10 minute read 21 Jul 2021
Asian family

Guiding family offices to achieve their ambitions and secure their legacy

Authors
Joy Chen

Associate Partner, Family Enterprise and Family Office Advisory, Greater China EY Private, Ernst & Young Tax Services Limited

Trusted advisor to entrepreneurial families, their businesses and family offices. Passionate about lifelong learning, diversity and inclusion. Supporter of next generation leaders around the world.

Desmond Teo

EY Asia-Pacific Family Enterprise Leader and Asean EY Private Tax Leader

Passionate about lifelong learning and building up new areas of work. Family of three children and two dogs, with a passion for all things old.

Carrie Tang

EY Greater China Family Enterprise Leader, Greater China EY Private Tax Leader and EY Greater China Business Tax Advisory Services Leader

Loves meeting new friends and building long-term relationship. Passionate about developing new business and practice. Enjoys music and ball games.

10 minute read 21 Jul 2021

Growing and preserving wealth and addressing issues of succession, governance, and taxes are important for successful family offices.

In brief
  • The EY Asia-Pacific Family Office Guide covers leading practices on setting up and running successful family offices, including the protection, growth and preservation of wealth as well as issues of succession, governance and taxation.
  • It also explains the tax considerations of setting up a family office in Singapore, Hong Kong SAR and Hainan province of Mainland China.
  • Family office risk management plays a central role in protecting families from succession challenges, market disruptions and privacy and cyber threats.

What is a family office? The idea developed in the 19th century when the family of financier J. P. Morgan founded the House of Morgan to manage the family assets. Today’s family office is a family-owned organization that manages private wealth and other family affairs.


There are different types of family offices. They include single family office (SFO) which is a distinct legal entity serving one family; multifamily office (MFO) which serve multiple families that pool their wealth, and embedded family office (EFO) which usually have an informal structure within a business owned by an individual or family.

Why set up a family office?

A family office supports the family vision and legacy, ownership transitions, leadership transitions and successful wealth transitions. The benefits include privacy and confidentiality as the family office is the sole entity that keeps all information for all family members, covering the entire portfolio of assets, activities, tax and general personal information. Other advantages include transparent governance and management structure, alignment of interests, potential higher returns, and improved risk management.

Establishing a family office is a big undertaking, and there have been cases when family offices have not met the family’s expectations. Issues can arise over the lack of market, legal and tax infrastructure, a preference for privacy, lack of trust in external managers, unaligned expectations for returns, and generational differences.

What should your family office do?

Before creating a family office business plan, the family must determine their expectations, priorities and scope to decide what services they need. These can include financial planning (investments, philanthropy and life management), strategy (business and financial advice and estate planning), governance (reporting and record-keeping and succession planning) and advisory (tax and legal advice, compliance and risk management).

EY Family Office Guide

Family offices are complex organizations that require deep knowledge. This guide provides leading practices for setting up and running successful family offices.

Request a copy

In-house or outsource?

Even the largest family office has to assess whether and what to outsource, and revisit this periodically. Outsourcing can provide great benefits in cost-efficiency and access to know-how, but some services are retained in-house for reasons of confidentiality and family office independence. The goal is to provide the most effective services in the most efficient way while avoiding and mitigating operational risks. Making the decision between in-house and outsourcing depends on the unique circumstances of the family and the family office.

Business plan, staffing and strategy

A written business plan, solid long- and short-term strategic plans, and the right staff are the foundations for a family office. The process that the family goes through to create the plan is just as important as the outcome, and planning for the next 10 years allows the family to think differently and also be better prepared to meet challenges in the future.

  • A business plan should include:

    • The vision and mission
    • The relationship to the family business
    • The structure of the office including legal structure and ownership and intended regulatory and tax impact
    • Jurisdiction
    • Governance
    • Services
    • Staffing
    • Operations, including what key technology is needed
    • Financials including funding and budgeting
    • Work plan — how will the office be implemented?

As well as a business plan, 5- and 10-year strategic plans are key as they bridge the gap between the family governance documents (sometimes up to a 100-year plan) and an annual business plan.

It is more important than ever that families have a long-term outlook. The strategic plan considers ‘stress testing’ assumptions on asset growth and income against the projected number of future family members and their consumption.

Families often find it helpful to bring in an independent advisor to lead and facilitate the process, ask inconvenient but essential questions and help to bring new perspectives as well as develop holistic solutions.

As well as a business plan, 5- and 10-year strategic plans are key as they bridge the gap between the family governance documents (sometimes up to a 100-year plan) and an annual business plan.

It is more important than ever that families have a long-term outlook. The strategic plan considers ‘stress testing’ assumptions on asset growth and income against the projected number of future family members and their consumption.

Families often find it helpful to bring in an independent advisor to lead and facilitate the process, ask inconvenient but essential questions and help to bring new perspectives as well as develop holistic solutions.

The investment process

Family offices can diversify their assets through non-mainstream investment paths. This flexibility diversifies the risks while reflecting the personal preferences and passions of family members.

Broadly, there are three phases to the investment process:

  • Phase 1: Identify goals and risk tolerances

    For most investment funds, the first step is to establish clear investment objectives and risk profiles. This may be led by the chief investment officer, or it can be a discussion with family members. It could also cover establishing charities or other philanthropic initiatives.

  • Phase 2: Establish the portfolio structure

    Next is to map goals and risk profiles to a recommended asset allocation. Once a recommendation has been reviewed, understood and accepted, the family formalizes its plan in an investment policy statement. The family should take into consideration the after-tax return they would expect to receive when selecting the combination of assets.

  • Phase 3: Implement and govern

    The type of investment strategy a family office pursues is a function of sourcing capabilities, desired control, liquidity needs, investing experience and family office infrastructure.

Investment strategies generally are either third-party managed where family offices use asset management funds to invest their capital in third-party managed investing, or direct investing where the family office makes the decision to invest capital into a specific asset or security. Direct investing can fall into two categories. Public direct investing is centered on liquid debt, equity securities, exchange-traded funds and derivatives that trade over a public exchange, while private direct investing focuses on taking a more active role in the deal process and underlying investment.

Communication and technology

Family offices have to verify the assets, ownership structures, and varied business and personal interests of their client families. Several kinds of information are typically required: financial data to support decision-making, portfolio data to confirm the effective oversight of assets, and continuous monitoring of processes to spot and mitigate risk.

Technology plays a central role in supporting this process of data gathering. Technology solutions can range from a single off-the-shelf product to a sophisticated ecosystem of integrated solutions. Components of this ecosystem can also be outsourced to external service providers, freeing up family office resources to focus on growing wealth. One key consideration before choosing or creating technology solutions is to identify and prioritize what is needed.

Digital transformation

Choosing from the range of technology options can be challenging for family offices due to a rapidly changing digital world and family offices need to be ready to adapt to these changes and challenges. Some areas to consider include:

  • Formalize remote infrastructure including setting up a virtual private network
  • Consider cloud-based applications
  • Focus on cybersecurity

Philanthropy

When families consider philanthropy, many consider charitable giving for public good, but there are other options.

These include:

  • Traditional philanthropy
  • Non-traditional or ‘taxable’ philanthropy – using structures that don’t have tax benefits to achieve families’ philanthropic goals; Often, by foregoing tax benefits, the structures also are freed from the associated operational constraints.
  • Impact investing — investing in companies, organizations and funds with the intention of making a positive contribution to society alongside a financial return
  • Venture philanthropy — using investing techniques to measure the effectiveness of philanthropic projects and fund (or defund) accordingly

How to institute a strong governance structure

Governance is an ongoing, active journey and not a destination. It takes time and effort to put a governance system in place, and it requires active efforts to operate it and adjust it as necessary to continue to meet the goals and needs of the family and office.

Implementing a new governance structure is a long journey but can be broken down into six manageable steps:

  • Understand governance
  • Evaluate the size and complexity of family and family office
  • Identify any existing governance structures
  • Decide governance system: top-down or parallel
  • Analyze how to get from here to there
  • Appoint a team and develop processes

Family office risk management

Often, one of the key purposes of a family office is to protect the legacy. However, protecting it across generations can be a complex task. With multiple risks, from family succession challenges, to market disruptions, to privacy and cyber threats. We have observed that risk management initiatives are historically too narrowly focused and family office personnel are pulled into siloed initiatives for specific processes. However, these reviews fail to uncover the real risks and effectively balance risk and the business. Family offices must adopt an approach tailored to their own risk appetite, resources and ability to execute coordinated initiatives.

A risk management process should begin with establishing a consensus on risk appetite with the family. Once this key decision is made, the following steps are more straightforward — identifying and rating the key risks, measuring the impact of risks on investment decisions, and reporting and initiating controls to mitigate risks.

Tax considerations for setting up a family office in Asia

Income taxation within Asia is complex as each jurisdiction has specific laws with tax rates that range from below 20% to above 40%. In addition, family offices must ascertain how different tax rules between jurisdictions interact as the basis of taxation may be global or territorial. Controlled Foreign Corporations (CFCs) rules may apply in some jurisdictions such as Mainland China, Indonesia and Australia.

Singapore, Hong Kong SAR and Hainan province of Mainland China (Hainan) have favorable tax regimes for family offices.

  • Singapore

    Singapore offers tax incentive schemes to attract family offices. Section 13CA, Section 13R and Section 13X fund tax incentive schemes allow for family investment vehicles (whether in or outside of Singapore) to enjoy tax exemption on qualifying income derived from prescribed investments. These investment vehicles must meet prescribed conditions, and may also require upfront approval from the Singapore authorities. 

  • Hong Kong SAR

    Hong Kong’s Unified Fund Exemption regime (UFE) is applicable to privately offered funds operating in Hong Kong, irrespective of whether they are domiciled or managed in Hong Kong or another jurisdiction. Subject to satisfying certain conditions, both the fund and special purpose entity will be exempt from tax on profits arising from specified transactions.

    The UFE also applies to limited partnership funds to accommodate the operational needs of private equity funds. In addition, a tax concession allows tax exemption on eligible carried interest received by or accrued to a qualifying recipient on or after 1 April 2020 from the provision of investment management services in Hong Kong to a qualifying payer.

  • Hainan province of Mainland China

    Mainland China does not have specific family office related regulations or specific tax regimes. Limited partnerships would normally be treated as transparent vehicles and adopt ‘tax after distribution’ treatment from a Chinese income tax perspective.

    The establishment of the Hainan Free Trade Port (FTP) provides a variety of comparatively more relaxed investment regulations and tax preferential policies, including the Qualified Domestic Limited Partner policies (QDLP) and investment vehicles, all of which are relevant to Chinese families looking to invest overseas in the future.

    Hainan’s QDLP policies are more favorable than those offered by other mainland China pilot cities. They are simpler to establish, are not limited to an investment threshold and are given more flexibility in target investments. It is expected that tax preferential policies and foreign exchange policies may be introduced though no details have been released.

  • Show article references#Hide article references

    1. Singapore Income Tax Act, Singapore Goods and Services Tax Act, Income Tax (Exemption of Income of Prescribed Persons Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010, Income Tax (Exemption of Income Arising from Funds Managed in Singapore by Fund Manager) Regulations 2010, Income Tax (Exemption of Income of Approved Companies Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010.
    2. Inland Revenue Ordinance of Hong Kong Special Administrative Region, Inland Revenue Department of the Government of the Hong Kong Special Administrative Region of the People’s Republic of China official website https://www.ird.gov.hk/eng/tax/dta_inc.htm & https://www.gov.hk/tc/residents/taxes/taxfiling/taxrates/profitsrates.htm.
    3. Enterprise Income Tax Law of the People’s Republic of China, Interim Regulations for Value-Added Tax of the People’s Republic of China.
    4. List of DTAs, Limited Treaties and EOI Arrangements on IRAS website, as of 7 July 2020.
    5. Multilateral Tax Treaties signed by the People's Republic of China on State Taxation Administration website.
    6. GST hike to 9% will happen between next year and 2025, The Straits Times, 17 February 2021.

Summary

Today, private family capital is estimated to be larger than private equity and venture capital combined. This concentration of family wealth and rising globalization are fueling the growth of family offices. Their remit is broad and complex, and covers everything from the investment process, communication and technology, philanthropy, governance structure, risk management and tax considerations.

About this article

Authors
Joy Chen

Associate Partner, Family Enterprise and Family Office Advisory, Greater China EY Private, Ernst & Young Tax Services Limited

Trusted advisor to entrepreneurial families, their businesses and family offices. Passionate about lifelong learning, diversity and inclusion. Supporter of next generation leaders around the world.

Desmond Teo

EY Asia-Pacific Family Enterprise Leader and Asean EY Private Tax Leader

Passionate about lifelong learning and building up new areas of work. Family of three children and two dogs, with a passion for all things old.

Carrie Tang

EY Greater China Family Enterprise Leader, Greater China EY Private Tax Leader and EY Greater China Business Tax Advisory Services Leader

Loves meeting new friends and building long-term relationship. Passionate about developing new business and practice. Enjoys music and ball games.