Holistic succession planning is a relatively new concept in Asia, says Borden Ladner Gervais senior consultant and lawyer Millie Chan. In an interview with Personal Wealth, she talks about how trusts and foundations are used as global estate planning tools. 
 

THE growth of private wealth in the country has made it important for high net worth individuals (HNWIs) to build concrete structures that help ensure their wealth continues to grow and will last for generations.

International wealth research group WealthInsight reported in December last year that Kuala Lumpur had the highest number of millionaires, surpassing all other cities in the world. According to the research firm, there were 13,800 HNWIs in the Malaysian capital in 2013, higher than in Abu Dhabi (12,500), Cape Town (8,753) or Birmingham (8,736).

WealthInsight projected that the number of millionaires in Malaysia would increase to 30,054 in the next four years from 26,000 last year, while total wealth would grow to US$206 billion from US$151 billion.

In addition to growing wealth, globalisation has made it easier for these HNWIs to invest in and amass assets around the world. According to the World Wealth Report 2015 published by Capgemini and RBC Wealth Management, HNWIs in Asia-Pacific and Latin America invested the most in opportunities beyond their borders. 

Global assets have made holistic succession planning all the more important. This has to be done to ensure that wealth is equitably passed on to future generations, who themselves are spread across the globe. 

However, holistic succession planning is a relatively new concept in Asia, says Millie Chan. The lawyer and senior consultant with Canada-based law firm Borden Ladner Gervais was in town recently to speak on trusts and foundations at a conference organised by Labuan International Business and Finance Centre.  

“Global estate planning in Asia is something that has only been talked about in the last 5 to 10 years,” says Chan, whose main practice focus is holistic global estate planning involving international wealth transfer, assets protection and capital preservation.

“The baby boomer generation is facing a different environment in terms of their family and business dynamics. This has created a different need for succession planning compared with their previous generation. One key characteristic is that their wealth has become visibly significant.”

Unlike the current generation, whose family wealth can be found on the various stock exchanges and in the public sphere, the previous generation rarely had their wealth publicly quantified. Corporate exercises such as listings and joint ventures with external parties were uncommon. So, there was no reason to value their wealth. 

Chan says the wealth of previous generations may have been be significant, but it was mostly captured in private family concerns. “The global corporate scene has since changed dramatically. Even if not many list their companies or declare their worth, there are people out there who can investigate their worth,” she adds.

In the past, families mainly relied on direct transfer of assets to pass on their wealth. Ownership was given directly to the children. “The minute the father gives everything to the children, there is no more filter … the switch to the tap is in their control,” says Chan. 

Wealth, especially of significant proportion, can have a toxic effect if you pass it on in a way that overwhelms the next generation who may not be equipped to deal with it, she observes. Such exposure has put the onus on HNWIs to do more to protect their amassed and inherited wealth rather than just relying on direct transfers.

“All this time, families have relied on direct transfers. Everything is passed on and given ownership. If you pass it on in a way that overwhelms — to children who are not equipped to deal with the wealth — it can lead to many problems,” says Chan. 

Transfer of ownership is one thing, but passing on ownership to the next-of-kin in a different jurisdiction poses challenges. One such difficulty is the inability to control how the ownership of assets will be distributed once it is in the name of the next-of-kin.

“The minute the ownership is in their names and they move to a different jurisdiction, ownership will come under the legal framework of that jurisdiction, including taxation and marital and divorce regimes. This ownership [of assets] becomes vulnerable to the system where they are living,” says Chan, a veteran lawyer who has specialised in this area of practice for the past seven years. 

For instance, Australia’s Family Law Act 1975 saw an amendment in March 2009 that recognises the right of de facto (unmarried) couples in South Australia to make claims in property division settlements.

The Family Law courts can order the division of property if the couple fulfils a number of requirements, such as having lived together for at least two years, one party has contributed financially or non-financially to the property, or a child was produced by the couple during that period. In some cases, this could apply to inherited property.

There are also different taxation policies to adhere to, especially in countries that impose worldwide taxation as opposed to a territorial taxation scheme, which is practised in Malaysia.

Many developed nations have adopted the worldwide taxation regime, where residents of the country are generally taxed on their worldwide (domestic and foreign) income, while non-residents are taxed only on their income arising in that country. Chan says if a father living in Asia passes on his assets to his daughter in Canada, all income arising from those assets can be taxed between 39% and 54.75%, depending on the province of residence.

“Let’s say a child residing in Canada gets C$10 million worth of property. That country follows worldwide taxation [regime]. All income arising from the assets is taxed, even if she is already paying tax in Malaysia. In Malaysia, it is territorial taxation — you are taxed on income arising within the territory. But overseas, in more sophisticated tax regimes like Canada and the US, it is worldwide taxation,” she adds.

Some countries employ a double taxation agreement, whereby the individual is granted an exemption for taxes he has already paid in one country, and only has to pay the remainder due in the country he has taxable assets in.

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 6 - 12, 2015.

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