The world has changed in significant ways since the turn of the 21st century. Technology has become ever more accessible, often essential, and continues to transform the way we live our lives. This has allowed for more government and institutional informational over-reach, control and, potentially, manipulation.
People are increasingly relocating around the globe for work or residence. Businesses are expanding into all corners of the global as transport and communication become more integrated and seamless. The workplace, meanwhile, has changed radically with employees demanding more flexibility, purpose and lifestyle benefits.
There have also been a number of major worldwide events, which have had far-reaching impacts – not least the global financial crisis in 2008, the COVID-19 pandemic, and several wars. It’s arguable that such events have altered the global landscape in ways that are unparalleled in recent times. While some have brought benefits and improvements to our lives, others have been distinctly challenging, even life changing.
For wealthy individuals, legislation was brought into effect that had a direct impact on wealth planning. The pandemic has made many focus beyond how they manage their wealth to whether their purpose and legacy actually have meaning.
In a broader context, however, the pandemic has come after a decade of tax transparency changes and heightened geopolitical uncertainty. Both factors are forcing wealthy individuals to review plans for succession.
During regular conversations with our private clients, we continually sees four key areas of focus come up time and again, no matter where in the world the clients are located:
- Succession and generational wealth transition
- Staying ahead of tax reform and transparency obligations
- Navigating residency and mobility
This article discusses these four topics in depth. It offers some key action points that high net worth individuals may consider today to help plan for a secure future.
Succession and generational wealth transition
Succession is rarely in the daily thoughts of wealthy families. Managing investments, running the family business and general everyday matters often supersede any concerns about succession and wealth transition.
More often than not, succession only gets attention during a ‘crisis’ – a change of circumstances or an event – usually a marriage, birth, or death or the sale of a business. Similarly, it could be as a result of an external event, such as a shift in the political landscape in an individual’s home country, a stock market crash or, as has been seen recently, a global health crisis.
Indeed, a recent survey, “Global private wealth and the future of philanthropy 2021”, showed that 58% of wealthy individuals only review their succession planning on an ad hoc or as-needed basis, with 22% doing so every five years or more.
It’s fair to say that the pandemic has acted as a trigger event, pushing HNWIs to look again at their succession plans. At the very least, it has made many founders and family principals very aware of their mortality.
Meanwhile, significant wealth among ageing an population has created a perfect storm for individuals contemplating their family’s future. There has been significant growth in private wealth in the Asia-Pacific region, especially in the past three to four decades. It has reached levels where business founders are recognizing the need to plan succession properly.
Succession and wealth transfer typically boil down to one thing – the desire for founders or principals to make sure as much of their wealth passes on to the next generation in the most effective manner. This generally involves trusts, private trust companies and foundations offered in various jurisdictions. More simply, it requires that a comprehensive, ideally future-resilient, wealth transition plan and will are in place, so assets are passed to the appropriate beneficiaries and inheritance tax is managed. While this may sound straightforward, the more diverse and sizeable an individual’s assets, and the larger their global footprint, the more complex the picture.
The details of succession often expose the fact that many people put it off until something specific happens. What structures do you intend to use, who has control over the assets, who makes decisions over investments? These questions arise even before thinking about succession within the family business, especially if that’s where the majority of the family wealth lies.
Succession planning is the most sensitive issues to be discussed in most families. In the case of a family business, for instance, sometimes the next generation want to pursue different interests and don’t want to adorn the roles of their parents. An even more difficult situation rears its head when founders feel the next generation aren’t ready to take the helm, or are reluctant to choose a successor, be that for business reasons or the desire to maintain family harmony.
Many HNW families consider using family offices. There is a real interest here from Asian families, especially. Family offices can help with succession planning in many ways, not least in terms of asset management, investments and wealth structuring. They create a much more organized and resilient structure for ongoing planning and management for both current and future family members. This is essential when considerable wealth is involved.
There is an increased use of family constitutions. Although they may not be legally binding, constitutions help to establish key principles for family members, including the next generation. A constitution can also have elements of procedure and governance, highlight how to manage conflict, and may talk about purpose, philanthropy and family values. This promotes family members working together and is guided by clear purpose and rationale. Creating these conversations before conflicts arise with high tensions clouded emotions will often save families wealth in the long run.
Staying ahead of tax reform and transparency obligations
For numerous reasons, wealthy families have faced an increasingly challenging tax environment for several years. Firstly, huge changes in tax-related legislation – most notably the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) – have come into effect. These rules have brought about increased demands for transparency and an onerous compliance burden. Since the COVID pandemic, governments are looking for new sources of revenue. These are likely to include the introduction of a new wealth tax or a one-off compulsory ‘extraordinary solidarity contribution’, such as that introduced by Argentina in 2021.
The global tax landscape s is made more complicated by the fact that tax policy can be introduced globally as well as being implemented domestically. For families with expansive global reach, this creates all kinds of complexity with significant penalties for failing to report accurately.
It’s becoming increasingly critical for each individual to have a totally transparent view of their tax liabilities and obligations. At the same time the entire family needs a clear picture across all the jurisdictions where tax is payable. Systems need to be in place to monitor any tax changes and their implications, also. While it is unsurprising that being compliant with this constantly shifting tax landscape is vital, individuals should be taking a holistic view of tax and always be looking for opportunities of optimization where they exist. Some countries have favorable infrastructure for family offices. Likewise, other jurisdictions provide an opportunity for family offices to build an ecosystem that involves co-investing.
Navigating residency and mobility
With the global economic and geopolitical landscape constantly changing – and the tax picture constantly reacting to that change – there is no surprise that navigating residency and mobility is a concern for wealthy families.
As mentioned above, the larger the global footprint of these families, the more complicated their wealth planning picture. With families running businesses in multiple locations, children being educated in foreign countries and individuals spending time in a number of countries in any given year, all sorts of residency issues might come into play. Individuals themselves are becoming very savvy on multi-jurisdictional residency and looking for insight into the detailed tax implications prior to their moves.
For individuals considering relocating, tax will always likely be a factor. In many instances, it is the prevailing one. In recent years, individuals thinking about relocating are often ultimately concerned with things such as improved political stability and better quality of life. But they are often unwilling to be worse off from a purely tax perspective. Accordingly, due consideration needs to be given to all the implications of moving either permanently or temporarily – or, indeed, splitting time between homes. As a perfect example, different states or cantons in any given country often have completely distinct tax regimes. So even the choice to move to the US, Switzerland, Singapore or Hong Kong, for example, may have different tax implications depending on where in the country an individual has a base. The good news, it is possible to get very specific on the details of a move. Individuals are keen not to encounter tax surprises, and it is increasingly possible to have local country advice delivered in a proactive and connected way. While publications such as E&Y’s Worldwide Estate and Inheritance Tax Guide give a summary of the gift, estate and inheritance tax systems in many jurisdictions, creating a plan from such a document is a tremendous undertaking.
The picture is not purely about residency, it can also relate to where an individual holds assets and investments in other jurisdictions, which can bring tax complexity as well as issues around estate duty. All of these factors come into play. For instance, even when a wine collector keeps their wine in a bonded warehouse in the UK, this can lead to estate duty when they pass away. The fact that you have assets in different locations brings with it complexities, making structuring and planning even more important.
Five Starter Projects
In order to address the four key areas of focus, high net worth individuals may want to consider the following five steps.
1. Conduct flowchart of current succession plans
Look at the structures and plans you have in place – such as wills and trusts – and double check whether assets will go exactly where you want them to go. Understand the tax implications of these succession plans. Once this comprehensive review has taken place, identify gaps or failings and make necessary changes.
2. Get the next generation involved
The future protectors of family wealth, purpose and legacy, are the younger generation so strongly consider involving them as much as you and they would like to be. Bring them on board at the earliest opportunity, so that you can be a mentor or guiding light. If you only bring the next generation on board when a founder dies, you are already way behind the curve.
3. Put a family constitution in place
While not a legally binding document, it will achieve many things. It will clarify family values and purpose; put procedures in place to deal with conflict; set a roadmap for wealth transition; and create a framework for decision-making. Again, get this in place as early as possible. It will help with situations going forward rather being used to fight fires.
4. Completely review your global footprint (and that of your family)
Considering the tax implications alone of residing in multiple locations, it is essential to have a complete overview of your personal and family global footprint (including residency and domiciliation), what the tax liabilities are, and whether you are up to date with any legislation that will have a direct impact. Tax residency is not an isolated topic; instead, residency is truly similar to many other types of business decisions. Look into contingency planning, as a ‘Plan B’ is often needed in a fast-changing world.
5. Appoint an advisor who is part of your journey over the generations and can constantly monitor your evolving family circumstances and tax position
Individuals can be impacted by tax in many ways – from personal liability to inheritance and estate tax – in a constantly changing environment. It is unlikely that any one person has the ability to constantly monitor their complex tax position, so it makes sense to appoint an advisor to oversee this – whether a third party or someone within a family office – to make sure liabilities are not triggered unnecessarily.