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Asian families are increasingly appointing 'elders' – individuals they trust who are close to them and their businesses – to help overcome the complexities of transferring wealth to the next generation.
Asia is growing its share of the world's wealthiest families at a faster rate than any other region except North America. And most of this money is new: it has yet to be passed from one generation to another. According to Wealth-X, an independent research firm, 68% of wealth in 'emerging Asia' (Asia excluding Japan, Singapore and Hong Kong) is self-made, while inherited wealth only stands at 12%. However, over the next five years we will start to see a wave of wealth transferred to the next generation for the very first time.
Asset protection is therefore becoming a more pressing concern for Asian families, as the next generation faces up to the huge responsibility of preserving wealth for future generations. At Deutsche Bank Wealth Management, we have found that under the right circumstances a successful transfer of wealth, and its subsequent management, can be assisted by the appointment of family ‘elders’ – outsiders who are trusted by the family and who understand its business, and who can help to bridge the gap between the generations by offering unbiased perspectives.
Risks you should be aware of when transferring your wealth
There is a Chinese saying that declares “wealth does not survive three generations”. It has become popular because transferring wealth in an effective and desirable way from the first generation to the second in China has historically proven difficult, making it unlikely that wealth will last until generation number three. And the same phenomenon is noticeable across Asia.
In part, this problem stems from Confucian ideas about family structures. Across Asia, children are instilled with a great respect for their parents and for older generations, and families tend to be more patriarchal. Typically, the head of the family and business owner will be a patriarch who holds ultimate power over their wealth and who is used to making all the decisions on how this wealth is managed, without consulting their children. As a result, the next generation may be excluded from the decision-making process about how to protect their family's wealth, and ill-prepared when they finally receive their inheritance.
Breakdowns in communication between patriarchs and their beneficiaries are common and, as families expand to include in-laws, differences in values and opinions between generations can become even more pronounced. Moreover, if the next generation is not taught how to govern assets on behalf of the family, it will struggle to maintain the family's legacy, potentially leading to further disharmony.
Lack of preparation ahead of wealth transfer can also put assets at risk when the time comes to pass them on, especially when this wealth is held in complex arrangements. If the head of the family has not put in place a plan that specifies how they would like their wealth to be managed, and by whom, their inheritance is at serious risk of not being used as they intended.
How we’ve seen elders help with wealth transfer in Asia
Whilst elders will have a number of responsibilities depending on the needs of the family, their main duties are threefold:
They help to convene family meetings and discussions. More frequent meetings with elders present mean any potential family disputes can be resolved.
They facilitate communication. Elders are responsible for bringing about open dialogues and cohesiveness, acting as a bridge between the first and second generations. Where we have supported families during the nomination of elders, we have seen a channel of communication opens up, allowing the younger generation to learn from the strategic decisions made by the head of the family.
They produce and help to uphold the family's 'constitution'. This constitution is a set of rules that outlines the intentions for the family's wealth after it has been transferred, and one of the elder's roles is to make sure that it is adhered to once the wealth transfer has taken place. We have worked with families who have granted their elders the ability to remove or restrict the powers of heirs over the family wealth if they abuse or disregard the constitution, within agreed parameters.
Who can perform the role of an elder?
There are no hard and fast rules around who can and cannot fulfil the role of an elder but, based on our work with families in Asia, they tend to be either:
a family member who is trusted and respected by all other family members, and able to act as a peacekeeper;
a friend or business partner who is close to the family;
a professional in the form of a lawyer, advisor or professional trustee.
As well as scenarios where families nominate one elder, we have worked with families where they have selected multiple elders to form a supervisory committee. This committee has the ability to remove or restrict the powers of the beneficiaries if required.
Appointing an elder doesn't always guarantee a smooth wealth transfer. However, from our experience, nominating one or multiple elders can help to provide structure and oversight to a process that many are embarking on for the first time.
Sheau-Yuen Tan is Head of Wealth Planning, Asia Pacific, Deutsche Bank Wealth Management
If you are thinking about your next wealth transfer and nominating elders to assist this process, Deutsche Bank Wealth Management can help. Get in touch or speak to your advisor to find out more.