Inadequate provision or delay in implementing a succession plan
could be detrimental to the family business and family harmony. The reason why
most family businesses fail to survive beyond the third generation is due to
the complex interactions and conflicting interests among family members on
issues such as how the business should be run and the power struggles among the
top management. In general, most business owners plan to distribute their
shares in the family business to their children. The following problems arise
as the number of shareholders grow.
Private
Foundation
Another effective means of sustaining wealth for the truly
wealthy is to limit the ownership of all the beneficiaries. A structure that
can achieve the above objective and allows the business owner to retain more
control over assets is to set up a private foundation based on civil law. A
private foundation is a separate legal entity set up by an individual, a family
or a group of individuals, for the purpose of philanthropy or private wealth
management. For simplicity, a private foundation is basically a hybrid of a
trust and a corporation, usually established by a founder to hold assets with
the objective of managing these assets for the benefit of the beneficiaries on
a contractual basis.
Some families use foundations to create a legacy. A foundation
established in a loved one’s name is a way to honour that individual even after
he or she has passed on. Establishing a foundation in a family name can also
encourage family members other than the founders to participate and provide a
common cause to foster bonding among family members across multiple genera-
tions.
Normally, the supervision of a private foundation is done by the
jurisdiction government where the foundation has its domicile. Labuan
International Business and Financial Centre (IBFC) is one of the few common law
jurisdictions in Asia Pacific that caters for both trusts and foundations with
a choice of conventional or Islamic (Syariah) model.
The administration of a private foundation established by a
founder consists of a council, an officer and a secretary. The council is
responsible for supervising the foundation’s management and ensure the
objective and purpose of setting up the foundation is fulfilled in accor- dance
with the charter, articles and
the law. The officer administrates the foundation and the
secretary is responsible for filing, reporting and lodging of documents with
the governing authority.
Assets placed in the foundation are owned by the foundation and
are to be applied to prescribed purposes. This feature distinctly separates the
ownership and management control of a family business. One of the successful
examples of a foundation owned family business is IKEA.
Reasons
for Setting Up a Private Foundation
•
Founder may have rights reserved to him over the management of the foundation
• Protection from hostile takeover of family business by a third
party
• A succession planning tool to enable subsequent generations to
participate in and enjoy a family’s wealth
• Structured way of holding assets with specific purposes
• Perpetuity
Strategy
for the wealthy family The wealthy individuals
understand that maintaining and preserving their fortune for generations is
equally important to actually creating and earning it. The family can use
various asset structuring vehicles for wealth preservation, however, to truly
achieve the objective of growing family wealth in a harmonious environment
within the family, cultivating strong family values with proper family
governance to ensure the family strategy is being well executed and in a
sustainable manner is essential.
In the next issue, we will explore what other things need to be
in place in order for a family wealth preservation structure to be fully
functional.
http://moneycompass.com.my/en/series-on-business-succession-5-a-family-wealth-management-story/
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