We are living in extraordinary times. Even as the world continues to change dramatically, more than US$15 trillion of wealth – roughly the size of the entire Chinese economy – is expected to be transferred through inheritance by 2030.1 In this issue of PCS Vision, we explore ways to mitigate the major threats to global family wealth and look at how Savings Plans can outperform bonds by being both reliable and flexible.

 

https://www.wealthx.com/report/wealth-transfer-report-2019/


Protecting and Growing your Global Family Wealth

 

As your success and family grow and extend internationally, the complexities in your world are ever increasing.

 

Global families face escalating challenges of navigating disparate tax and legal frameworks. When income, residency and citizenship are spread across multiple countries and regions, the number of possible risks and advantages can escalate when it comes to cross-border wealth transfer.

 

Long term planning with a global lens is essential to finding the safest, most efficient, and compliant way to protect and grow your global family wealth.

 

The issue of taxes

 

Obligations of a global family

Inheritance and estate taxes can erode a family’s wealth. In the UK and US alone, legacy taxes can be as much as 40%.

 

In the current COVID-19 economic environment, tax legislation can evolve more rapidly; governments around the world are changing, or considering changing, tax legislation to address the budgetary shortfalls caused by the pandemic. Flexibility and risk management capabilities in your financial instruments are key in these conditions, especially considering the continuing volatility in many of the major currencies.

 

Pandemic conditions aside, any changes to tax laws should be considered when it comes to wealth transfer strategies. For example, the 2020 PRC Global Tax Regime imposes tax on worldwide earned income on those who reside in China for more than 183 days. There are considerable wealth transfer implications from this single legislation change and it is only one tax law in one territory.

 

The ultimate goal is to provide the whole family with easy access to, and optimized use of cash and assets held in different currencies and locations.

 

In the short to medium term, income tax minimization and deferral, necessities in a wider tax strategy, must be balanced with the mounting cost realities of a global family life.  This means tax strategies and instruments need to be coordinated with other financial instruments that optimize cross-border liquidity and currency conversion.

 

Advantages of a global family

Having tax and compliance obligations in multiple regions is complex, but that complexity does not have to be adverse, it can be leveraged to your advantage.

 

Dispersed geography and citizenship can present multi-dimensional financial advantages. The opportunity to safely transfer tax burdens to a region with a lower tax rate is one such benefit. Deferring obligations intergenerationally is another potential option – tax itself might be a certainty, but global families can stretch timeframes when required.  

 

Each global family presents a unique combination of opportunities that can be maximized with its own unique strategy.

 

The right solutions will work to protect your wealth in the long term as well as facilitate efficient cross-border wealth transfer.

 

 

Thinking beyond taxes

 

When creating a tradition of lasting success in a global family, there are several critical considerations alongside tax implications. How do you preserve as well as grow your asset base for the future?

 

To protect against dynamic asset erosion, you need funds that can be distributed to loved ones without undermining the capital base. Alternative asset classes, such as life insurance and savings plans can guarantee returns while building liquidity for future distribution.  Alternative assets can be easily integrated into a holistic wealth management strategy.

 

Intricate planning is key when planning across multiple generations. Details – such as forced heirs and safe currency conversion – are all crucial. No detail is too small if global families want to successfully protect and transfer wealth across tax regions and generations – or indeed, both simultaneously.

 

Life insurance and savings plans are effective tools that can help protect and grow global family wealth: 

Provides for loved ones who are not protected heirs
  Provides liquidity for estate duty / inheritance tax
  Creates onshore and offshore assets
  Provides liquidity for loan liabilities
  Offers financial freedom
  Acts as income replacement
  Allows for business legacy/estate equalization
  Takes care of distribution to philanthropic interests
  Provides liquidity for settlement against owner’s personal guarantees

Successfully passing on a substantial legacy is complex.

 

Complexities can be managed. Moreover, it can be leveraged. PCS by Mercer are experts in protecting and growing your wealth for generations to come. Our global perspective is market leading. To find the right opportunities, we build individual solutions in strategic partnership with industry leaders such as cross-border tax experts.

 

We will help you integrate the right insurance and savings plan solutions into your financial instruments, so your family wealth prevails irrespective of geography, global economic conditions, social turmoil and time.

 

Your family is unique – with its own dynamics, traditions, values and ways of doing things – and you have worked hard to provide a lifestyle for them. Now, the most import thing you need to do is protect it.


Case study: Wealth preservation and transfer solution for a global family

 

One of our existing clients, a global family of four needed a solution that would support their family lives across two countries, three different residency/citizenship statuses, potential emigration and eventual wealth transfer to the children. They were looking for short- as well as long-term insurance solutions that help them meet, and minimize, all tax obligations while safeguarding their wealth and lifestyle. (Wife and both children reside in the U.S. while the husband lives and works in China)

 

 Upon reviewing our clients’ assets and needs, the PCS by Mercer solution:  

 

  • Solution is applicable irrespective of residency/citizenship
  • Tax planning meets the requirements of the 2020 PRC Global Tax Regime
  • Husband holds a USD 40 million life insurance policy in preparation for future transfer of wealth and business expansion.  Children as beneficiaries. (As it is a participating policy, the coverage will increase every year.)
  • Purchase Irrevocable Life Insurance Trust (ILIT) of USD 10 million: husband as policyholder, wife as insured
  • Manage cost of living: Purchase annuity insurance in China – wife's yearly annuity is tax free
  • Manage cost of living: Purchase substantial health insurance in the U.S. with wife as policyholder
  • Husband is free from estate tax obligations
  • Wife's annuity payment is free from estate tax
  • In conjunction with ILIT, wife is free from estate tax obligations
  • Husband’s life insurance is income tax free. The tax-free status extends to the children as beneficiaries
 

Our detailed and tailored process led to the successful meeting of all our clients’ requirements. We established four policies with total sum assured of more than USD 50 million. 

Savings Plans versus Bonds

 

Contrary to popular belief, even high net worth and ultra-high net worth individuals (HNWI and UHNWI) need some form of savings. A savings plan, abound with flexibility and sophisticated attributes, can be a much better savings option than the traditional safe haven of bonds.

 

Why do the uber-rich need savings?  

 

Do HNWI need savings? While there is a pervasive misconception that their substantial assets are sufficient for any and all of their needs, the lived reality can be very different. Access to dependable cash flow, especially over a generational timescale, can be challenging. This is particularly true as: 

  Volatility remains the norm in the global economy,
  Interest rates continue to fall across the world,
  Families grow beyond one generation, and
  Assets, like businesses and real estate, are often illiquid and/or bound as collateral. 

So, the resounding answer is yes, it is prudent, if not necessary for HNWI to secure an alternative, long-term revenue source. A savings plan is one such option. 

 

Better than Bonds

 

In the current volatility, bonds can seem attractive because of their perceived dependability, having been, historically, a low risk, set-and-forget source of fixed income and investment diversification.  However, savings plans can be more than a viable alternative. Not only are they an equally dependable source of revenue that offers all of the benefits of bonds, savings plans are also inherently much more flexible, giving you many more wealth management and legacy-gifting options. 

 

Top Five Benefits of Savings Plan

 1. As wealth transfer solution    

Most bonds mature after 10 years and trigger tax implications if there are changes in ownership. A savings plan, on the other hand, allows you to transfer policy ownership a number of times, over a number of generations. You, therefore, have the ability to plan broadly and on a much more significant time scale. The generational timeline is crucial when you are creating a lasting tradition of success. 

 2. As a death benefit settlement option    

One of the flexibilities in savings plans is that you can choose to assign beneficiary(ies) and distribute policy payment according to policy owner’s will. This can be done in lump sums or over a prescribed period. 

 3. Pre-determined breakeven   

Unlike bonds, the price of which is dependent on market value at maturity, a savings plan can be customized to have an inbuilt breakeven point. You also have the flexibility of surrendering the policy at any time should you wish to. 

 4. Tax deferral benefits    

In some taxation regions, the annual growth of a savings plan’s cash value is not treated as income and therefore subject to tax. This is not the case with bonds. Moreover, the proceeds of savings plan death benefit can be tax-free. *

 5. Different CRS reporting requirements    

Savings plans can have far less onerous reporting requirements. Bonds generally need detailed reporting because they are treated as financial instruments bearing a principal amount and a series of annual coupon payments. As the assets of savings plans belong to the insurance company, the details of policy assets are not typically subject to the same comprehensive reporting requirements.

 

A savings plan can provide income while offering many more benefits as a low-risk financial instrument. To explore how it can help you protect and grow your wealth, contact PCS by Mercer today.

 

*  This is for reference only and PCS do not provide tax advice. Clients are required to independently seek tax related advice from their tax advisors. 


Case study: Savings plan as a stable income solution

 

A middle age client of PCS by Mercer – a private investor with USD 8 million in assets and a conservative investment profile. She was looking to secure a dependable yearly income for five decades. She also wanted to maintain a contingency reserve for emergency situations such as future medical care. 

 

 Upon reviewing the client’s assets and specific needs, PCS by Mercer built the following Savings Plan solution:  

 

 

  • Enabling client to receive a steady income of approximately USD 26K annually till age 100 totaling USD 1.3 million
  • Savings Plan with coupon has customized flexibility for the client to leave the annual coupon to accumulate
  • Establish contingency reserve
  • Annual premium of USD 200K x 5 years = USD 1 million (total premium)

 

We were successful in meeting our client’s requirements of a regular, flexible income plus a contingency reserve through a personalized and considered process.