How can affluent families keep their wealth beyond three generations?
The old proverb “from shirtsleeves to shirtsleeves in three generations” reminds us that some families can go from being poor to wealthy, and then back to where they started quite quickly.
This concept of the three-generation wealth cycle is supported by research that shows approximately
70% of wealthy families lose their wealth by the second generation, and an incredible 90% by the third.
The study, carried out by U.S.-based family-wealth consultancy the Williams Group, also found that 60% of the time, the biggest factor is a communication breakdown among family members, and a lack of effective wealth planning accounts for a quarter of such cases.
Communication breakdowns often stem from basic issues such as the unwillingness to deal with sensitive topics such as death, incapacity and divorces, or give up control and involve the younger generation in the decision-making process.
Therefore, the first step to keeping wealth in the family is building communication channels at home through family discussions and meetings and proactively engaging with the heirs. This, together with sound financial education, should properly equip potential heirs with the skills, values and direction needed to handle a sudden and significant amount of wealth.
However, what the beneficiaries actually do with their new-found wealth obviously varies enormously from family to family. So, while it is possible to prepare the younger generation to some extent through good communication and some financial training, they may still surprise everyone in the end.
A well thought-out wealth transfer plan can cover myriad issues including tax planning, wealth protection, estate planning and business succession planning.
The assets owned by a family can often span various jurisdictions. Therefore, the type of legal entity in which assets are held and in which jurisdictions they should be set up need to be carefully considered from the outset.
From a tax angle, consideration should be given to:
- The family’s ‘corporate’ structure – optimal structures may enjoy lower withholding taxes at source.
- The tax regime of the jurisdiction – certain income or subsequent repatriation of profits to an ultimate holding company may enjoy more favourable tax treatments.
- The regulations of relevant jurisdictions – some will have a more investor-friendly regulatory framework than others.
Families should also consider whether the holding structure is optimal for transferring assets to the next generation. For example, are there any estate and/or gift ‘leakages’ or public disclosure
requirements that may create unnecessary attention?
Family members also need to think about whether the right legal mechanisms are in place to protect their wealth from depletion by divorce, debt, ongoing or pending litigation and, last but not least, what
might be described as ‘unwise’ spending. After all, research shows it takes the average inheritor just 19
days to buy a new car – a sobering thought indeed.
For more information, contact:
Nexia TS Tax Services, Singapore
T: +65 6536 1312 / +65 6534 5700