According to Wealth-X, US$18.3 trillion of collective wealth globally will be transferred by 2030, of which around US$2.5 trillion will be handed over in Asia. As traditional businesses adapt to both the digital era and modern family structures, what tools and strategies should family enterprises consider to support succession planning?
Desmond Teo, EY Asia-Pacific Family Enterprise Leader; Spencer Hsu, Associate Partner, Private Tax Services, EY Corporate Advisors Pte. Ltd.; Jiawen Guo, Head, Family Office & Structuring Solutions, Bank of Singapore; and Lynn Ong, Family Office Advisor, Family Office & Structuring Solutions, Bank of Singapore, share their insights.
How early should family businesses start thinking about succession planning?
Desmond Teo:
It’s never too early. Having the conversation long before the current generation is planning to retire is extremely valuable. Early leadership transition helps family enterprises stay relevant and grow as the next generation brings fresh ideas while still benefiting from the patriarch’s or matriarch’s experience and guidance.
The last thing you want is to have a succession unexpectedly thrusted into the hands of the next generation due to an untimely death or an irreconcilable family dispute. In fact, the best time to start the succession planning conversation is when emotions are not running high.
Jiawen Guo:
I agree. Many families wait until conflicts arise before making formal succession plans. However, it’s far more effective to plan and reach a common consensus during peaceful times while family relationships and ties are strong. Otherwise, people can be distracted by an issue at hand and find it difficult to see the bigger picture.
Some families may find it challenging to have this conversation due to sensitivities or they may be unsure how to approach the issues. This is when it may be helpful to bring an advisor into the picture. Difficult issues can be raised by a neutral party who isn’t emotionally involved and can genuinely be presented as being independent to help facilitate the discussions.
What tools and arrangements should be considered when securing a family enterprise legacy?
Spencer Hsu:
Multiple tools are available, including wills, trusts, insurance, family constitutions, family holding companies and single family offices (SFOs), which are ideal for families focused on investments or family affairs, such as education, family concierge and philanthropy.
The combination of these arrangements typically depends on factors like the family’s objectives, number of generations or family branches, and the size and nature of assets under management. Given that wealth creation within Asia largely happened within the past four decades, there is an increasing need for trusts, SFOs or family holding companies for Asian families that are more institutionalized, with a stronger focus on managing investments.
What new questions should family enterprises consider when thinking about succession planning?
Lynn Ong:
When families plan for ownership succession and the transfer of shares to the next generation, it may seem “fair” to distribute shares equally among the beneficiaries regardless of their involvement in the business. However, this approach can create challenges. For example, one child may actively contribute to the business while others pursue different careers or start their own ventures. Legal ownership not only grants dividend rights but also voting control, which can influence key business decisions. This can become challenging in times of shareholder disagreements or when passive family shareholders hold a majority vote, potentially impeding business operations. Beyond these concerns, families must also consider fairness in recognizing the contributions of family members who work within and outside the business and the allocation of economic benefits.
Related to this, it is also crucial for families to assess the business’s long-term viability in light of the next generation’s aspirations. Traditionally, succession planning focuses on safeguarding continuity and transition of ownership, management and leadership from one generation to another within the family. However, other than an intergenerational succession of the business, alternatives — such as a sale or public offering — may provide a more suitable path forward if the next generation is keen to pursue interests outside the business.
Jiawen Guo:
In terms of planning options, tools like trusts, which hold the company shares, are useful for separating legal ownership, control and management, and economic benefits. In this way, only family members actively involved in the business will have control over business decisions, but passive family members will still receive economic benefits through trust distributions. That said, trusts may not work for all families due to various reasons, including situations where there are foreign ownership restrictions or onerous tax implications. In such cases, holding companies — or foundations in some jurisdictions — may be a better option. Holding companies can be set up with different classes of shares to help achieve certain planning objectives. For example, a class of shares may carry voting rights but not dividend rights and vice versa. Or there may be a special class of shares that gives the patriarch or matriarch super voting rights.
In addition, insurance can be a useful tool to complement families’ planning. The liquidity created could allow certain family members to cash out their share and pursue their own projects. Where appropriate, tailored insurance planning solutions could also be used to address other planning needs for the family. These include but are not limited to the coverage of tax and other liabilities, estate equalization needs, addressing keyman risks, and any philanthropic objectives or projects.
Some families have a significant portion of their wealth locked in illiquid assets, such as their family business. Liquidity solutions can help create cash flow for the family’s immediate needs and cater to family members who are not bequeathed ownership or control of the family business.
Where does personal wealth fit into succession planning?
Jiawen Guo:
Besides their business assets, families should also consider succession plans for their personal wealth. These may be quite different from the succession plans for business assets, especially if there may be plans to appoint heirs to be business successors. An effective succession plan enables a smooth transition of both ownership and management while maintaining segregation of business assets and personal wealth.
When it comes to personal financial assets, families may choose to consolidate their financial asset holdings through a private investment company (PIC) that allows family members to be involved through bespoke shareholding and directorship structures. To further facilitate the orderly succession of assets held by the PIC after the current owner’s lifetime, families may consider holding the PIC through a trust. This can be useful to help address issues like incapacity planning, tax planning, wealth management and protection, and confidentiality.
How should families go about choosing an appropriate business successor?
Desmond Teo:
In the past, succession planning was often based on cultural norms, such as having only male descendants take over the family business. But women are increasingly getting involved in businesses or investing in them. The last Asia-Pacific EY Family Enterprise Young Generation Leaders Program hosted an almost equal number of female and male leaders.
Often, a separation between ownership and management is seen in the second or third generations. Over time, families tend to grow faster than the business. There could be dozens of cousins. Not everyone can be directly involved in the business. Business needs may also outstrip competencies found within the family. In this case, the net must be cast wider than the family to find the commercial competencies needed to get excellent performance out of the business.
How can family enterprises keep up with modern digital trends while staying true to traditional values?
Desmond Teo:
The upcoming generation of digital natives has different perspectives that can bring innovative ideas for adopting digital tools, adding revenue streams or changing business models. It’s a great thing to bring their thinking into the business early. However, a cornerstone of family enterprise success is a strong set of shared values. Those values may be slightly refined to reflect changing times, but fundamental values typically stay the same. It’s important that these continue to serve as the lodestar for the business while the next generation experiments with new ideas in a safe environment. Experiments should be sandboxed to support the “try, fail, learn” model of innovation — ideally when the previous generation is still there to guide new endeavors.
How can family members manage conflict resolution in a way that preserves cohesion and does not jeopardize the future of the business?
Desmond Teo:
A key ingredient for a smooth succession is overcoming the mindset that business owners must work in the business. In this case, it’s so important to establish expectations early in terms of who in the next generation will be involved in the business. Family constitutions are extremely helpful in such cases. These documents spell out values important to the family, the ownership structure, a distribution policy, and employment criteria and conditions for family members. For example, these individuals may be remunerated based on market rates, with performance measured against what’s expected in the market.
In an instance, a family constitution made it clear that it was not a birthright to be involved in the business and that employment would be based on individual interests, strengths and availability. The siblings were educated in the family constitution from an early age. They understood that if one was chosen to lead, this was a responsibility to be borne on behalf of the rest of the family. It was a change of mindset that helped set the family enterprise up for success during generational change.
