How high-net-worth individuals in Asia are doing legacy planning

[SINGAPORE] Legacy planning for many high-net-worth individuals (HNWIs) in the Asia-Pacific is set to be a growth area.

A study by private bank Lombard Odier has found that 42.4 per cent of the wealthy in the region do not have any formal or informal family governance structures in place.

However, legacy planning is a complex affair. Respondents to the survey cited varying goals – maintaining family unity and shared values (53 per cent); minimising legal and tax complexity (35 per cent); and supporting next-generation entrepreneurship and independence (41 per cent).

What choices are Asia’s HNWIs making in their wealth and estate planning journeys now? The Business Times spoke to advisers on the strategies being explored in the region.

A portfolio for the next generation

While no two legacy-planning portfolios for HNWIs will look the same, there are some common asset types used:

• Jumbo life insurance: These are high-value, specialised life insurance policies designed for HNWIs and ultra-HNWIs. Coverage amounts can range from US$5 million to more than US$100 million, unlike standard policies.
• Properties: These are sited in different countries and subject to substantial legal, regulatory and tax support in the wealth-transfer process.
• Alternative assets: These are the likes of watches, art pieces and private jets. There is also consistent interest in cryptocurrencies.
• Public stocks and bonds: Such assets tend to perform in line with markets, instead of optimising for growth/alpha.

Ray Ang, Singapore CEO of Grandtag Financial Consultancy, said the attraction of insurance is an outsized death benefit for the heirs, which is often what makes them “sit up and pay attention”. The largest claim he handled for a legacy-planning client exceeded US$50 million.

Cross-border assets such as real estate are also often not covered by a single will or legacy plan fixed in one country, said Ma Yongli, a consultant at financial advisory firm Finexis Advisory.

This means clients will require regular discussions with their tax accountants and lawyers with expertise in other jurisdictions, especially when dividing or liquidating the properties; their advice would also be needed for the reallocation process thereafter.

Ma said: “Since family members of ultra-HNWIs are often spread out across the globe, this can complicate wealth transfer because tax laws differ from country to country.”

He also noted that legal court processes or probate in overseas jurisdictions can take significantly longer than in one’s home country, especially for Singapore clients.

“This is where life insurance nominations can play a critical role… (to get) cash to family members quickly, without waiting for the legal process to run its course,” he said.

Gifting method

A legal and highly effective strategy for tax optimisation is therefore gifting, which HNWIs engage in early on in the legacy-planning process, advisers told BT.

It can apply to physical wealth such as property or artwork, but is also frequently used with wealth-structuring tools including life insurance policies.

For example, a jumbo life insurance policy with a US$1 million death benefit could be purchased for tax planning purposes, on top of protection reasons.

“Oftentimes, the cash surrender value on the day of purchase is not high, say, about US$200,000. Once a gifting procedure is executed – the client would be gifting something that is valued at US$200,000, instead of US$1 million,” said Ang. “This means that the recipient pays either no tax or less tax.”

But gifting can serve other non-wealth-accrual purposes as well, said Finexis’ Ma.

“Certain clients may be concerned about leaving too much and diluting the drive of the next generation,” he said. “This results in their preferring to gift during their lifetime, in smaller and more intentional amounts, rather than leaving a large lump sum at death.”

Emerging-market stocks rotation

Diversification and increasing portfolio liquidity are significant primary goals for HNWIs in the Asia-Pacific, the Lombard Odier study found.

This comes through clearly in the way these HNWIs approach their legacy-planning portfolios, compared to their personal wealth accounts, said Mahesh Sethuraman, Singapore CEO of Saxo in an interview with BT.

The digital broker does not offer legacy-planning services, but engages with several clients on related portfolios.

He noted that, in light of the geopolitical instability triggered by the Iran war and US President Donald Trump’s administration, clients are concerned about the long-term stability of the US dollar.

HNWIs in the Asia-Pacific therefore believe that portfolios designed for the next generation must look beyond US assets, to prepare for a more fragmented world order, said Sethuraman. This explains their interest in adding all-world exchange-traded funds to these portfolios.

“Clients may actively increase their allocations in (emerging-market equities) from India, South Korea and Indonesia, for example, while reducing their US allocations,” he said.

This is especially since such investments are “effective hedges” against the US market, given that these countries have smaller markets and show growth potential in areas such as chip development and digital infrastructure.

Asia’s ageing population

The rapidly ageing population in the Asia-Pacific underpins the demand for legacy planning. A report by the Asian Development Bank indicated that one in four people in the region will be older than 60 by 2050, with the transition occurring more quickly in China, Thailand, Vietnam and Sri Lanka.

Grandtag’s Ang said the children of some clients are now older than 50 or 60, which affects how the wealth-transfer process is set up. “Without the right experience in management and proper planning, that wealth may not pass through three generations,” he said.

Finexis’ Ma said that incapacity planning is also coming up more in his conversations with clients. Tools such as a Lasting Power of Attorney and healthcare directives are being more “actively discussed” as part of the planning process, too.

He also noted an increasing interest in “standby trusts” in the market. Such trusts are set up during an individual’s lifetime, but stay dormant until a trigger event, typically death or loss of mental capacity.

“Due to how the trust is not fully operational until the point of activation, the upfront costs are lower than that for a full trust structure,” said Ma.