IT is tempting to believe that high net worth (HNW) families can afford to coast on their good fortune: They may operate a thriving business, own enough assets to eventually distribute to their children, and do not lack funds for life events such as a wedding or children's university education.
Yet even the wealthy need to begin to plan early, says John Elkovich, Prudential's head of HNW solutions. Even though there is no lack of cash for immediate and even mid-term needs, wealthy families grapple with a host of issues arguably more complex than those facing individuals of modest means.
Hence, wealth planning and some amount of wealth structuring are likely required. The sooner that families begin to plan, the better prepared they will be to cope with risks. Most importantly, they would have acquired tools to help ensure the sustainability of their wealth for future generations.
Said Mr Elkovich: "Planning early means that the planning you do is not rushed. As people live longer, there may be up to three generations working in a business. Being able to plan for issues like succession allows for a smooth transition."
Prudential last year launched a HNW platform, called Opus by Prudential, as it believes there is an advisory gap in the HNW space. Research shows, for instance, that Singapore's 184,000 millionaires are not adequately insured against personal, financial and business risks.
The research also shows that only one in five wealthy families has a wealth transfer plan for their assets.
Opus by Prudential aims to be advice-and service-led. It has around 65 private wealth consultants drawn from Prudential's agency force.
As it aims to provide comprehensive advice on wealth planning and transfer, it has also assembled third party specialist expertise in areas such as trusts, tax and business advisory, tapping firms such as Rajah and Tann and Deloitte Singapore. Here are some circumstances when early planning will go a long way towards addressing issues in the future.
Mr Elkovich says most HNWIs don't start planning until they are in their 40s. He recommends to begin planning as early as possible. "For such individuals, the focus should be on what they have to do today to protect their tomorrow when they have a family and greater assets."Risks could accrue quickly. In the process of growing a business, for instance, a HNWI is likely to begin to take on debt which may be personally guaranteed. Should the business owner die, the lender could claim the business and its assets, as well as the owner's assets to cover the loans. "The advice for such individuals is to plan the protection of their assets and business early, whether they have dependents or not."
Succession planning can be a fraught affair, particularly when there are conflicting desires and ambitions, and children who may not want to continue their parents’ work.
Mr Elkovich says there are a number of options, which can help a family to avoid selling their business altogether. One is to appoint a non-family executive and incentivise him or her to run the company.
Two is to have an exit strategy. To accommodate a child who wishes to start a venture apart from the family, a business owner may sell a stake in the business and distribute the proceeds to the child. This may be done through a buyout agreement with the business partners.
There may also be a buy-sell agreement with the business partners to ensure business continuity. A buy-sell agreement is a legally binding contract between partners or co-owners of a business, that governs the sale of an owner’s share of the business to other co-owners in the case of death.
A buy-sell agreement may be funded with life insurance on the participating owners’ lives. This is often recommended by business succession specialists and financial planners to ensure that the agreement is well funded and to guarantee that there is money when the agreement is triggered.
Some heirs are in the family business, and others are not.
For such a family, the involvement of some children in the business ensures continuity of the enterprise. But there is another equally important issue: How would a parent ensure an equitable distribution of wealth among all the children? The challenge is that a business is often worth far more than a family’s other assets including real estate. Failure to ensure some degree of equity may cause resentment and strain family ties.
Estate equalisation is the process of dividing an estate and business equally among the heirs. One aspect of this exercise may involve giving a controlling stake in the business to family members who will take over the business. A second aspect is the division of other assets. Certain assets such as real estate, however, are relatively illiquid and not as easily divisible unless the property is sold.
Typically, financial planners would recommend the use of an insurance policy in wealth planning, for a few reasons. Insurance creates liquidity and a family may avoid having to sell assets at the wrong time. A substantial death benefit also enlarges the estate, so that eventually the total value distributed among the heirs would be roughly equal.
Here is a hypothetical example: The Tan family runs a business valued at S$9 million. They have a family home valued at S$4 million and liquid assets of S$8 million. The total value of the current estate is S$21 million. They have three children; one is involved in the business. Solution: Mr Tan uses S$3 million of his cash to buy an insurance policy with a death benefit of S$9 million. The insurance payout would enlarge the total estate from S$21 million to S$27 million.
The distribution plan would give the business (S$9 million in value) to the child who runs the business. A second child gets the family home (S$4 million), plus insurance proceeds of S$5 million. The third child gets liquid assets of S$5 million plus insurance proceeds of S$4 million.
Philanthropy is an avenue to accommodate the next generation who may not want to be actively involved in the family business, but wish to contribute to the family’s legacy. Incorporating a social impact or charitable objective to the business and the family ethos can help to further cement family ties and ensure a sustainable legacy. In this respect, insurance can also be an instrument to create or expand a charitable bequest.
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