Tools To Defy The Myth

Creating and enhancing wealth is only half the battle. Will it outlast the proverbial 3-generation barrier?, writes CIMB Private Banking and CIMB Trustee Services.

AS families become more prosperous and their businesses flourish, the task of managing and retaining the wealth and businesses gets increasingly complex. This is why many people believe that the chances of these family-owned money and other assets remaining intact beyond the third generation are slim. Hence we have the Chinese saying: “Wealth never survives three generations.” And there is a Western equivalent: “From shirtsleeves to shirtsleeves in three generations.”

However, CIMB Investment Bank director and head of securities and trustee services Yap Huey Hoong, who oversees matters relating to trustee services such as succession and distribution, points out that a handful of families have avoided this pitfall by coming up with a family holding structure or an estate succession plan.

“Creating a family holding structure for succession requires a lot of thought. Deciding who gets the baton can be difficult and even heart-wrenching, as the choice involves emotions and can at times create friction in the family,” she says.

“We have seen many cases in which the founders, in trying to be fair, have given their children equal shares of the businesses, irrespective of whether they are good at running the businesses, or whether they are even interested.”

It is also common to see many a wealthy founder facing a dilemma when his daughter is far more capable or astute than the eldest son. Yet, the latter is the person most often designated to be the founder's successor. This is especially true among Asian families.

Says Yap: “It is clear that such succession and family structuring decisions are not easy. However, without a proper family holding structure and a succession plan, one is simply deferring a difficult decision to the next generation, thus forgoing a chance to preserve the family wealth and success of the business.”

The affluent, she adds, should seek the advice of professionals when establishing a family holding structure. “Having professional trustee advisors is important as they will devote their full attention to structuring a trust in accordance to one’s personal needs, goals and wishes,” she explains.

For generations, many wealthy American and European families have been relying on trust structures to preserve their family wealth. A trust is a good gatekeeper that can help hold together family businesses and wealth. The founder can use a trust to help him create a family holding structure to protect the business he has built. By doing this, he prevents the family business from being split into fragmented parts, with many different shareholders who may have varying expectations and requirements.

“Using a trust as a family holding structure also ensures that the business and wealth is kept intact and is passed down to the next generations in an orderly manner,” says Yap.

Another advantage of the family holding structure is that it protects the family's businesses and wealth in cases when the family members lack the business acumen to succeed the founder or when they are just too young to manage the wealth.

Yap advises that when identifying a suitable trust holding structure, it is important to overlay this by identifying a decision maker to succeed the founder and to lead the family business or to make decisions relating to the family wealth.

It can take years to work out successful succession planning. Founders or decision makers need to set in place the chosen plan and parameters, groom the successors and monitor their performance.

When picking a decision maker, openness and communication between the founder, the successor and the other family members are important. This includes understanding their own needs and the family’s needs versus the needs of the business.

One has to set clear goals for the successor and there has to be an ongoing inter-generational dialogue between the senior generations and the successors. In choosing a suitable candidate to lead the family business, it is also important to hire career professionals as the company’s managers.

Yap reveals that unlike Asians, Europeans are more willing to accept a professional running the family companies. The Europeans clearly see the hiring of professionals as a solution to keep the family intact and to keep family members away from day-to-day operations, as their participation can lead to disputes.

The Rockefeller family is a well-documented example of the survival of family wealth going beyond three generations.

The Rockefellers are a famous American industrial and banking family. Their wealth was built on a business empire founded by John Davison Rockefeller and his brother, William. This is a classic example of a complicated family business that could have dissipated as the family grew into multiple branches.

Instead, thanks to the founders' vision and plans, the Rockefeller family wealth has survived for over 140 years or six generations. The masterstroke was the setting up of the family trusts in 1934, which have locked up most of the wealth.

A powerful trust committee of decision makers govern the Rockefeller family trust structures. As at November 2006, there are over 160 members of the Rockefeller family, with aggregated wealth of over US$10bil.

This is a valuable lesson for families and founders who do not believe that their wealth can last for more than three generations.

Says Yap, “The failure of a family to preserve its wealth and business is not a curse. With proper preparation and most importantly, early planning and openness and communication amongst family members, this third-generation myth should remain just a myth, at least for those with the foresight to not leave anything to chance.”