Sustaining family wealth in the era of the great wealth shift
Careful planning and consultations with professional planners can ensure a smooth transfer of wealth and conserve it across generations. BY LEAH NG
IMAGINE receiving a substantial inheritance only to lose a significant portion of it because of the lack of planning or financial knowledge.
This scenario is becoming increasingly relevant as we approach the largest intergenerational wealth transfer in history.
WealthX reports that about US$2.5 trillion worth of intergenerational wealth will change hands in Asia by 2030.
For high-net-worth individuals (HNWIs), this presents both opportunities and challenges – making careful planning essential to ensure a smooth transition, as well as to grow and preserve wealth.
Priorities for wealth transfer vary between families. Some tend to prioritise asset protection and maintaining family governance, cherishing heritage and values. Others prefer to leverage innovative strategies for dynamic wealth creation and investment.
Regardless of these differences, both groups must achieve a balance between preserving wealth and fostering its growth to safeguard their family wealth across generations.
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Preparing the next generation: The importance of financial literacy
A cornerstone of legacy planning is to reduce financial complications for heirs. Transferring assets is not always straightforward – legal complexities, tax considerations and administrative procedures can complicate the process.
It is crucial to educate heirs early on about wealth transfer and wealth-management principles.
Engaging heirs early in discussions on family wealth fosters a sense of responsibility and prepares them for future challenges.
Implementing gradual wealth transfers or setting up trusts can help them become accustomed to managing the family’s wealth incrementally.
Regular meetings with the right professionals, such as wealth planners and trusted advisors, are also important.
They offer professional advice and access to a range of wealth management, asset protection, and tailored legacy solutions, providing ongoing support and equipping heirs with the necessary skills to sustain and grow their inheritance.
Crafting a legacy: Ensuring a seamless wealth transition
While the wealth amassed by Singapore’s HNWIs enables them to leave a legacy of general financial well-being, safeguarding this legacy presents multifaceted challenges. A commonly cited Chinese proverb that wealth does not last three generations highlights the difficulty of conserving family wealth across generations.
Comprehensive legacy planning with the assistance of professionals can address many aspects of wealth transfer. These professionals can give advice on processes such as setting up a trust, establishing lasting powers of attorney or creating succession plans.
This planning ensures that the wealth transition is smooth and aligns with the family’s long-term goals and values.
Tools that HNWIs can consider in facilitating wealth transfer across generations may vary, depending on the composition of their portfolios. The HNWI’s portfolio may include substantial business assets, which can complicate estate distribution.
A PwC survey found that 41 per cent of HNWIs’ investible assets stem from income from business ownership or the sale of their businesses; 33 per cent indicated that the source is an inheritance or a trust.
To manage these assets and wealth, HNWIs may consider setting up a structure for business succession and implementing proper family governance to ensure the family’s long-term financial objectives are met across generations.
Additionally, HNWIs can make contributions to philanthropic foundations and thus support causes that align with their values. Moves such as these facilitate wealth transfer while making a positive impact on society.
Life insurance plans can be helpful to HNWIs whose main assets are held in their business equity. The payout from life insurance provides liquidity or cash flow that can ensure continuity of business operations.
A life insurance payout can be used to equalise asset distribution without having to break up the business, for example, by providing cash flow to family members who are keen to run the family business.
These family members can use the cash to buy over the shares of those family members who choose to pursue other careers or interests. Such forward planning can ease the transition and ensure the family business remains stable.
Safeguarding your estate: Managing risks and preserving value
The HNWI’s portfolio may comprise assets such as equities, bonds, commodities, real estate and collectibles. Adding life insurance as an asset class can add value to an HNWI’s overall portfolio, as it allows partaking in investments that may not be directly affected by market conditions.
This helps diversify the market risks that other financial investments may be exposed to. Financial assets such as equities may be volatile. The cash value of insurance solutions tends to be more stable, making such solutions a useful tool to deliver stable returns and reduce portfolio fluctuations.
In this increasingly interconnected world, it is not uncommon for HNWIs and families to own assets in different jurisdictions, each of which carries different tax considerations.
Estate duties can reduce the value of one’s estate materially. In these cases, the cash payout from insurance can go towards covering estate or inheritance taxes – thus preserving the rest of the estate value for distribution.
With the number of wealthy individuals expected to continue to increase, HNWIs must proactively prepare for the significant upcoming wealth transfer. Engaging with the right professionals and regularly reviewing one’s legacy plans can ensure that one’s wealth is preserved, protected and passed on, in line with one’s wishes. By taking these steps, HNWIs can secure their family’s financial future and create a lasting legacy for generations to come.
The writer is chief bancassurance officer of Manulife Singapore
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