Asia – the new ‘frontier’ for wealth planning

22 February 2015

Written by Marcus Hinkley

A booming Asian client sector highlights the need for Guernsey to focus expertise on the region, according to Marcus Hinkley, partner and head of Collas Crill’s Singapore office.

Asia represents the ‘new frontier’ for private wealth. Numerous private studies have echoed that the Asian region, led by China, Hong Kong, Singapore and Indonesia, are the fastest growing for new global millionaires and consequently, the East has become the most important region for those in the private wealth industry.

This area has potential for significant growth given Singapore's burgeoning wealth management industry, with many referring to it as the 'Switzerland of Asia'. Already the go-to investment destination for Southeast Asia, Singapore is increasingly attracting wealth from further afield, including mainland China, as well as wealthy individuals to its shores.

This is something it has done very successfully, with the island having the world's highest proportion of millionaire households (one in every six at last count). Property prices have sky-rocketed as a result, one of the more interesting by-products being a venue that bills itself as the 'most expensive nightclub in the world'. For this reason it is no surprise that private wealth practitioners have come to Asia marketing the trust and other fiduciary products.

What has been found is that it is difficult to market the traditional form of trust, and as such the industry is witnessing a remarkable transformation of the "trust" structure. In this article, I examine the differences between the Western and Eastern "trust" and highlight those areas that those marketing trusts will need to be aware of.

In Asia, trusts are often estate planning focussed, dominated by settlors who are less concerned about taxes and more concerned with passing on family wealth, and also loathed to cede control of administrative and dispositive powers to a trustee. With predominantly first generation wealth, it is no wonder that there is a much more cautious approach towards trusts. One must not forget, the concept of a trust dates back to the Crusades.

Even a trust in its modern form has existed for over hundreds of years in the West, so it ought to be of little surprise that, with similar drivers, settlors of the East are reticent about the modern trust. Today's advisers recommend managing control issues by the use of reserved powers, purpose trusts, private trust companies, family offices or detailed family constitutions, but otherwise create trusts with very long perpetuity periods with default discretions vested in the trustee.

The popularity of the reserved powers trust, almost default solutions in Asia today, evidence this most starkly. There is too another important divergence between the development of the Western styled trust and that of the East: whilst the traditional property-based Western trust relationship emphasised the relationship of trustee and beneficiary, the Eastern styled trust device primarily considers the settlor and his wishes. In this way, the Trust has become sort of an agreement based relationship with the Settlor.

The greater use of revocable trusts has no doubt added to this mind shift. Accordingly, currently there is an uneasy divergence between practice and trust principles but given the numbers of Asian (and non-common law based) clients it is foreseeable that trust principles will need to adapt. Further headwinds to the development of the trust industry in Asia are that, contrary to Europe, tax planning is not a driver for advancing private wealth and therefore succession is heavily relied on as a rationale for creating structures.

However, as those in the insurance business well know, planning for death is a hard and slow sell - rarely is there a perceived urgency to the same extent that a looming tax bill generates. As for how the offshore industry, and Jersey and Guernsey in particular are faring to attract Asian clients to their shores, to date offshore solutions have featured strongly in Asian clients private wealth structuring.

The Cayman Islands developed structures for its American and South American client base, such as reserved powers trusts, and these have also found favour in Asia. Jersey and Guernsey, being two of the most well regarded private client jurisdictions have also increased their Asian market share in the past five years, focusing primarily on North Asia. What is interesting is that the type of trust services which are sought after here are quite different to that of the Western model.

Whilst expectedly international law firms and trust companies are trying to fit their existing service offering into the Asian mould, those firms which are doing best recognise that to succeed it is necessary to adapt services to what this market demands.

I have already mentioned that desire to retain control and simplicity whilst achieving succession planning for both accumulated passive wealth and family businesses are drivers. So too, is a desire to avoid unnecessary "red flags" by setting up in jurisdictions which have been highlighted by the OECD, and recently those jurisdictions that have a strong regulatory environment have benefitted: the Channel Islands is taking advantage of this most recently as is Singapore.

Although the solutions in the West and East tend to be different, those trust professionals that assume that they can offer the traditional Western styled trust advice, which has been rooted in over a century of development, and based on motivations which differ from that of the East will find themselves struggling.

Those that will succeed will recognise the dynamics of the Asian economies and the drivers of their people, as well as the relative lack of awareness of the core concepts of trusts. At the same time, I submit that given the divergence between the core principles and practice, that one history has shown that the core principles can, and may need to change to adapt.

An original version of this article was published by Private Client Practitioner’s 2015 Guernsey Special Review, January 2015.

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