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Designing a wealth distribution plan  

Wednesday, 20 February 2008

Designing a wealth distribution plan

Many may find wealth distribution a difficult process, so one tends to procrastinate or find convenient ways to distribute wealth without giving due consideration to the objectives. In this final article in the series, CIMB Private Banking and CIMB Trustee Services provide an insight on how a well-structured plan can ensure that the family wealth will be enjoyed for generations.
A FEW weeks ago, Barron Hilton, 80, announced that he would give away a staggering 97% of his wealth of US$2.3bil to charity, thus leaving 3% to be shared among his heirs.
The press had a field day with reports that Paris Hilton, one of the heirs to the Hilton fortune, who stood to inherit an estimated US$100mil, will now receive only about US$5mil.
Of course, US$5mil is not a small sum of inheritance. However, for those who have never been trained to handle money or never had to earn a living, they will struggle at managing such a small fortune.
The great debate was on whether Grandpa Hilton had planned too much too late. If he had made his plans earlier, would we have had the chance of being entertained by the notoriety of young Paris?
This is one of the dilemmas which parents constantly worry about when faced with questions about their wealth distribution: “If I let my children know too much, or if my children realise how much we have, will it destroy their motivation to make something of themselves?”

Paris Hilton will only receive US$5mil from grandfather Barron HiltonThe steps to achieving a suitable wealth distribution plan need not be difficult or arduous. The easiest part of the planning process is to determine which wealth distribution tools are suitable.
Generally, it is best to consider the use of a trust together with a will for a complete wealth distribution structure
A will is a basic necessity to ensure that the order of probate can be granted without any delays, and also to enable one to decide and state how his wealth is to be distributed.
However, in order to create a legacy and to enable systematic distribution to the next generation, it is also important to consider the use of a trust.
Trusts are commonly used by families for the preservation of wealth and to ensure that young children are taken care of.
The benefits of a trust include the ability for family members to receive immediate access to funds for emergency purposes after the death of the founder.
However, more importantly, as a legacy-planning tool, trusts can be used to delay distributions until the children are old enough to handle the wealth.

Considerations when designing a wealth distribution plan
Once the distribution tools are chosen, one needs to set out the wealth objectives and determine the structure while giving consideration to the interconnecting family dynamics.
In setting out the objectives, it is best to consider whether to create a legacy asset, or whether to merely address the issues of additional protection and systematic distribution for the children who may still be young.
It is also important to consider whether the objective of the distribution to the next generation is merely to provide them with a head start in life or to provide them with a piggy bank which can be drawn upon at any time.
Once the objectives have been determined, the next stage is to understand one’s own wealth structure and the asset classes owned.
For example, if the fixed deposit account is held in joint names, then the surviving account holder will automatically inherit the deposit, without the need to address this in the will.
As mentioned in the previous article, many choose to undertake this route of using joint accounts for convenience without due consideration as to whether this forms part of the bigger wealth distribution plan.
If the founder has a family business, he will have to address several issues – how the shares of the existing family company are legally held, and whether they are held by the founder and his spouse or whether there are minority shareholders that are made up of non-family members such as business partners.
Without the understanding of these circumstances, one ends up planning in a vacuum and can create problems for future heirs or even business partners.
If the bulk of the assets held by the founder are liquid assets, they are generally considered easier to divide and distribute, whereas real properties and family businesses are not that straightforward.
It is important to have liquid assets, which can be tapped into by family members for any emergency in the case of the sudden death of the decision-maker. However, due to the liquidity, such assets can be dissipated quickly if not structured properly.
Finally, after laying down the objectives and understanding how the assets are legally owned, the next phase is to consider the various factors which will determine the distribution plan for these assets.
The age of the beneficiaries is always an important factor when considering the distribution of assets to one’s family members.
One of the constant dilemmas which parents face is deciding when is the right time to distribute as they may end up distributing to their children either too early or too late.
In determining when the heirs should inherit, one should consider other factors such as how wealth can impact characters of the beneficiaries and how their motivation may be affected, as well as how to then maintain their values through a properly structured plan.
The other main factor to consider is which assets to distribute to the heirs.
All parents plan to be fair to their children. Some will just divide the assets equally and ensure that all children receive equal shares of what they own.
However, this may not always be the best plan.
Take this scenario: If a person owns a family business, 15 properties and some liquid assets, the easiest and most convenient plan for a person is to divide all the assets into three equal shares for his three children. This may not be a bad plan if the situation warrants it.
However, a situation may arise where one of his children is an artist and is not business savvy, one is a doctor, and only the last child is directly involved in the family business. In this scenario, it may be difficult to slice the family business into three equal slices.
For the child who is an artist and not involved in the family business, it may be a burden to him to be involved in a business which he does not understand. The properties, on the other hand, are simpler to deal with.
Conventional wisdom states that each child should inherit different properties so as to avoid any future disputes amongst the siblings.
Contrary to conventional wisdom, however, dividing the properties into three equal parts with each child owning one-third of each property may not be a bad distribution plan either.
The family dynamics which comes into play here may be the driving factor, especially if the three children are on good terms and where the more financially and business-savvy child would be in a better position to take care of the interests of his less savvy siblings. That is, of course, if the family dynamics warrant it.
This, however, may not be a long-term plan as the children may have their own families and interests, which may at times conflict with the interests of their siblings or their siblings’ family.
As such, a longer term plan, especially if these property assets are considered as prime assets and forms the bulk of the family’s wealth, it may be more suitable to consider holding these assets in a family trust.
The dilemmas for those who have managed to acquire wealth can be deeply worrisome, especially in wanting to preserve and enhance their hard-earned wealth and balancing that with preserving the family’s harmony and unity for future generations.
In creating a legacy and preparing subsequent generations to be responsible stewards of wealth, it is therefore important to plan early, and avoid choosing easy options of wealth distribution purely for convenience.

CIMB Private Banking provides a wide spectrum of wealth management services, including wealth structuring and trust services through CIMB Trustee Services.

Source : Thursday February 7, 2008

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