millennials may well find themselves making similar arguments when they approach their own retirement – or even rather sooner. More than once, Withers has acted in divorce cases where adult children have prompted their mother to end the marriage because their father has a new family that they fear will inherit the family fortune. Elsewhere, in so-called “rainbow families”, same-sex couples are asking lawyers how best to secure equal rights for their children regardless of who is the biological parent.
As the continent’s laws and indeed its families continue to evolve, it is likely that the specifics of wealth transfer will look a little different by the time the next generation is ready to pass on assets. Withers’ advice, though, will remain broadly the same: to prepare early, to communicate carefully, and to keep everyone focused on what is best for the family.