Our previous volume 4 defines the extent of complexities of an individual‘s wealth. In this article, we shall be discussing about 10 common mistakes that a high complex individual had committed in their Asset Protection and Preservation strategies on their hard earned wealth.
10 common mistakes in Asset Protection and Preservation by High Complex Individual
(1) Having a Will is always almost not complete
Whether you are a Muslim or a Non Muslim, writing a Will or Wasiat enable you to dictate who should inherit your hard earned Wealth. While a Non Muslim can Will away 100% of his/her wealth as provided under the Will Act 1959 (amended 1997), a Muslim on the other hand, can only Wasiat away 1/3 of his/her wealth as provided by the Quran as the Faraid Law of distribution. However and no matter how it’s done, both of these instruments are just a vehicle for transmission of your wealth.
Firstly, it does not provide for any confidentiality since the grant of probate is issued by the High Court (public have access to such a document). Therefore, chances of unscrupulous individuals knowing who inherited your assets are high.
Secondly, a Will is subject to contest as in the Nina Wang’s from Hong Kong. She fought for 5 years to prove that the Will written by her late husband was genuine and legitimate and that the rightful beneficiary was herself. Such complexities are equally the same when there are potential and foreseeable feuds over a family’s wealth. Issues like squabbling, squandering and spendthrift heirs are some most common problems in such families. Can such internal strife be solved amicably among heirs without bickering, lawsuit or rivalry? What would happen upon death, will they challenge the Will? If chances are, they will, then, should we put all assets in a Will? Of course not! It may complicate matters and may not have significant help as to whether a Will is written or not. Asset Protection and Asset Preservation will be the solution for such complexities.
Firstly, it does not provide for any confidentiality since the grant of probate is issued by the High Court (public have access to such a document). Therefore, chances of unscrupulous individuals knowing who inherited your assets are high.
Secondly, a Will is subject to contest as in the Nina Wang’s from Hong Kong. She fought for 5 years to prove that the Will written by her late husband was genuine and legitimate and that the rightful beneficiary was herself. Such complexities are equally the same when there are potential and foreseeable feuds over a family’s wealth. Issues like squabbling, squandering and spendthrift heirs are some most common problems in such families. Can such internal strife be solved amicably among heirs without bickering, lawsuit or rivalry? What would happen upon death, will they challenge the Will? If chances are, they will, then, should we put all assets in a Will? Of course not! It may complicate matters and may not have significant help as to whether a Will is written or not. Asset Protection and Asset Preservation will be the solution for such complexities.
(2) Putting all your Wealth in a Will = Suiciding your Wealth
The above statement may sound weird but if you are highly complex, as defined in our volume 4, please read on.
Thirdly, since all Wills go through Estate Administration process and legal hassles, all assets under the deceased’s name will be frozen. During this interim, family members may face cash flows difficulty. Lifestyle expenses, education fund and family cash flow are some of the most common issues affected by such trauma.
Fourthly, the estate size may be significantly reduced due to claims from claimants who have priority over others. They are…
Thirdly, since all Wills go through Estate Administration process and legal hassles, all assets under the deceased’s name will be frozen. During this interim, family members may face cash flows difficulty. Lifestyle expenses, education fund and family cash flow are some of the most common issues affected by such trauma.
Fourthly, the estate size may be significantly reduced due to claims from claimants who have priority over others. They are…
- medical and or funeral expenses if any,
- administrator or executor who according to the Probate and Administration Act 1959, can claim up to 5% of the Estate size,
- Inland Revenue Bureau, where all taxes have to be paid,
- Creditors’ claims, whether they are corporate or individual and lastly
- the residues shall be payable to your beloved family members as according to your Will.
(3) Giving all the Wealth to your Spouse and Children, by assuming that they are as competent in managing it, is called INSANITY
We have received numerous comments like “upon my demise, I don’t care how they (heirs) handle my wealth. I have done my part by giving them their best. Now it is their turn to take care of it. If they lose it, that’s their problem”. On second thought, when you look back, their spouses were merely homemakers and their children were hardly of majority age. How on earth can one disregard such foreseeable, rationale and common sense that their heirs may mishandle the wealth due to their nature of incompetencies? Surprisingly, when it comes to decision making for their businesses or wealth accumulation processes, they are inclined to apply their best understanding and judgment on interests of their family to the fullest. Isn’t there a mismatch between the both or is it due to ignorance that our clients are unaware of?
While it is not wrong to have such mindset, we usually probe further “Mr. Client, can you transfer your wealth to them now?” Obviously their answer will be “of course not, I don’t think they are ready to handle my wealth and besides, I’ll lose control if I do all the transfer now.” Bingo! The irony is that they would rather not transfer their wealth and observe how their heirs manage the wealth during their lifetime. They would rather transfer the wealth to their heirs upon their demise and be unable to observe how their heirs manage it. Isn’t that a ridiculous decision?
The point here is planning for your Wealth is a continuation of human ambition. The fulfillment of that ambition is by acquiring and holding on to properties. It is a statement of a life commitment to continue those legacies, while maintaining a lifestyle that is comfortable for you and your family. It’s the ability to share your success with others by passing it down to them so that they can continue the journey. It allows you the opportunity to control your success both during life and after death. Your Wealth, after all, is all that you have made and built through careful planning, despite the risks faced during your lifetime. One good example is your potential creditor, who, through lawsuits could end your wealth. Therefore, it is your onus to bring it to the next level by utilizing all your resources to create an environment that will be sufficient for you and that will extend beyond your life. It is the ability to share your success with others by passing it down to them so that they can continue your journey. It allows you the opportunity to control your success both during life and after death.
While it is not wrong to have such mindset, we usually probe further “Mr. Client, can you transfer your wealth to them now?” Obviously their answer will be “of course not, I don’t think they are ready to handle my wealth and besides, I’ll lose control if I do all the transfer now.” Bingo! The irony is that they would rather not transfer their wealth and observe how their heirs manage the wealth during their lifetime. They would rather transfer the wealth to their heirs upon their demise and be unable to observe how their heirs manage it. Isn’t that a ridiculous decision?
The point here is planning for your Wealth is a continuation of human ambition. The fulfillment of that ambition is by acquiring and holding on to properties. It is a statement of a life commitment to continue those legacies, while maintaining a lifestyle that is comfortable for you and your family. It’s the ability to share your success with others by passing it down to them so that they can continue the journey. It allows you the opportunity to control your success both during life and after death. Your Wealth, after all, is all that you have made and built through careful planning, despite the risks faced during your lifetime. One good example is your potential creditor, who, through lawsuits could end your wealth. Therefore, it is your onus to bring it to the next level by utilizing all your resources to create an environment that will be sufficient for you and that will extend beyond your life. It is the ability to share your success with others by passing it down to them so that they can continue your journey. It allows you the opportunity to control your success both during life and after death.
(4) Appointing an individual as Legal Personal Representative is a big MISTAKE.
A Legal Personal Representative is also known as:
Therefore, it obvious that the power warranted to them are almost boundless, dealing with complexities like having many companies, more than one family, having many assets onshore and even offshore (that may be huge), handicapped child and etc that most complex individual may possess.
Naming their spouses, brothers, sisters or even parents as their Legal Personal Representative are some common nomination that we had seen in a Will, Insurance policy (ies) and Power of Attorney. While generally it works for less complex individual or the medium income earning group, such nomination may not be effective for a complex individual. Question like “what happens if the Legal Personal Representative….
Obviously, the next question is “who and what constitute the right person to be the appropriate Legal Personal Representative?” Internationally, it has been proven that a Licensed Trust Corporation will do just fine. However, the issues of experience, competency, integrity, professionalism, confidentiality and independent conduct of the Trust Corporation have always been in the mind of our client (as the environment for retail sector are at its infancy stage in Malaysia). When in doubt, choosing an offshore Trust may be a better choice where independence and experience are concern. Alternatively, choosing and appointing a Protector will also provide a good check and balance. The Protector’s role is merely to advise and the Trustee’s role is merely to manage the Wealth for the benefit of the beneficiary (ies). Neither the Protector holds the money, nor do they have any access to the Wealth. Therefore, they do not possess any self interest. Meanwhile, the Corporate Trustee merely takes instructions from the Protector. These two will act independently for the benefit of the beneficiary (ies)
However, some common rejections from our client are “it costs too much to appoint a Corporate Trustee and a protector to manage my wealth” Again, it is merely ignorance. Would you rather pay peanuts to get monkeys or engage competent, professional and qualified personnel to do the right thing? Just like all the professionals whom you have employed or recruited and who have, one way or the other, helped you acquired your Wealth.
- an Executor (in the event of a Will),
- an administrator (when there is no Will),
- a donee (as in Power of Attorney) and
- anyone that is deemed fit appointed by the court to represent the deceased’s interest for the benefits of the family members.
Therefore, it obvious that the power warranted to them are almost boundless, dealing with complexities like having many companies, more than one family, having many assets onshore and even offshore (that may be huge), handicapped child and etc that most complex individual may possess.
Naming their spouses, brothers, sisters or even parents as their Legal Personal Representative are some common nomination that we had seen in a Will, Insurance policy (ies) and Power of Attorney. While generally it works for less complex individual or the medium income earning group, such nomination may not be effective for a complex individual. Question like “what happens if the Legal Personal Representative….
- Doesn’t outlive us? Is there any substitute? Does an individual have perpetual existence?
- Squanders away all the RM 10 million Wealth while he/she is supposed to hold on Trust on behalf of the beneficiary
- Have dispute among the beneficiary (ies)? Are there any provisions for remedies?
- Decided to renounce their responsibilities? Is there a successor?
- Lacks impartiality, competency, integrity and professionalism in handling such massive Wealth?
Obviously, the next question is “who and what constitute the right person to be the appropriate Legal Personal Representative?” Internationally, it has been proven that a Licensed Trust Corporation will do just fine. However, the issues of experience, competency, integrity, professionalism, confidentiality and independent conduct of the Trust Corporation have always been in the mind of our client (as the environment for retail sector are at its infancy stage in Malaysia). When in doubt, choosing an offshore Trust may be a better choice where independence and experience are concern. Alternatively, choosing and appointing a Protector will also provide a good check and balance. The Protector’s role is merely to advise and the Trustee’s role is merely to manage the Wealth for the benefit of the beneficiary (ies). Neither the Protector holds the money, nor do they have any access to the Wealth. Therefore, they do not possess any self interest. Meanwhile, the Corporate Trustee merely takes instructions from the Protector. These two will act independently for the benefit of the beneficiary (ies)
However, some common rejections from our client are “it costs too much to appoint a Corporate Trustee and a protector to manage my wealth” Again, it is merely ignorance. Would you rather pay peanuts to get monkeys or engage competent, professional and qualified personnel to do the right thing? Just like all the professionals whom you have employed or recruited and who have, one way or the other, helped you acquired your Wealth.
(5) No provision in Wealth Preservation for Generational Wealth
Generally, most Asians or should I mentioned Malaysians, for that matter, have little knowledge or awareness that they can preserve their wealth for many generations on their demise. While the founder fought from rag to riches, their next generation may merely enjoy the fruits of the predecessor. Often than not, issues like spendthrift, squabbling and squandering heirs are some common bugs among the high complex individual families. Such heirs are known to have Silver Spoon Syndrome.
However, many are not aware that Generational Wealth Strategies are part and parcel of the Wealth Succession Plan. It gives you the option to plan for those who you think can continue your journey and to perform some unfinished works that you always wanted to do such as charitable or philanthropic causes. One good example of Generational Wealth Strategy planning is where the idea of giving the wealth to their children but never letting them own it until they reach the age of 30 or 35 years. Preventing the silver spoon heirs from squandering the hard- earned wealth, leading and coaching them on the importance of wealth management are part of Generational Wealth Strategies.
One classic case of generational wealth strategy is a well-known Singaporean also known as the Pineapple King. It was in the nineteen century that he determined to break the 3rd generation taboo. He set down a legacy of 100 years and today all his 16 beneficiaries who outlived the 100 years legacy had benefited with about RM3.5 million each.
Depending on the goals and objectives of an individual, there are many vehicles that one can select to achieve their Generational Wealth Strategy. Such are Family Trust that can be either offshore or onshore depending on the domiciliation of assets and objectives of an individual, Family Holding Company commonly known as Family Wealth office can be set up either onshore or offshore.
Some salient points to consider are…
However, many are not aware that Generational Wealth Strategies are part and parcel of the Wealth Succession Plan. It gives you the option to plan for those who you think can continue your journey and to perform some unfinished works that you always wanted to do such as charitable or philanthropic causes. One good example of Generational Wealth Strategy planning is where the idea of giving the wealth to their children but never letting them own it until they reach the age of 30 or 35 years. Preventing the silver spoon heirs from squandering the hard- earned wealth, leading and coaching them on the importance of wealth management are part of Generational Wealth Strategies.
One classic case of generational wealth strategy is a well-known Singaporean also known as the Pineapple King. It was in the nineteen century that he determined to break the 3rd generation taboo. He set down a legacy of 100 years and today all his 16 beneficiaries who outlived the 100 years legacy had benefited with about RM3.5 million each.
Depending on the goals and objectives of an individual, there are many vehicles that one can select to achieve their Generational Wealth Strategy. Such are Family Trust that can be either offshore or onshore depending on the domiciliation of assets and objectives of an individual, Family Holding Company commonly known as Family Wealth office can be set up either onshore or offshore.
Some salient points to consider are…
- Who and what provisions to be put in place? Anyone or any organization?
- Multiple levels of and substitute beneficiaries?
- Determine the amount that the beneficiaries is to receive with inflation adjusted, duration of funds and distribution when the funds end.
- State any legal conditions for the income to be enjoyed.
- Have periodic payments to the beneficiaries.
(6) Lack of Asset Protection Strategist to their Hard Earned Wealth – Shrinkage
Asset Protection can be defined as figuring and applying a series of lawful techniques that protect your assets from claims of future creditors, squandering heirs, dissolution of marriage and possible litigation due to personal negligence that would have significant impact on one’s hard earned wealth.
One typical example is Director’s Guarantee. In the event of default in servicing a loan payment by their company, the creditors may choose to come after the directors where they are jointly and severally liable for the guaranteed amount they had provided. Many directors were made bankrupt when the loan amounts were too huge for them to repay. Imagine, all their hard-earned wealth would have perished to repay their debts. Malaysians are forgetful lots. Although some may be aware of these issues, many chose to be ignorant about these painful lessons experienced by others.
Professionals too are faced by many kinds of risk. Risk of being sued due to negligence committed retrospectively for unlimited liability. More often than not, their Professional Indemnity Insurance may not be sufficient to cover those liabilities. Nobody is perfect and due to some “uncontrollable factors”, negligence is committed unknowingly. Hence, their personal wealth has to suffer and thus their household expenses, child education and living maintenance lifestyle are badly affected.
Segregation of personal wealth from own name, while maintaining control, is vital in order to prevent loss/shrinkage of our hard-earned wealth and must be planned concurrently when committing into any foreseeable risk. Such segregation process is called ASSET PROTECTION planning. In the event of lawsuits or bankruptcy suits, this protected wealth will not be affected and are always there for your beloved family.
One typical example is Director’s Guarantee. In the event of default in servicing a loan payment by their company, the creditors may choose to come after the directors where they are jointly and severally liable for the guaranteed amount they had provided. Many directors were made bankrupt when the loan amounts were too huge for them to repay. Imagine, all their hard-earned wealth would have perished to repay their debts. Malaysians are forgetful lots. Although some may be aware of these issues, many chose to be ignorant about these painful lessons experienced by others.
Professionals too are faced by many kinds of risk. Risk of being sued due to negligence committed retrospectively for unlimited liability. More often than not, their Professional Indemnity Insurance may not be sufficient to cover those liabilities. Nobody is perfect and due to some “uncontrollable factors”, negligence is committed unknowingly. Hence, their personal wealth has to suffer and thus their household expenses, child education and living maintenance lifestyle are badly affected.
Segregation of personal wealth from own name, while maintaining control, is vital in order to prevent loss/shrinkage of our hard-earned wealth and must be planned concurrently when committing into any foreseeable risk. Such segregation process is called ASSET PROTECTION planning. In the event of lawsuits or bankruptcy suits, this protected wealth will not be affected and are always there for your beloved family.
(7) Most have Personal Will but no Corporate Will – deceased family’s interest are not protected from Surviving Business Partner
Many clients used to ask “What is a Corporate Will and what kind of message are we are implying” Frankly, we do not mean to confuse our clients but it is merely rendered for easy understanding that it has something to do with the death of any of the partners in a Company. Shareholders, joint venture, partnership and nomination agreement are some common contracts in our daily lives. We were often engaged by our client to look into the area of risks and the possible impact to their family wealth. To our dismay, most of these contracts did not have the “what if” scenario i.e. DEATH!
Some essence of Corporate Will consists of the following;
Some essence of Corporate Will consists of the following;
- Risk management for mind mapping perspective to calculate all angles of possible risks
- Buy and Sell provisions among partners in the event of death
- Dictating the Valuation formula
- Formulating the Business Continuation Trust
- Funding Mechanism to fund the sale and purchase of deceased shares
- Tax and Accounting implication.
(8) Fail to Plan for Business Succession Plan – the T-junction syndrome
According to a research by Grant Thornton Canada, one of the six global accounting, tax and business advisory organization,
70% of successful business did not make it to 2nd generation and 90% of successful business did not make it to 3rd generation
The above research is terrifying, judging for the facts that families controlled about 40% of public listed companies in Malaysia, top ten families own about a quarter of the market capitalization and out of the top ten firms on KLSE, 3 are family controlled (the rest are mostly GLCs).
Most founder of successful businesses play 2 major roles during their helm. These 2 roles are called ownership and leadership role. The survival of the company depends on these essences and because of lack of awareness and ignorance among them with regards to its complexities, challenges and options, they usually fall short of passing down their baton to the next generation.
70% of successful business did not make it to 2nd generation and 90% of successful business did not make it to 3rd generation
The above research is terrifying, judging for the facts that families controlled about 40% of public listed companies in Malaysia, top ten families own about a quarter of the market capitalization and out of the top ten firms on KLSE, 3 are family controlled (the rest are mostly GLCs).
Most founder of successful businesses play 2 major roles during their helm. These 2 roles are called ownership and leadership role. The survival of the company depends on these essences and because of lack of awareness and ignorance among them with regards to its complexities, challenges and options, they usually fall short of passing down their baton to the next generation.
(9) Appointing a proxy in the company… how does it relate to their Individual Estate Plan
Proxies also known as nominee arrangement are some common typical business structures set by Malaysian at large. One of the most common reasons is preservation of identity. The Malaysia National Economic policy has one way or the other encouraged a multi-racial business partnership involving Bumiputeras as pre-requisite entry to government contracts, licensing of business activities and etc.
In order to endure their ongoing businesses, many are ignorant about the implication of their beneficial interest on the shares that were held by their proxy upon heir proxy’s death. Upon the proxy’s death, will the actual beneficial owner be able to regain their control and the management of the company? Will the proxy’s deceased family pose a challenge to the
As the saying goes ‘analysis by paralyses’, the following matters are some common typical planning done by many Malaysians.
(I) Pre-signed Form 32A.
(II) Legal arrangement – Trust Deed
In order to endure their ongoing businesses, many are ignorant about the implication of their beneficial interest on the shares that were held by their proxy upon heir proxy’s death. Upon the proxy’s death, will the actual beneficial owner be able to regain their control and the management of the company? Will the proxy’s deceased family pose a challenge to the
As the saying goes ‘analysis by paralyses’, the following matters are some common typical planning done by many Malaysians.
(I) Pre-signed Form 32A.
- After 10 years, there could be some changes at the board level? Will the new board approve such transfer?
- If there are changes in the Form 32A format, how would you deal with your current pre-signed form? Can you still get your proxy to sign a new form? How will you be notified about such changes?
- Can the deceased proxy’s family contest the validity of such an arrangement?
- If the case goes to court, what will be your legal position on this case?
(II) Legal arrangement – Trust Deed
- What will be the legal position of the Non-Muslim beneficial owner in a Bumiputera status company where its pre-requisite condition includes that the beneficial interest of the company must also be a Muslim?
- In the case of a Muslim proxy, how does it affect the Non-Muslim beneficial owner should the Muslim proxy dies?
(10) Lack of Generational change strategies in Family business - passing down the baton is almost difficult.
In our opinion, one of the common problems in Family Businesses is high self-ego among all and more often than not, family squabbling issues. Generational change strategies are undivided planning issues that cannot be taken lightly. Imagine a founder having more than 1 family, perhaps 3 families, how would he plan for his succession to be fair or equitable (as the saying goes “you must be fair but not equal”) to all his children from different families?
Planning it today is much like any other calculated risk that you have taken during your early time in business, such as enduring the business slump cycles, expansion, securing contracts, pumping in more capital and investing into other business feel will fetch good returns and with those planning, it has brought you to where you are today.
Some tips and traps, when planning for Generational change that we should look into are as follows;
Planning it today is much like any other calculated risk that you have taken during your early time in business, such as enduring the business slump cycles, expansion, securing contracts, pumping in more capital and investing into other business feel will fetch good returns and with those planning, it has brought you to where you are today.
Some tips and traps, when planning for Generational change that we should look into are as follows;
- What are the minimum entry qualifications or criteria to be qualified as a candidate?
- What position or is it going to be a bottom up position?
- Is there a career development timeline and program on leadership skills?
- What are the critical success factors of the organization and quality management control?
- Company vision and mission to carry on by the successor?
- Are there any support from the rest of the family?
- Where there are many children, is there a need for family constitution to be in place?
- How about the key employees? How do they view such changes?
- External support like, stakeholders, trade partners and etc.
At A.D. FINANCIAL, we start our relationships by listening to you and putting… YOU FIRST
Alvin Yap is the Principal Consultant and Group Managing Director of A.D. Financial Sdn Bhd (“ADF”). Under his leadership, ADF has expanded its footprint in Asia by establishing offices in Singapore and Hong Kong to provide consultancy for high net worth clients from Singapore, Indonesia, Vietnam, China and other countries. Besides that, he is highly sought after to speak in regional and international family wealth planning seminars. His expertise in Business Succession Planning has led many business owners and founders of listed companies to seek his advice on their complex business continuation and personal wealth matters.
Alvin is currently devoting his Practice to Multi Family Office Advisory for high net worth Individuals in structuring their complex wealth matters with a view to preserve their hard earned wealth. A strong believer of “Preservation First, Accumulation Second” and “Distribution Last”, Alvin’s expertise injects a fresh perspective on how wealth and family values can be preserved for many generations in Asian families.