Mark Smallwood, head of wealth management solutions, Asia Pacific at Deutsche Bank Private Wealth Management, talks to Innovative Investor about the issues HNWIs in Asia need to consider, and the steps they can take, to address legacy-transfer issues.

Innovative Investor - How do HNWIs in Asia view succession planning? And how is this different from HNWIs in the West?

Mark Smallwood - In the West, a large percentage of the population dies intestate: that is, without a legal Will. The figures are probably even higher in Asia given the greater cultural sensitivities around discussing the issue of passing away. Our key message to our Asian clients is that this should not be a discussion about death but a discussion of legacy. The family wealth is not for just one generation but, hopefully, for many generations to come so it is clear that planning on the intergenerational transfer and continuity of this wealth is an especially important decision for the successful businessperson.

In China, for example, the system is similar to most western countries - if there is no Will the state decides which family and relatives will receive the assets and in what proportion. If a legal Will does exist then the assets will be distributed in accordance with the deceased's instructions. The simple advice we give to our clients is to visit their legal advisor and to at the minimum execute a valid Will.

The execution of a valid Will means there is a clear, unambiguous record of a person's wishes for their legacy and the transfer of the estate can occur much more quickly than under a statutory process. The costs associated with the transfer of the estate are also lower than under a statutory process.

It is common for HNWIs to have assets in multiple jurisdictions so in drafting the Will, it is important the legal adviser knows of all jurisdictions in which the assets are based. In some cases a foreign Will needs to be drawn up subject to the laws of the jurisdiction in which the assets are located.

Innovative Investor - In many jurisdictions, HNWIs use trusts as an estate and succession planning vehicle. What are the key benefits of setting up a trust?

Mark Smallwood - One of the main benefits of a Trust as a succession planning vehicle is that it is a private contractual arrangement between two parties, the Settlor and the Trustee. As a private document, a Trust is not subject to public scrutiny, whereas a Will is a public document and requires execution through a court. Under a Trust arrangement, the Settlor transfers the title of the assets to the Trustee who holds the assets on behalf of the Settlor for the beneficiaries who are selected by the Settlor, and may indeed include the Settlor.

For example, Mr A transfers the title of his bank accounts to a professional trust company that holds his assets for his children. In the Trust agreement, Mr. A and the trust company agree that during Mr A's lifetime he can manage the bank accounts and instruct the Trustee to make payments to him or third parties.

A trust agreement might also state that in the event of Mr A's death, the Trustee should hold on to his assets until any children reach, say, 25 years of age. In the meantime, the Trustee can use their discretion to make payments on behalf of the children until they turn 25 for matters such as education, healthcare and general living expenses.

Innovative Investor - There are many HNWIs, especially Chinese private investors, who have offshore assets. What are the main aspects of cross border planning that investors should be mindful of?

Mark Smallwood - Chinese HNWIs, for example, often may have assets outside China, taking the form of businesses, real estate and bankable assets. Many of our clients send their children overseas either for further education purposes or to help build their business empires. Such a move might be permanent or temporary - or as often, temporary and end up permanent.

Often clients fail to correctly plan their personal financial matters appropriately across borders. A common example is the case of a wealthy Chinese family sending their son to a university in the US. When the son finishes his postgraduate studies, he decides to stay on to expand the family's business in the US market. The son obtains a Green Card, is the owner of the US business and his longer term plan is to return to China once the business is up and running and take over the family business from his father when he retires.

What most individuals fail to realise is that the US Green Card is a permanent resident certificate, and subsequently the US assumes the person has the intention to reside permanently in the US. In the above example, the son who has been residing in the US for the last 10 years is a US taxpayer and his world wide income in the US is taxable regardless of where he resides. So, on returning to China, he is still subject to income, capital gains and inheritance tax in the US as well as China. This means that when he inherits the Chinese family business from his father, that business will now be in his taxable US estate and, when the son himself dies, the Chinese family business that he inherited will be subject to US inheritance tax, which could be as high as 55%.

Those planning to surrender their Green Card should also be aware that under recent legislation in the US, individuals who have held a Green Card for more than eight out of the last 15 years will also be subject to an exit tax based on mark-to-market valuation of their worldwide assets as well as continuing US tax on US source income for a period of 10 years after this date, and should they spend more than 30 days in the US in a year during this 10-year period, they will be taxable on their worldwide income.

Unexpected tax consequences can be avoided for wealthy families moving out of the borders of China by putting in place effective succession (legacy) plans for the non-Chinese situs assets. In the above example, if the son had stayed to work in the US under a Visa arrangement (a Visa is not a permanent resident certificate), at such time when he returns to China, he simply surrenders the Visa and is no longer subject to US taxes. Also if the son intends to remain in the US and the father in China, rather than leaving his assets directly to the son, the father could leave selected assets to a carefully structured Trust. In this regard, the above structure would derive asset protection benefits in addition to the tax benefits.

For wealthy Chinese persons with international assets or family members residing in different parts of the globe, potential tax consequences must be understood and appropriate measures need to be taken to legally ensure that tax exposure is minimized and that there is an effective structure in place to ensure the smooth succession of the family legacy, whilst conforming to foreign and domestic laws.

Innovative Investor - What other advice can you give private clients looking to protect their family and business legacy?

Mark Smallwood - Another building block in planning the intergenerational family legacy is the use of life insurance to secure protection for both the family and the business, and health insurance to provide for private health care costs for family members. The same principles that govern the family are also applicable to the business.

The two principal types of life insurance are term insurance and whole life insurance. Term insurance is designed to provide a payment of capital on the death of an individual during a specific period of time, while whole life insurance is designed to pay out upon the demise of the insured. In practical application, term insurance will be used to mitigate short term liabilities - for example in the case of a large loan taken out to fund a capital investment in the family business. If the loan is expected to be paid down over five years - and the patriarch were to die within this five-year period, there may be a significant problem due to his 'Key Man' status in generating business profits. In this case the business can insure the 'Key Man' for the amount of the loan for the five-year term.

In the case of whole life insurance, the family patriarch may decide that while his son is likely to take over the business when he passes away, he would also like to ensure that his daughter receives a commensurate cash amount to ensure her long term security. In this case, the liability arises on the eventual passing of the patriarch so he will undertake a whole of life policy on his life for the benefit of his daughter, with the payment being made on his passing whenever that should arise. Often the policy itself may be held in a trust structure.

Finally, many HNWIs should also consider private medical cover for them and their families. For a modest outlay, a comprehensive cover can be secured to cover 'catastrophic situations' such as multiple injury road accidents, for example, where the medical costs could be significant. A good healthcare policy could prove invaluable even to a very wealthy family.

Innovative Investor - What is the role of private banks when addressing succession planning needs of high net worth clients in this region?

Mark Smallwood - With the growing sophistication of the financial sector in Asia, we see a polarisation of services as it occurs internationally, and it is important for HNWIs to understand the different service levels provided by banks, brokers, family offices and independent asset managers.

The private banking arm of a major bank should be able to address multiple needs of HNWIs utilizing not only their private banking platform but the investment banking, corporate finance and for succession planning their Fiduciary Services platform which will typically take the form of a number of trust companies in various jurisdictions. Clients are reassured that by having a major corporate balance sheet behind their trustee, they have the peace of mind to know that there is a solid long term foundation in place for the long term management of their fiduciary assets (which are not on the trust companies balance sheet). Furthermore the private bank will normally have good connections with non-banking specialists such as tax and trust lawyers and insurance brokers who provide complementary solutions and advice.

Typically the client raises the issue with their Relationship Manager who is the point person and who will bring in specialists such as the bank's Wealth Planners to discuss the clients' needs and recommend appropriate solutions to their requirements. The ultimate goal is to ensure that the clients' holistic as well as investment needs are fulfilled.