The number of family offices in Singapore has been growing strongly in numbers and sophistication over the last few years. On one hand, the political and social uncertainties created by the political tensions in some parts of the world as well as the risks and problems created by the pandemic have led to ultra-high-net-worth individuals (“UHNWIs”) finding a more reliable place to consolidate their wealth. On the other hand, Singapore has continued to prove itself as a country with strong rules of law, well-developed infrastructure, as well as the ability to react and manage risks and threats, thereby stands out as a popular immigration destination for UHNWIs.

Setting up a single-family office (“SFO”) under the Enhanced-Tier Fund Tax Incentive of Section 13X of the Income Tax Act (“13X”) or the Onshore Fund Tax Incentive of Section 13R of the Income Tax Act (“13R”) is just the beginning which allows the UHNWIs to manage and/or consolidate their wealth and stay in Singapore. Thereafter, they may choose how they want to utilize their SFO structure to their best advantage. Increasingly UHNWIs prefer to have a more sophisticated SFO that can function not only as their professional investment managers or advisers, but also as a trusted platform that will provide wide-ranging services including asset management, accounting or legal services, tax reporting, philanthropic activities, succession and wealth transition planning as well as family governance.

While family offices are relatively new in Asia, the western countries have decades of experience in the family office and many have seen profound success in the transition of family wealth and ensuring continuous prosperity, harmony and unity of the family. The Rockefellers are known to have first pioneered family offices in the late 19th century – their family office which was founded centuries ago is still in existence. Till date, the Rockefeller family is still one of the most influential families in the world, managing billions of dollars in assets.

In contrast, a 20-year study conducted by a renowned wealth consultancy based in the United States, the Williams Group, has found that 7 out of 10 families tend to lose their fortune by the second generation and 9 out of 10 families lose it by the third generation. Seemingly, there is a trend cutting across various cultures that wealth rarely survives beyond three generations with many cultures having proverbs conveying the same meaning in different ways: Chinese says that, “wealth does not last beyond three generations”; American says that, “from shirtsleeves to shirtsleeves in three generations”; Japanese says that “rice paddies to rice paddies in three generations”; according to the Sottish, “the father buys, the son builds, the grandchild sells and his son begs”, and so on. The high failing rates of transfer-ring wealth from one generation to the next is usually caused by inadequate planning, misaligned expectations, communication problems, a breakdown of trust, the lack of an agreed decision-making process and/or an authoritative figure that is capable of resolving family disagreements within the family after the patriarch is no longer around.

A lesson worth learning from successful sophisticated SFOs in Western countries is to have in place family governance, which is known as “family constitution”. A family constitution ensures that decision making processes, values, guiding principles and valuable lessons of the family are properly and clearly contemplated, articulated, discussed, organized and documented.

Big families are like small countries – they need rules to ensure harmony and order. Especially for UHNWIs with busi-nesses, as their family businesses grow, informal rules will not be sufficient to deal with the increasing complexity of running and owning multiple businesses and diverse assets together. This is of particular concern where some family members do not have managerial roles, are not shareholders of the business, or if family members have incompatible personalities that could affect how business decisions are to be made. Thus, the patriarch may want to consider putting in place a family constitution as a part of its family governance and succession planning which sets out the “rule of law” for family members to be organized and provide a fair process for the family to make joint decisions.

A family constitution, although not legally binding, is a powerful document in ensuring family cohesiveness and acting as a road map to steer the family forward harmoniously, especially in cases where the patriarch and matriarch of the family are no longer alive. While it does not have legal effect, it must be noted that the very purpose of having a family constitution is to prevent the disastrous occurrence of a public dispute and to resolve family matters within the family itself. Many times, we see family businesses collapsing because of the conflicts within the family. For family constitutions engagements, our lawyers work closely with our partners, which comprise of a psychologist and a trust professional.

Through the involvement of impartial professional advisors, i.e. lawyers, a psychologist and a trust professional, our clients will be guided in a systematic and comprehensive manner in tailor-making their family constitution, align-ing their expectations and understand-ings, identifying areas of potential con-flicts, and coming up with strategies to resolve conflicts. In addition, the family constitution sets out the foundation for all other legal documents such as the shareholders’ agreement, the trust deed as well pre-nuptial agreements (i.e. agreements entered into before marriage).

It is often prepared in consultation with the family members, with the view of ensuring that each member’s views are taken into consideration and encourag-ing accountability within the family. It is intended to be an evolving document to meet the changing needs of the family. We have seen families with SFOs looking after investments and administrative aspects of the family only. There were totally no formalized governance mechanisms. As a result, confusion, conflicts, and disagreements occur now and then, especially when the family relationship became co-mingled with the business relationship.

Even when the first generation was still around, arguments and quarrels could not be prevented or satisfactorily dealt with. Thus, the lack of a family governance may prove that having a SFO alone will not enable it to function as an effective tool for wealth transition and succession planning. A family constitution is much needed to identify potential areas of conflicts and proactively devise calibrated plans to preserve harmonious family relationships and ensure smooth wealth transitions. We have observed in our experience that the process of putting a family constitution often acts like therapeutic sessions for the family, where distrusts and misunderstandings are revealed and underlying rationale are analyzed by the psychologists. Family members come to appreciate that each other still cherish their family relationships despite heated debates and distrust, and that ultimately everyone wishes to stay as a united family although each of them wants to do things in different ways.

As the types of businesses and assets owned by UHNWIs getting increasingly complex, SFOs will continue to evolve from being just investment-focused to becoming a more integrated and holistic solution for UHNWIs who desire to have formal governance mechanisms rather than unspoken or informal rules for their increasingly more complex operations, businesses as well as wealth management.

As the dynamics of every family are unique, there is no one-size-fits-all kind of family constitution, and the exercise of balancing various expectations and concerns of the family members could be challenging and intractable, professional guidance and advise will provide much value-add in the creation of a tailored-made family constitution.

At SMTP, we advise and hand-hold our clients in formulating their family constitution, from the very beginning to completion of the matter. With our long-term experience in advising UHNWIs in the region and around the globe, we understand the intricacies within the family and the difficulties and dilemmas faced by the family members in reconciling the family relationship and the business relationship as the younger generation gets involved in the family business or starts taking over the family business. Indeed, as we often advise the different generations of a family, we inevitably end up as the life-long legal and family advisors to many of our valued clients.