When to start planning wealth transfer for your family?
Transferring your wealth – why start the planning now?
Wealth can be transferred as gifts during your life, or after as inheritances, but irrespective of your wishes, age, and expected longevity, everyone should begin planning.
Thinking and planning for your ultimate intentions for your wealth gives you long-term control amidst the unpredictable changes that life brings. And once you have set a framework in place, a good rule of thumb is to review your wealth transfer plan yearly, because a lot can happen 12 months and you want to be up to date with your risk management, especially in volatile times.
If you are a business owner, anytime you do a major strategic plan for your business is also a good time to review your wealth transfer plans. It should reflect, in detail, exactly how you want to transfer the business assets, the structure, your succession plan, as well as the potential wealth equalization mechanism involved if there are family members who will not inherit the business assets. Developing stakeholder and shareholder communications is also important.
Routine reviews aside, common trigger points to evaluate your wealth transfer strategy include, getting married, having kids, marriage breakdowns, business partnership dissolutions and retirement.
A strategy is key because it will help to instil confidence in your stakeholders. For instance, your business might only have two key shareholders, and however successful the business might be, if one shareholder should pass away unexpectedly without a clear partnership buyout agreement and funding mechanism to enable that agreement, the death could prove highly damaging. Funding mechanisms like life insurance inject liquidity at crucial times, and more importantly, provide certainty when it is most needed.
Having a wealth transfer plan is even more important if your world is complex, such as having multiple businesses, assets and beneficiaries in different countries. Without a clear strategy and structure, businesses and illiquid assets can be tied up for years, especially when there are legal disputes. Beyond estate equalization, you can protect the value of your assets in the long-term by building in a capital injection. The capital, when properly structured, avoids the need to liquidate assets during the wrong market cycle and eroding your estate.
The key things you need to think about when planning wealth transfer
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Potential leakagesTaxes, probate and debts are three major risks in terms of wealth erosion and clients need to plan ahead to minimise all three. Another potential leakage risk is the beneficiaries themselves. Clients need to be confident their beneficiaries can properly manage their gifted/inherited wealth. We can help them put structures and timelines in place to minimize beneficiary-related wealth erosion.
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Income replacementWho will need what in your absence? Educational, financial, medical support or a steady income that does not erode the capital? We help clients think through any existing funding mechanisms or help to set some up.
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Segregating business assets from personal assetsMany family businesses lack robust and clear succession plans, so we help clients think through how to begin succession planning, maintain stakeholder confidence in their absence, ownership transfer mechanisms and estate equalization if some people in the family are not inheriting the business.
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LegacyPhilanthropic endeavours and leaving a philanthropic legacy are increasingly important to high and ultra-high net worth (HNW/UHNW) individuals. Planning is crucial in maximizing the efficiency and impact of charitable works. We can help clients set up charity-related funding throughout their lifetime and beyond.
The most common pitfall in the wealth transfer process
The biggest pitfall we see is the protect gap in many HNW and UHNW individual’s life protection policies. Having an old policy gives some people an artificial sense of being armoured. They have a misguided, but understandable belief in being fully protected. They think, "I already have one, so my family and business are protected and fine." When in fact, they could be underinsured by as much as 20-60%.
HNW individuals' wealth and the complexity of their assets often increase quickly. In the first year of the pandemic for example, the world's 2,365 billionaires saw a $4 trillion boost to their wealth, increasing their fortunes by 54%2 So unless they all reviewed and updated their policies in the recommended 12-month timeframe, there are many in that cohort who under-insured by a large margin.
Life policies and wealth transfer arrangements are both ways of making a long-term plan, and for any plan to be robust, it must be stress-tested regularly.