Prioritizing succession and generational wealth transition
Succession is often on the minds of matriarchs and patriarchs within wealthy families, but typically it isn’t a priority. 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 comes to the fore when there is a change of circumstances, an event or a crisis – such as a marriage or birth, a death in the family 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.
As Parets explains: “It’s fair to say that the pandemic has acted as a trigger event, pushing our private clients to look again at their succession plans. At the very least, it has made many founders and family principals very aware of their mortality.”
In a broader context, however, the pandemic has come on the back of a decade of change to tax transparency and heightened geopolitical uncertainty. All of these are acting as drivers for wealthy individuals to review succession.
Parets also highlights the fact that “Baby Boomers” – those born between 1946 and 1964 – are approaching, if not well into retirement, and many have acquired tremendous amounts of wealth that will, sooner rather than later, be transitioning from one generation to the next.
This latter point is echoed by Desmond Teo, EY Asia-Pacific Private Tax Leader. “There has been significant growth in private wealth in the Asia-Pacific region, especially in the past three to four decades,” he says. “It has reached levels where founders are recognizing the need to plan succession properly.”
Irrespective of the drivers, 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.
“When you start to get into the detail of succession, it is perhaps no wonder that many people put it off until something specific happens,” says Parets. “What structures do you intend to use, who has control over the assets, who makes decisions over investments? And that’s even before you start to think about succession within the family business, especially if that’s where the majority of the family wealth lies.”
Both Parets and Teo say the conversations they are having indicate that wealthy individuals recognize the importance of succession and wealth transfer planning and are considering how best to involve the next generation.
“I think that's quite personal to the families,” says Parets. “In the case of a family business, for instance, sometimes the next generation want to pursue different interests and don’t want to step into the shoes of their parents. Alternatively, some founders may 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.”
Others are considering using family offices. “There is a real interest here from Asian families,” says Teo. “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 formalized structure for ongoing planning and management for family members present and future, which is essential when considerable wealth is in the picture.”
Teo also points to an increased use of family constitutions. “Increasingly, we’re starting to see families consider drafting a constitution. While it may not be legally binding, it helps to establish key principles for family members, including the next generation,” he says. “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 ideally needs to be undertaken when family members are working together and are guided by clear purpose and rationale. And not after conflicts arise where tensions run high and family members may be clouded by emotions.”
A heightened sense of purpose
For many wealthy families, purpose and legacy play a large role in not only how they run their businesses but also the way they interact with both local and global communities. Purpose, however, can mean very different things to different private clients and their families.
For some, it can relate to the family’s ongoing involvement in managing or being on the board of a family business. More commonly associated with purpose, however, are philanthropic endeavors and the value that wealthy families can bring to the outside world, including the communities in which they live and run their businesses.
Some families prefer to establish foundations to support specific causes; others want to be really hands-on with their philanthropy; while some prefer to maintain a distance. And there is often a significant cultural aspect to this, a sense of duty or, indeed, a religious responsibility.
Purpose can also be about family cohesion. “Many of our private clients are focused on building and leaving a legacy,” says Teo. “And sometimes a foundation or charity is one way of the family working together.”
It’s easy to see how COVID-19 could have created a heightened sense of purpose for wealthy families. The EY Single Family Office study, which was released in May 2022, revealed that 44% of family offices intend to make investments based on their potential positive societal and/or environmental impact in the next 12 months. It will be interesting to see how that level of engagement progresses from here.
To a degree, this brings the conversation back to family constitutions. Aside from any long-standing philanthropic ventures, many families don’t even have purpose and values enshrined in writing.
“Families quite often have a natural governance structure that has grown organically and where there’s no formality in place,” says Parets. “Likewise, there may be no commitment to philanthropic projects or a clear set of family values. Making that step from this natural governance structure to something more formalized is often a big leap.”
As families grow, however, it is highly likely that the next generation will want to be involved in something more meaningful. Younger people are generally far more environmentally and socially aware, and this will drive an increased interest in philanthropy.
“That said, these things are fluid, and priorities shift as the world changes,” says Parets. “So, while I’ve seen an increase in inquiries on philanthropy in the past couple of years, clients are now turning back to traditional wealth planning matters, such as tax and succession. If anything, a sense of purpose requires constant attention if it is to be delivered on.”
Needing to stay ahead of tax reform and transparency obligations
For a number of reasons, the tax environment for wealthy families has been challenging for several years. Firstly, a swathe of tax-related legislation – most notably the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) – has come into effect, bringing increased demands for transparency and a heavier compliance burden.
“The direction of travel is one that isn’t likely to change any time soon,” says Parets. “Governments are looking for new revenue sources post-pandemic – and that may well include the introduction of a so-called wealth tax or a one-off compulsory ‘extraordinary solidarity contribution’, such as the one introduced by Argentina in 2021.”
The global tax picture for high net worth individuals is made more complicated by the fact that tax policy can be introduced globally as well as being implemented domestically. For families with international footprints, this creates all kinds of complexity, with significant penalties for failing to report accurately.
“It’s becoming increasingly critical for individuals to have a totally transparent view of their tax liabilities and obligations, and that of their families, across all the jurisdictions where tax is payable,” says Parets. “As well as having systems in place to monitor any tax changes and their implications.”
While it is unsurprising that being compliant with this constantly shifting tax landscape is vital, Teo says that taking a holistic view of tax also means looking for opportunities where they exist.
“Some countries have favorable infrastructure for family offices,” he says. “Likewise, other clients are attracted to jurisdictions where you see family offices building an ecosystem that involves co-investing.”
Navigating residency and mobility
With the global economic and geopolitical landscape in a state of flux – and the tax picture constantly changing – it comes as 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. Marianne Kayan, Principal, Private Tax, Ernst & Young LLP notes that these clients are becoming very savvy on multi-jurisdictional residency and looking for insight into the detailed tax implications prior to their moves. She says, “It is great to green light a move to a particular country and provide a family actionable advisory that solidifies a decision. Sometimes a move looks great from a quick internet search, but talking with tax advisors from a particular country may reveal the need for a deeper dive.”
For individuals considering relocating, tax will always likely be a factor. But in many instances, it is no longer the prevailing one. “In recent years, I’ve had conversations with clients thinking about relocating who are more concerned with things such as improved political stability and better quality of life,” says Parets. “Even to the point where they may be worse off from a purely tax perspective.”
Despite this, 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 may have completely distinct tax regimes. So even the choice to move to, say, the US, Switzerland, Singapore or Hong Kong, may have different tax implications depending on where in the country an individual has a base. Kayan says “the good news, it is possible to get very granular 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.” (EY’s Worldwide Estate and Inheritance Tax Guide, for example, summarizes the gift, estate and inheritance tax systems in 44 jurisdictions and territories.)
And 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.
“The kind of scenario that makes everybody sit up is where wine collectors keep their wine in a bonded warehouse in the UK and realize this could become subject to estate duty when they pass away,” says Teo. “The fact that you have assets in different locations brings with it complexities, making structuring and planning even more important.”
Five steps private clients can take to manage these concerns
Wealthy individuals are clearly juggling a whole range of concerns right now, and that is understandable in the light of the global financial picture and the fact the world is emerging from a devastating pandemic.
In order to address the four key areas of focus, high net worth individuals may want to consider the following five steps.
1. Conduct a root and branch review of succession plans
This includes looking at the structures and plans you have in place – such as wills and trusts – and double checking whether assets will go exactly where you want them to go. It’s also important to understand the tax implications of any succession plans. Once this comprehensive review has taken place, identify gaps or failings and make necessary changes.
2. Ensure the next generation are involved going forward
They are the future protectors of family wealth, purpose and legacy, so strongly consider involving them as much as you (or they) would like to be. “Bring them on board at the earliest opportunity, so that you can be a mentor or guiding light,” says Teo. “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 this is not a legally binding document, it can help achieve many things. It can 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, it is advisable to get this in place as early as possible, so it helps 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 domiciliation), what the tax liabilities are, and whether you are up to date with any legislation that will have a direct impact. Kayan notes, “At this point, tax residency is not an isolated untouchable topic; instead, residency is truly similar to many other types of business decisions. Families are looking into contingency planning, and such a plan is wise 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. And, as is clear, the landscape is constantly changing. 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 aren’t triggered unnecessarily.