As families become more global and diverse, managing wealth can also become increasingly complex. Investors continue to look for ways to build and manage their assets and transfer them to the next generation, or to charities, in ways that are both responsible and sustainable.
Successful wealth transfer involves finding the most suitable structures for personal and business assets, says Vivian Kiang, head of RBC Wealth Planning, Asia.
"Having a family business can be very complicated, especially if they're global," says Kiang, who is based in Hong Kong. "Having the right structure can ensure one generation's wealth is properly managed and then transferred to the next generation."
There are four common asset holding structures: single-name, joint-name, private investment corporation (PIC) and trusts. Each one has benefits and uses depending on an investor's unique circumstances, such as if they have children, a business, or even children working in the business.
"Our objective is to lay out the pros and cons and help investors choose which structure — or structures — are best, based on their individual needs and wishes," says Shirley Tang, managing director and team leader at RBC Wealth Management in Hong Kong.
Here are the most common kinds of holding structures and how they can be part of your estate planning:
1. Single-name structures
As the name implies, the single-name structure is for one individual investor and can include assets such as bank accounts, company shares, or other assets such as real estate.
Single-name structures can be easy to set up and the individual investor maintains full control of his or her assets. Kiang says having a single-name structure is a great option for someone who plans to hold an asset for a short period of time, or if the asset is small and irrelevant to the family as a whole.
One potential drawback is that, if the holder were to pass away or become incapacitated due to an injury or illness, the assets will be frozen for an unknown period of time. "Nobody else can manage the asset on behalf of that person," says Kiang.
If the person who owns the asset passes away, their holdings will need to go through probate before being sold or passed on to beneficiaries such as family members or a charity named in a will. The process could take several months before the assets are released, says Kiang. If there isn't a will, the process could potentially take months, even years to make its way through the legal process.
2. Joint-name structures
In a joint-name structure, two or more people own the assets, such as a husband and wife, father and son, or mother and daughter. With joint tenancy, none of the owners has a separate or divisible share in the asset. When one passes away, the other takes ownership of that asset. "Having a joint ownership is like giving your asset to someone," says Kiang. "The benefit goes to the surviving owner."
Joint-name structures can be easy to arrange, and the owners may assign anyone the lasting power of attorney (LPOA) to manage the asset jointly if an owner becomes incapacitated. There is also no asset freezing if one of the owners dies or is incapacitated.
With tenancy in common, asset shares of the deceased need to undergo the probate process and will be frozen until probate is granted.
Kiang says it's not uncommon for elderly parents to ask one or more of their children to become joint owners or signatories on their assets, especially if they need help managing it as they get older.
"It is hard to quantify the extent of the deceased's share of the funds and identify who is entitled to receive those funds," says Kiang. "As a result, court cases on joint bank accounts are very common."
3. Private Investment Corporations
PICs are more complex and allow for a mix of ownership structures. In a PIC, shareholders own shares of the company, while directors have control but no ownership.
One benefit of a PIC is that the structure allows for multiple shareholders. "This is a common method to gift assets to beneficiaries," Kiang says. It can be a good structure for a husband and wife, for example, who own a business or an asset and don't want to actively manage it. They could nominate a son and daughter to be directors, or a trusted professional outside of the family.
"With a PIC you can separate the ownership and management," Kiang says.
Kiang advises against having a single director in a PIC structure because, if they pass away or become incapacitated, the asset may be frozen.
"You also have to be careful of who you name as a director," Kiang says, since they will have control over how the assets are managed. She says a director has a fiduciary duty to manage the company assets for the benefit of the company and its shareholders. "If a director does not act in good faith, shareholders or beneficiaries of the deceased shareholders can always sue the director."
She also cautions that shareholdings are subject to creditors' claims, including spousal claims in the event of a divorce. Additionally, asset disputes that go to court become public record, which may be problematic for families who are concerned about keeping information about their personal lives, and wealth, private.
A trust is a fiduciary arrangement that allows a third party, known as a trustee, to hold assets on behalf of one or more beneficiaries. Trusts are commonly used to maximize tax efficiencies, as well as to protect assets as part of a broader succession plan. For example, a trust might set out terms such as how much money is distributed to children and any conditions, such as completing an education or after a certain age.
Tang says parents often use trusts as a vehicle to pass along their wealth in stages and how those vehicles fit. "It helps parents give their children enough money to support them, as well as to protect them," says Tang. "It also helps them to lay out the kind of values they want the family to follow."
Trusts may also protect assets in the event of a marital breakdown. For instance, if a married child receives a portion of a vacation property, and then gets divorced, the trust structure may help to protect that portion of the asset. "The benefit of a trust is protection and planning for the whole family," says Tang.
Trusts are also the quickest way to move the assets, since they're free of probate, making them immediately liquid. Trusts are also private documents, which means there is little or no risk of the family's information going public if a dispute goes to court.
The trust structure may be particularly appealing at a time when second and third marriages are more common, and spouses and children are living in various jurisdictions around the world. "The more complicated the family, the more protection a trust can provide," Tang says.
She recommends families with trusts review the structures regularly and update the trustee when family circumstances change, such as the birth of a child, a divorce or a death.
"Trusts are an ongoing, generation-to-generation planning tool that should regularly be revisited," says Tang.
Which structure is best for you?
Depending on asset types, Kiang says families might want to consider different holding structures. Kiang recommends investors seek professional advice before deciding which structure — or structures — to use. "It's important to talk to a wealth management professional to get an idea of the pros and cons of each and how they fit your individual life circumstance," she says. "By understanding structures in succession planning, investors gain better insights into their existing asset holding plan."
Tang says choosing a structure that fits your needs may provide both financial and emotional benefits. "It's not just about the right structure to preserve wealth, but also to preserve family harmony for the long term," Tang says.
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