This article highlights the importance of intergenerational wealth planning in China, where the family business often accounts for a large portion of HNW families' assets.

International financial centres such as the British Virgin Islands and its rivals are battling to win business in Asia. Notwithstanding recent economic headwinds in the Asia region, the growth of a large and affluent middle class there is positive news for centres well-versed in structuring, holding and transferring assets in a tax-neutral manner. In this article, Claire Abrehart, managing director of AMS Financial Services, BVI and Team BVI representative, examines China's potential. The views expressed are those of the author; the editors of this publication are pleased to share these comments and invite readers to respond.

China accounts for a fifth of the world’s population and holds nearly 10 per cent of global wealth. A new billionaire was created almost every week in China in the first quarter of 2015, according to a report by UBS and PricewaterhouseCoopers. The nature of the wealth boom is unlike those seen in developed economies. But over the last decade, a generation of young affluent individuals has emerged from humble beginnings and experienced more wealth than the society around them has seen in previous years.

But Chinese society is ageing. By 2050, 25 per cent will be over 65. As this generation ages, they face a dilemma of how to preserve wealth and leave it to their families. This represents a huge risk for families if the process is not managed effectively, as much wealth in China tends to be tied up in large, complex family businesses.

Beyond high net worth individuals (HNWIs), China’s growing middle class has also become more influential. Many businesses within China’s expanding middle class started as small operations often run by members of the same family. Unlike the trajectory of family-owned businesses in developed economies these businesses tend to be run by the same person; despite their growth into medium-sized or larger enterprises, the patriarch or matriarch remains the dominant person to whom everyone in the family defers when it comes to business strategy, growth and preservation of capital.  

With increasing numbers of HNWIs and middle class businesses - both determined to preserve their wealth - intergenerational wealth planning is becoming all the more relevant. This makes the role of a family trust potentially life-changing for generations of wealthy Chinese.

Policy impact
The potential impact of China’s abandonment of the “one child” policy on wealth planning remains to be seen. There is no evidence that lifting these controls would result in a crippling population surge, and from what can be observed since the initial relaxation in 2013 it is unlikely there will be a significant increase in the birth rate in the immediate future.

It therefore seems unlikely that wealth planning and wealth transfer will be markedly different whether there is one, or more than one, dependant. There will not be any significant changes in terms of the tools used (and in particular the use of the family trust) – although the considerations will likely change over time depending on the number of children and how the patriarch/matriarch wishes to provide for them –  since not all the children may want to be involved in the family business.  

As wealth planners the key is to focus on succession planning broadly, irrespective of the one-child policy impact – and the issues that individuals and family-run businesses will face: are the children capable of looking after the money, are all the children interested in the business? Even if the birth rate does increase, it will be a generation before the changes are felt.  

So what should families focus on? One of the big differences between the closely held family business compared to a business with more diverse ownership is that the family business tends to employ more family members in management positions who are often paid more than the market rate. In addition there is significantly more potential for family disputes to arise over the direction of the business. This is an area where succession planning can be very useful to diffuse tensions.   

Those doing business in China will invariably deal most frequently with the client’s “trusted advisor” - more often than not the accountant, who then may involve lawyers and investment advisors. Direct contact with the Chinese patriarch or matriarch may be rare, but is absolutely necessary to directly establish their wishes and get a feel for the family dynamic. It is important to develop a shared vision, one that both the patriarch/matriarch and the next generation buy into so that there is a clear path for the future.  

The beauty of trusts is that they can cater for this shared vision. Trusts are a very flexible vehicle and can be set up with specific purposes to satisfy the requirements of the whole family. Trusts can be set up to pay for the overseas college education of children or for wider purposes for anticipated future generations.  

In addition the settlor can be very specific about matters such as what age the child inherits, or receives shares in the family business. Where there is more than one child, a trust can assist where some children work in the business and some do not, spreading the benefit to those who do not.

The British Virgin Islands has had a flourishing trusts sector for over 50 years beginning with the enactment of the Trustee Ordinance in 1961, which was based on English trust law at that time. Since then, BVI trust law has twice been modified by legislation designed to enhance the flexibility and utility of the trust product as a wealth management vehicle.

VISTA is considered to be one of the most innovative pieces of international trust law and the reason why the BVI has become a leading global centre for trust and estate planning and wealth management, and a jurisdiction of choice for high net worth and ultra-high net worth families from around the globe, particularly in Asia.