Labuan IBFC's unique qualities offer sound wealth management options for the growing HNWIs in China
Many Asia's richest, including the owner of Alibaba Group, is among the ultra-net-worth-individuals (UNWIs) who uses wealth management solutions such as family offices to manage their wealth.
According to reports, about eight times as many high-net-worth individuals (HNWIs) are in China as in Hong Kong. Just in China alone, the number of HNWIs stands at around 890,000 people.
The number has increased over the years and the country is a major contributor to the increase of the number of HNWIs in the Asia Pacific region, recording a 60% rise compared to five years ago.
With this growing base of HNWIs, Chinese HNWIs are increasingly looking for wealth management solutions to help them manage their wealth efficiently and to preserve their fortunes for future generations.
Family succession planning and its issues
There is a glaring dissimilarity when it comes to the level of awareness towards family succession planning between the East and the West. In Western countries, family succession planning is a common practice.
However, in general, the awareness on wealth preservation and succession is relatively low among Asian families, particularly the Chinese, albeit the trend in using professional wealth management solutions is growing in Asia.
Asian families tend to emphasise more on ownership – who will own the assets – rather than focus on how wealth or assets can be used for future generations.
For instance, the Economist Intelligence Unit research report commissioned by Labuan International Business and Financial Centre (Labuan IBFC) found that two-thirds of Southeast Asian family businesses have leadership succession plans but the majority have yet to implement formal governance and succession structures. More than half of business families use informal gatherings for family governance.
Additionally, cultural differences such as respecting elders and filial piety, as well the ever present generational gaps are some of the contributing issues that hinder the process of family succession planning. Indeed in Asia it is considered taboo for children to raise the issue of succession and Asian families, especially the Chinese, are generally more reticent and avoid discussing such matters.
Family vision, values and traditions are also losing their adherence as families become increasingly scattered throughout the globe. This subsequently impacts forward planning and regular review of family constitution, which are important to encourage proper governance of succession structures.
Notwithstanding the roadblocks to family succession planning in Asia, it is undoubtedly clear that Asian families need an efficient and effective wealth management vehicles that can meet their wealth preservation and succession needs.
A wide range of private wealth management options
Labuan IBFC offers a plethora of wealth creation and preservation structures in conventional and Islamic forms. These comprehensive private wealth management vehicles range from common law trusts to civil law foundations.
In fact, Labuan IBFC is the only jurisdiction in Asia that offers private foundations as a wealth management solution.
A Labuan Foundation, for example, is a corporate body with a separate legal entity, established to manage its own property for any lawful purpose, be it for charitable or non-charitable purposes. It provides a conduit for dynamic wealth transfer, dynastic planning and inheritance management protected within a tax-efficient legal entity. There is no minimum initial asset required for its establishment and the foundation can exist for a fixed or perpetual duration.
The Labuan Foundation is governed by the Labuan Foundations Act 2010, which provides a strong statutory firewall that protects the foundation with clarity in its functioning. As a separate legal entity itself, the foundation is distinct from its founder, officers and council.
Like a Labuan Foundation, the Labuan Private Trust Company (LPTC), is also a separate legal entity and is established via the Labuan Financial Services and Securities Act 2010 (LFSSA) and registered with the Labuan Financial Services Authority. The trust company is permitted to provide all trust company services accorded to LFSSA such as a suite of trust and administrative services to a closed-end group.
In a nutshell, both Labuan Foundation and LPTC allow the founder/settlor to retain sufficient control over the affairs of the entities without compromising the validity of the foundation. They are given flexibility on the formation of the board of directors or council, comprising of family members or trusted advisors of the family. This allows both wealth management structures to be privy to the requisite knowledge of the family affairs, as well as better understand the needs of the intended beneficiaries.
A family office (FO) can also be established via the LPTC or Labuan foundation, attributing to the uniqueness of Labuan IBFC being a midshore jurisdiction that can offer a flexible yet well-regulated and cost-efficient environment.
Among the advantages for the Chinese affluent to establish a FO via the LPTC or Labuan Foundation are:
- Flexibility in retaining sufficient control;
- Efficient decision-making on closely-held family owned assets by involving multiple trusted advisors so that advice can be obtained in a more timely manner; and
- The continuity that enables the FO to undertake wealth succession with greater certainty. For instance, eradicating the need for future changes in the trusteeship and foundation as it is a perpetual vehicle to manage and transfer family's wealth to the beneficiaries without binding it to its founder.
Labuan IBFC - A suitable jurisdiction for wealth management needs
Choosing a suitable jurisdiction to manage wealth depends largely on the list of criteria or preferences that a HNWI has, but increasingly, Labuan IBFC has been gathering momentum as a reputable wealth management centre in the Asia Pacific region with its comprehensive wealth management solutions.
This is evident as the wealth management sector remains as one of the high growth sectors in the midshore jurisdiction in 2015, with nearly a 28% increase in the number of foundations, bringing the total to 166. And as evidence to the centres allure to those in the region more than 77% of these foundations originated from the Asia Pacific region.
In addition to Foundations, Labuan IBFC is also home to more than 300 trusts, comprising of special trusts as well as purpose trusts.
The midshore jurisdiction is also attractive as it provides access to Malaysia's extensive double taxation treaty network and a simple and straightforward tax system that is complemented by laws to eliminate "fiscal friction" as it offers no exchange control, no transfer taxes, no withholding tax and no indirect taxes that may act as barriers to international transactions, investments and asset management.
In closing, with China's potential to chalk a sustainable growth pattern and the subsequent rise in its affluent population, there is indeed an increased demand in the quest for a jurisdiction to assist in wealth preservation and management needs.
For this, Labuan IBFC with its unique solutions offering a highly effective and comprehensive range of wealth management vehicles, estate management and dynamic succession, possesses all the right tools to meet the ever-growing demands.
The article was first published by China Offshore
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