Many High-Net-Worth Families (HNWFs) remain underprepared when it comes to legacy and succession planning. This can result in jeopardising both family harmony and the businesses they have toiled so hard to build.
According to a recent Knight Frank’s 2020 Wealth Report, there were 103,335 HNWIs each with a net worth of over US$30 million in Asia alone in 2019. Wealth continues to flow into the continent, while still trailing behind Europe and North America, its numbers are rapidly catching up, with a projected growth rate about double that of the West.
The majority of the wealth comes from family-owned businesses. Ernst & Young estimates that at least 85% of companies in Asia-Pacific are owned by families. A 2019 research study by the Asian Private Banker survey with relationship managers on their HNW clients, found that succession and legacy planning was a top priority for the heads of these families, especially here in Asia.
Why do most Asian HNWFs remain reluctant to establish definitive succession plans?
According to the same research study, about 40% of Asian HNWs have or are currently planning a succession plan. Most Asian HNWs have yet to implement any definitive plans despite listing succession and legacy planning as their top priority. The most obvious reason for almost two-thirds of them is that they have not even broached the topic with their families.
This was corroborated by other research, such as UBS’ 2019 Global Family Office Report. The report found that among family offices, about 49% of Asian family offices have succession plans in place, which is below the global average. Interestingly, even though implementation of a succession plan is not on the table yet, the setting up of a family office structure implies a more structured and coordinated nature to managing the families’ wealth.
One main reason for this mismatch between implementation and priorities, is partly due to the fact that the topic of legacy planning borders on cultural taboos surrounding the discussion of death, which may lead to procrastination and difficulties in even starting such a discussion. Despite this, families must consider the very real risks of not having adequate succession plans in place. Some of these risks can include:
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Potential successors being unwilling or unable to take over the family business, putting the future of the business in jeopardy
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Potential disputes over the split of family assets once the patriarch or matriarch is no longer around
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Potential inability to meet cash needs at death—e.g. from personal and family debts, discharging of personal guarantees, estate, and inheritance taxes (in the case of foreign investments). This could create financial anxiety for the surviving family members and might even necessitate the selling of fixed or business assets
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The potential inequitable split of assets because a large proportion of it may be held in fixed assets or in the business itself
Despite individual family circumstances, the core challenges are largely not unique to many HNWFs. Having said that, there are a number of possible solutions to some of these challenges, for example, the use of universal life insurance plans, Trusts, as well as Foundations.
Legacy planning challenges
In 2019, the HNW population rose by nearly 9% to 19.6 million HNWFs, according to the Capgemini World Wealth Report in 2020, with an estimated USD15.4 trillion of wealth expected to pass down through the generations by 2030. How these HNWFs manage their wealth and intergenerational transfers will have a big impact on the way their legacies are preserved and carried forward.
With the current uncertainties the world is facing, the financial needs of HNWFs have not gone away. Lockdowns have resulted in HNWFs spending more time together which may have heightened their awareness for the various aspects of their lives that need more protection. .
Added to the above-mentioned risks, the current COVID pandemic has also created a few other considerations as well as challenges for HNWFs:
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Business – As majority of HNWFs are often business owners, nearly all industries have been affected by the pandemic in one way or another.
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Travel – Many HNWFs lead international lives with family members and assets spread across the world. During the pandemic, it has been very difficult and at times almost impossible to travel around, and that could potentially lead to tax implications if one had to stay put in certain countries longer than anticipated.
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Investment – The volatility of financial markets coupled with ultra-low interest rates presents difficulties in searching for investment yields.
The Asian Private Banker research study also found that interest in legacy planning within HNWFs continues to grow as they realise that personal health and circumstances can change rapidly. Proper structured legacy planning can help HNWFs protect and efficiently pass along their wealth to the next generation.
Interestingly, over 75% of HNWFs with over USD30 million in net worth have had some form of legacy planning This indicates that these HNWFs are recognising the need and value of having some legacy structures in place.
Legacy planning is about having options
While no one can predict what’s going to happen in the future, the need for HNW legacy and succession planning is growing in importance. The needs of every HNWFs are unique and varied, from family circumstances, businesses, to life values and goals. Legacy planning should be the foundation of a sound and holistic wealth management plan. When planning your legacy, what most HNWFs look for are options. The most common is the ability to divide assets as they see fit. The other options are to enjoy a lavish retirement, while still being able to leave more to family. One option for some is to enable the family to give back to society through philanthropy. A well-structured legacy plan can be an effective and economical way to fund a philanthropic donation.
Speak to your wealth adviser to find out more on how to achieve a more holistic legacy and succession plan.
Learn more
This article was written by Tong Hoe Sng, Director of Wealth Management at Aura Group. To learn more about legacy planning, visit private wealth.
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