Beyond the historic market volatility, the personal nature of Covid has affected us all in one way or another. What has become clear is that many people were not prepared for the unexpected.
J.P. MORGAN: ‘ARE YOU READY FOR THE UNEXPECTED?’
JOHN DERRICK:
Welcome everyone to the J.P. Moran webinar. As mentioned, ‘are you ready for the unexpected?’ as the topic will cover this morning with my colleagues from our Wealth Advisory teams.
So beyond the historic market volatility we’ve seen in the last few months the personal nature of Covid has clearly affected all of us. What is clear is that a number of our clients were not prepared for the unexpected, and the crisis has highlighted the importance of having a plan to deal with such circumstances.
A number of our clients have taken the extra time they’ve had with their family to talk through their contingency plans and put in place measures to ensure the family is secure should anything happen to them.
Today we’ll share with you some of the options available in the UK and some of the things that we’ve learnt working with clients in the last few months. For many, the opportunity to review the short term options has clearly led to a broader discussion with their family about strategy and the value of wealth. How should a family even begin to have the discussion, how should you communicate this plan to the next generation? These are some of the questions that we’ll cover this morning.
To review some of these issues and share with you our experience of working with families on these topics I’m delighted that we’re joined by Maya Prabhu, who leads our Wealth Advisory practice in Europe and James Chilvers from our Wealth Advisory team in the UK. Together they help families craft their short and long-term strategies with us and ensure that clients are informed on the options available to them when structuring their wealth to meet the needs.
If you’ve any questions during this discussion that you’d like me to bring up at the end then please send them through to Courtney [t/c 01:48 Uttom], whose details can be found on the screen and on the original invitation.
So without further ado I’ll hand over to James, and the first question really, James, is a number of clients have asked us about the immediate question as they saw friends and family fall ill, so what would happen to their bank accounts if they’re incapacitated. Could you tell us a bit more about how to approach this type of contingency planning in the UK, and how we work in this situation at J.P. Morgan.
JAMES CHILVERS:
Thank you very much, John. And you’re absolutely right, we’re seeing this question being raised by a range of our clients over the last few months, and it’s brought to the forefront of people’s minds the importance of having an effective emergency plan for the short term. And turning to slide 3, we’ve got a very simple visual representation of what successful families need to do to be well-prepared. We’ve got the short term or contingency or emergency plan, whatever you want to call it, and then you’ve got your medium to longer term plan. The longer-term plan Maya will speak to later in this session.
There are some key questions that we see families ask themselves and guide families to ask when thinking about these considerations and when wondering what an effective short term or contingency plan looks like. So turning to slide 4 I think there are some really important things to think about.
So the first is if something happens to me, if I’m incapacitated or fall ill does my family have sufficient access to wealth, in the short term at least, to keep the household running during that difficult time. So that’s sort of 101. Do other members of the family have sufficient liquid cash to continue to fund the day to day should the person that otherwise would hold the wealth fall ill?
The second is where is the cash held and is it safe? This is something that during significant market volatility we see lots of clients turn their minds to. Is the money that my family needs to keep going in an organisation that is safe and secure, particularly during these extremely volatile times.
Finally, whose name is that money in, and we’ll come to the options avail to clients in a moment in relation to access to wealth. Who should the family call? So this seems straightforward and it seems pretty obvious, but actually it’s something that the next generation might not know the answer to. There is a list of people that we would expect in an emergency other members of the family might need to call to make sure everything can continue to function as it should. So the lawyer, the accountant, a banker or bankers if a family has more than one relationship. Trusted family members or friends that have been identified as the first generation. If there’s a family office the key family office representative, and if there’s a business that the principal is involved in, a trusted member of that business to discuss how it might continue during a period of incapacitation or illness.
So that’s sort of access the money and who to call. The other two sort of shift slightly into the medium-term plan and we’ll come to that later, but there are two key questions. One is if you have existing structures that hold your wealth how will they continue to operate should you be unavailable to continue to participate in the administration of them, and who understands them, knows what they do and how they should operate. Have you communicated that to anyone in the family? And then finally, and I say this to all clients in every meeting I have, is do you have an up-to-date will and lasting power of attorney? The answer is often maybe and, in some cases, people might be surprised to hear I don’t actually have a will. That’s a really common answer in the UK. In fact, a very small proportion of individuals in the UK have a valid will in place, so it’s always worth thinking about that and also dusting off any old ones you might have and making sure they’re up to date.
JOHN DERRICK:
James, quite a lot of people have used this time to review their structures and a number of my clients have put in place, general or limited powers of attorney on their accounts. Could you just talk us through the pros and cons of these, please.
JAMES CHILVERS:
Sure. So just turning to slide 5, look, I think it’s a bit of a spectrum of options available to families in relation to bank accounts, and this is worth thinking about before you even turn to the medium to longer term considerations around wills and lasting powers of attorney and so on.
So on the left you have other family members holding cash in their own name, so from the left you have given away control, and as you move across the slide to an account in your name you’ve retained control, but others don’t have access to wealth. So I’ll start from a family member holding cash in their own account.
Look, this is an option lots of families put in place. It requires, of course, trust in that other family member that they are going to maintain that pot as an emergency pot of cash to sustain the family should something happen to the main wealth holder. If you’re giving away money to another family member who isn’t your spouse or civil partner you may have Inheritance Tax considerations to think about with your tax and legal advisors. And also, you’ve just got to bear in mind that if you’re giving away to, say, the next generation, it’s theirs, it’s in their hands and they could do with it what they like. So for many families that’s fine, and the conversation’s been had and the next gen understand that, that this pot is for an emergency only. But it’s something that does play on many of our client’s minds when thinking about these sort of short term emergency options.
The second option, and we’ll come to GPOAs and LPOAs, general powers of attorney and limited powers of attorney in a moment. The second sort of most common option and perhaps most straightforward is having a joint account. Two individuals of the family holding cash jointly, both can access that account as they please, transact and instruction on that account as they wish. It’s worth bearing in mind that both the default position in the UK from a revenue perspective is that that account is owned 50/50, so any interest made on that account needs to be reported in both account holders tax returns at the end of the year and divided by two, unless some other arrangement has been put in place in relation to the ownership of the assets within that account. So it’s worth noting that there’s, again, possibly some tax implications, both from a tax return sort of income perspective, but also if the other joint account holder isn’t your spouse who’s likely to benefit from an unlimited exception from Inheritance Tax when assets pass from one to the other, if it’s the next generation who holds a joint account with the first generation that could also have some Inheritance Tax implications. Again, you’re giving away control here. The other account holder can access those funds as they please and transact as they please. So the up side to this though is if something happens to you should you be incapacitated or die the other joint account holder has total and complete access to the wealth and you don’t need to go or your estate doesn’t need to go through a complex probate procedure in order to allow access to those funds.
So just continuing to move across the options here. The general power of attorney is actually something that banks can put in place in relation to bank accounts held with them. It allows the legal account holder to identify an individual who has a range of powers over the account, as though they are an account holder themselves, so they can essentially transact on that account, they can withdraw money from that account, and they can place instructions on that account as they wish if they are a general power of attorney. The downside here is that in order for this to continue – sorry, let me rephrase that - the downside here is should something happen to you, should you die, a GPOA or a general power of attorney is immediately revoked on death. So a GPOA is useful for incapacity but it isn’t as useful if the worst happens. And if the worst happens then GPOA is immediately revoked, and the account which is legally in your name needs to then go through the sort of standard probate procedure in the UK, which I think John you’ve had clients, and I’ve certainly come across clients over the years where the probate procedure for complex estates can take many months if not years. So it’s worth noting that the GPOA although useful during a period of incapacity the downside is it is of no use should you die.
JOHN DERRICK:
James, one of the things we sometimes come across is the issues of powers of attorney outside the home market, and by that I mean it can be someone in Europe or someone in the US, and two of the issues that we sometimes can encounter is either cross-border issues or sometimes tax issues from that perspective. I just wondered if you can just touch on that when people think of who they might use for power of attorney.
JAMES CHILVERS:
Yeah, this is more of a banking regulatory point than tax or legal to your first comment, in that if an individual sits outside of the market in which the account is held, any bank will have as a result of the regulations that apply to all of these institutions, will have strict rules around what that individual in another jurisdiction is allowed to do in relation to the account. And also what you, John, as a banker will be allowed to talk to them about given you’re based in the UK and they’re based elsewhere. And you’re absolutely right to raise it, because all of this other good stuff is very interesting, but practically we have seen non-UK based GPOAs struggle to have the range of powers that I’ve described as a consequence of those regulatory issues that you raise.
JOHN DERRICK:
One other question I was going to ask you, James, is the advantage of the current crisis, in one way, is it has accelerated digital access, it’s accelerated the speed with which all of us have efficiently sometimes organised our affairs digitally, however, one of the challenges of being “all digital” is how do you record all this information for others, and how do others access it in times of difficulty? Because with paper files it’s relatively easy, there is a record. When things are digital where do you even start? What type of things should people think about with the digital sphere and security?
JAMES CHILVERS:
It’s a great question and it forms today part of any conversation a lawyer will have when discussing wills and powers of attorney. I think 101 is take an inventory. And that sounds very analogue given the context of the question, but it’s the starting point that most are advised to begin with. What access do you have digitally? What is your online footprint? And what access would you need other members of the family to have and to which accounts? And that can range both from the sort of financial, which we’re talking about at the moment, but also to the sentimental. I don’t know about you guys, but I probably have 10,000 photos stored in some Apple Cloud somewhere, which if they were lost I imagine it would be as upsetting as anything. So it’s very important to have an inventory that’s stored safely and securely that the family know to look at. And make sure you tell someone where that inventory is and explain to them how they ought to gain access.
Now, of course, in this day and age and when cyber security’s so high up people’s list of priorities, particularly during Covid-19, there’s been an increase in cyber risk, how you allow people to access those accounts without compromising that security is a complex and difficult question. There are online password manager tools that can be used for which a master password is required. That might be one way that individuals could think about allowing trusted members of their family or, indeed, their lawyer or attorney to be able to gain access to the most important accounts they hold. I think the other thing is to make sure that the lawyer that has done your estate and will plan knows about this inventory and if there’s sort of password manager type solution has an understanding of that.
And then finally, and it’s administratively burdensome, but keep an up-to-date inventory of your access and your online footprint. It is a moving feast unfortunately, so it does need to be sort of kept up to date throughout the course of your life, a bit like your will should be reviewed relatively regularly.
JOHN DERRICK:
Thank you, James. And if anyone is interested in a further discussion on the cyber aspects I’m happy to organise that with one of our cyber security teams as well to think through how you might think of your digital footprint so that people can access what they need at the right times.
We’ve covered powers of attorney, James, we’ve covered the shorter term aspects, are there any final comments you’d make around other things that we need to think about within the shorter contingency area?
JAMES CHILVERS:
Yeah, sure. Just very quickly on limited powers of attorney and lasting powers of attorney. A limited power of attorney is something a bank can put in place in relation to an account. The problem with the limited power of attorney is it doesn’t really give the holder access to funds that need to be withdrawn from an account, so it does as the name suggests, have limited use in the event of an emergency, and again is revoked in the event of death. And then finally, we mentioned an account in your own name. No-one will have access to that, and it will be subject to the standard probate proceedings. A lasting power of attorney in the UK is a separate document outside of these GPOA and LPOA documents that I’ve mentioned today, which is executed with your lawyer normally, although you can do it yourself, with the course of protection. Now this is a separate sort of government document that essentially can give trusted members of your family the right to access all of your accounts across the piece, across banking relationships in the event that you’re incapacitated. So that’s worth thinking about. And many lawyers alongside a will will suggest that one of these is put in place in relation to financial affairs. And second, you can also have a lasting power of attorney in relation to welfare, so your health and how you’re looked after if you’re unable or don’t have the capacity to take those decisions yourself. So that’s something certainly to think about.
I think the key thing, and this might be a good moment for you to ask a few questions of Maya, John, the key point of all of these practical solutions is that they’re only as good as the conversations you’ve had with the members of the family they affect and the communication that you’ve had with those other members of your family. So it’s those foundational sort of elements that I think Maya will speak to as we move forward.
JOHN DERRICK:
Thanks, James. I think the only comment I would add is that when you have illiquid assets or private assets these matters become even more important. And I’ve certainly been in a scenario where we’ve had an entrepreneur selling a business and obviously there’s quite a long completion time for that transaction in the same way as there can be for some properties. And where there was more than one shareholder one of those other shareholders became incapacitated and so the entire transaction was held up. So it is important when you look at illiquid assets in particular because of the time periods they last, not only to think of your position but the position of other shareholders or co-owners of assets as well, because a co-owner not having any powers of attorney in place can equally freeze your ability to actually execute. But your markets which are more volatile makes it much harder to do.
Thank you, James.
So Maya, one thing we’ve most certainly learned recently is life is not a dress rehearsal. We get one chance and actually none of us will probably have gone through an experience where we are effectively confined by government to our own houses in our lifetime and hopefully won’t again. That has meant a lot of people have spent time together. For some that’s good, for some it’s not so good. So the real question to you is when is the right time to discuss these matters of wealth and generation and when do you start to broach these subjects with your family?
MAYA PRABHU:
Thank you, John, and good morning to everyone. I think that’s a very good question. The first thing I’d say is that research shows and actually our experience shows that it is amazingly common not to talk about money and wealth and future plans within families. And I mean I work across Europe and the Middle East and that is incredibly common, and the topic is avoided. And the reason for that is that, you know, people are fearful. I mean how do you talk about money? They’re fearful of having that conversation. And what sits behind that is that parents and the rising generation, the next generation, have their own sets of concerns. Parents, for example, their number one worry is if I start talking about money to my children will it take away their sense of purpose and direction and motivation, and to do something for themselves and to reach fulfilment in their own lives by being productive.
They’re also worried about well, what roles can my children play? Well, they’re very different personalities. I’ve got someone who’s a spendthrift, I’ve got someone who saves every penny. How do I have the conversation when them when they’re so different?
A third concern could be I don’t want the talking about money to be a burden to my children. A client I’ve worked with his children were in their mid to late 30s and he said their lives are carrying on and I don’t want to burden them with this.
And finally, one of the other concerns is well, what if my children get divorced, what will happen to the money, and how can I discuss that with them. It’s a very difficult subject. The children themselves have their own concerns, the first being how will I live up to the success of my successful parents, or successful family ancestors. Will I know what to do? Will I lose it all? Some feel a sense of guilt, have I won the birth lottery, do I deserve this, do I deserve to be here? And if I raise this subject with my parents because what’s keeping me up at night is I kind of know there’s some money and if there’s an emergency situation what will happen? And if I raise this subject with my parents then will they think I’m trying to be greedy or grasping or wanting money? Whereas what I want to do really is just to be able to sleep at night.
So these are the reasons why people find it hard to have the conversation. So turning to your question about so what should people do, I think the first thing is that sharing any kind of information needs to be appropriate by age and maturity of the next generation, and needs to be well described and handled. And it doesn’t need to start with talking about your balance sheet. I think that’s what people are most worried about, although I would say to James’ point on cybers, Google is quite an informant, often incorrectly, to parents as to the next gen, as to what balance sheet might be. So you don’t need to start with your balance sheet is the first thing.
And when to approach it is so different in every family, and most commonly we see these conversations starting when the children are mid to late 20s, and it really starts with, if we can move to slide 11, how to start is we suggest a framework that you can use. I think we’re moving a bit further on on the slides, next one, this one, yes, please, thank you.
So this is a framework that we suggest that clients use to have conversations around their wealth. And what it is is starting with not numbers or who gets what, how much and when, but with what is our vision for our wealth? What is its purpose, what is it for, and what values really underpin our success and our approach to money as a family? And these values and this vision and this sense of purpose is really what guides the conversation and the decision making. You can then talk about what are the risks to our family wealth. Is it that people might get divorced, is it that we don’t have a will, is it that people are not financially educated? What do we need to do to be able to change those things and mitigate those risks.
And the third thing is how do we organise ourselves, how do we make decisions? Should we have a family meeting, for example, once a quarter? Should we meet our bankers together once in six months, whatever it might be, and how do we talk about this?
And finally, how do we continue to learn and develop our relationships as a family? Because particularly if wealth is considered to be multi-generational, so lasting more than your next generation, and for many of our clients the quantum of their wealth is such that it does form part of their vision and their plan, then it’s important that the next generation practices working together and strengthening their relationship. So that’s just a very quick canter through that in a nutshell.
JOHN DERRICK:
So Maya, you talked about discussions in the mid-20s, but actually quite a lot of us have spent a lot more time with younger children around and often sort of 16, 17, 18 year olds, some of whom couldn’t even go to university. So mid-20s sounds like quite late for some of these discussions to me, what’s the consideration around those who are younger?
MAYA PRABHU:
Yes, I think for younger children, obviously it’s never too early to start. And I would say almost as if a partnership, so as a couple, if you can be quite intentional when your children are young in thinking about what is our vision for our wealth then it means that you can start to role model the values around money and how we approach money as a family and give money messages that are linked to the vision that you have in mind. So that’s the first thing.
The second very practical way that you can start doing that is actually philanthropy is a great gateway and entry point to talk about what money means to us. It’s a great way to also talk about family values. So we’ve done family workshops around philanthropy where the youngest child might be as young as 8 or 9, and they can talk about values. They can talk about what it means to them. They may not use a word like integrity, but they understand telling the truth and things like that. So even young kids have passions and things they know are right and wrong and you can start to have the conversation using philanthropy as a base.
And for parents to during these workshops share, when we think about our wealth we have several buckets, we pay for our expenses, we think about our holidays, we think about our business interests, we save for the future. So you start to set that kind of, I guess, training around money, but if a very soft way without talking about numbers or balance sheets.
JOHN DERRICK:
Thank you. So one of the most challenging discussions really comes about this topic of equal verses fair when it comes to financial benefits. So we’ve all read articles about disagreements between families, you see it in newspapers they like to draw this out, so could you just touch on how do you approach this concept of equal versus fair, and in particular look at multi-generational families, when it comes to financial benefits?
MAYA PRABHU:
Well, I’ll ask you a question just to kick us off. So you’ve got two children and if I said to you today, just off the top of your head, how are you going to divide your money, what would you say?
JOHN DERRICK:
Equally.
MAYA PRAHBU:
Of course. And that’s because that’s what most parents think and that’s because you love your children equally, so therefore you would not want to make any difference in financial benefit between them. But it’s a bit more complicated than that and let me explain why this becomes a bit complicated. It’s so because over time children there are a wide range of circumstances they might find themselves in. For example, and there are an infinite number of scenarios we can talk about, but let’s talk about two or three examples. Let’s say you had one child that decided to pursue a double PhD in Harvard and you had another child that went to the University of Sussex and did a bachelor’s degree and got started in work. And you paid for the education of both of them. There is a differential created straightaway there because of the choices that they have made in terms of their education. For example, could the one at the University of Sussex think well, to compensate for that maybe I should get some money to start up a business. Why not? So how do you sort of have that conversation?
Secondly, you may have a child who decides to start their own business and you invest in that, and you have another that decides to be a teacher. Let’s say the business does exceedingly well, would you kind of compensate the teacher and feel like they needed to get some extra money because you provided that business start-up money?
I had a situation, it was quite difficult actually, where the client had a son and daughter. The son was getting married, they suggested to the son and his fiancé when they were planning the wedding that maybe they’d like to consider a pre-nup, and the parents would very much like them to consider a pre-nup. The fiancé was absolutely beside herself. He was beside himself because he felt that his parents were trying to say that he hadn’t chosen someone appropriate. And anyway, they decided to elope. And the younger sister sort of saw this and when it was her turn to get married she happily signed the pre-nup. So what they decided over time was the properties that they had gifted to the son they actually withdrew, as it was a gift that the used to the property but it wasn’t in his name. They actually withdraw that. Whereas the daughter had properties in her name. And there was a great sense of… The parents thought that well, the rule was around pre-nups, one has signed it, one has not, so therefore there’s no problem. But you can imagine, the son felt a great sense of unfairness in relation to how he had been treated. And there’s a difference in financial benefits.
And another final point I’d make on that is that there are some assets that are very hard to divide equally. For example, a family I worked with the mother played the piano, that was her great hobby, and the home was always filled with music because she would tinker on the piano. As it happened, the two sons also took up that interest and they loved playing the piano as well. So when you think about the piano and the future, you can’t cut it in half. It has a huge amount of sentimental value for both.
So that’s why having the conversation and talking about what does fairness mean to us in our family is really the key topic. On what basis will we judge fairness and how are we going to achieve that? Because if the family’s involved in that conversation they’re less likely to feel they’ve been treated unfairly and therefore they’re more likely to be collaborative with the family discussions rather than thinking they have to just look after themselves.
JOHN DERRICK:
Thanks Maya. I mean things obviously go wrong. One of the key learnings is how does one avoid these mistakes, and maybe you can also touch on defining what success means to different families that we’ve talked about. How do you balance out someone running a business versus someone with three PhDs who’s a scientist but earns very little? But more importantly, what framework can people use to think of righting these wrongs, because they’re not impossible to change.
MAYA PRABHU:
Yes. I think it important to have financially similar - if we can just keep the previous slide please, that’s fine – financially similar opportunities are important, not the same, but similar. Secondly, what families have done is they say let’s have different pots of money. We have a pot for education, we have a pot for business start-up, we have a pot for philanthropy, we have a pot for health, and that is accessible to all members of the family. Now who is family is a good question to define as well. Do we mean children, grandchildren, spouses, adopted children, godchildren, close friends, it depends entirely on the family, that’s for them to talk about. But having different pots means that everyone has equal access to education should they wish it. Everyone has equal access to getting business start-up money. Obviously, they would need to have a business plan and you’d have some sort of procedure and process in place to be able to do that. But everyone has access to that, everyone has access to health. That’s one way in which people do it, rather than trying to say that it has to be – so there’s equal access to the money for those purposes, rather than getting down to dividing up dollars and pounds.
JOHN DERRICK:
Thank you. So once you’ve got a plan in place, how do you actually sustain that?
MAYA PRABHU:
I think, yes, you see that’s the most important thing, because a bit like a good marriage this is about on-going nurturing and on-going work. You asked about successful families, what would successful families do. So this is what the research shows. They think about their wealth in three dimensions. So one is that they work on their financial wealth. Clearly, if there’s no money to talk about then there’s nothing to talk about. So they invest well, they manage their properties well, they manage their leverage and debt well. So good financial investment, that’s the first thing they think about.
The second thing they think about that is critical is how do we build the capabilities and nurture members of the family. So nurture them as individuals, their passions, their interests, et cetera, and their ability to work together and their capability to be able to manage the money, because no-one is born knowing how to manage money. So you build their capability over time on how to manage money. And the third thing they think about is their social capital, which is no-one makes money in a vacuum, how do we link with society, whether it’s through philanthropy or volunteering, or any way that they think about it, but what is their connection with that? So that’s in terms of success.
And how to sustain this takes a little bit of effort. Having regular family meetings, for example, with several topics on the table, which could include your point earlier, what’s happening with our financial investments, what’s happening with our philanthropy. It could be around planning a family holiday. It could be around the philanthropic side. So all of these things, what can we learn together, what more do we need to learn about? Do we need to learn about sustainable investing? Do we need to learn more about what’s happening in the private market? So this continual - do we need to know about pre-nups, do we need to know about lasting powers of attorney? So having these topics on the table and having on-going family discussions is really what sustains it.
JOHN DERRICK:
Thanks Maya.
So one of the questions that we’ve been sent is around engaging all the family. So some of my family members want to engage, but one of them doesn’t, what do you do in those circumstances?
MAYA PRABHU:
Very tricky. I would seek to understand why they don’t want to engage, because sometimes it’s a case of I find the topic of money really difficult. And so we need to kind of delve into that a bit. The second, sometimes it is because they feel I’ve been treated unfairly and if this topic comes up again then I’m not sure how I might emotionally react. And so I think it’s sort of trying to understand why and then start with topics that are a relevant interest.
In fact, a family that I work with, the sons – they have two daughters, I beg your pardon – are in their early 20s, they’re like 20 and 22, the parents are very keen to get them involved but you know what the daughter said, she said that I’m just starting my graduate traineeship or I’m just applying for grad roles and I know that what I’m going to earn is not even what you make of your investment income, I just want a couple of years to be able to get started in my role, feel a sense of, I guess, satisfaction with it and then I will be ready to engage with it. So I think it’s great that the parents brought it up, but that’s a really interesting reason why. And so you defer for a couple of years. Instead they focused on philanthropy as topics that they want to continue to engage around. So this is a bit of a process.
JOHN DERRICK:
I think one of the other questions is around structures. What is the best structure, what are the optimal structures to use and how do I think about the right structure for our family?
MAYA PRABHU:
So I’m going to hand over to James in a second, because he’ll be able to go into the detail of that very well. I’ll just start by saying at a principle level is it’s important to know what is our vision for the future. What is the purpose of our wealth? Is this for one generation, two generations, multiple generations? And I think once you have got that in place then the choice of the structures becomes driven by what you’re trying to achieve as a family rather than simply the various pros and cons of each structure of which they will each have pros and cons. But how to choose is defined by knowing what your vision is as a family.
And James, maybe you can shed some light on some of the options.
JAMES CHILVERS:
Thank you, Maya. I 100% endorse what you’ve said. I mean often in the conversations we have with clients many people are very solution oriented, so they want to know the answer before you’ve done all of the sort of quite difficult and quite challenging ground work that you’ve touched on, Maya. And actually, understanding all of the objectives, the visions and the value that the family holds for wealth matters when thinking about which structure might best suit that family.
Like all good former lawyers, the best answer I can give here is it depends. It depends on each family member’s and family’s circumstances, both from a tax residence and in the UK, at least, domicile perspective. It can depend on where the children are, so say, for example, you have members of the family who find themselves in the US being educated, but then stayed there to work, that can affect how a particular structure can operate and should be operated moving forward. So I can’t give a specific answer to this without, frankly, speaking to every client and outlining their options.
I mean just a high level the options range from your traditional sort of trust structure, they still exist. They have been around for many centuries. There was a period where perhaps they were used aggressively in relation to tax, but I think today they are continuing to be used for family succession planning as a first principle, and that is an important thing to think about it with your sort of independent tax and legal advisors.
Family investment companies are a corporate structure that we’ve seen a number of our clients use, particularly UK based families without the sort of international footprint that many of our client base have. They’re a corporate structure with special shareholding arrangements that allow for control to be retained by gen 1, you know, the parents, whilst sort of future value in the assets held within it are given away to the next generation. There are loads of pros and cons in relation to all of these structures that would need to be spoken about in detail with your advisors.
There are other structures, such as family limited partnerships, even off-shore bonds for UK based clients, which if anyone on the call would like to have a more detailed conversation about I’d be delighted to go through the options based on their specific circumstances. But the key principle is raised by Maya, you need to understand the destination before we can help you figure out the route and figure out which structure might be one of the preferable options for you to speak to your independent advisors about.
JOHN DERRICK:
Thank you both.
So I think if we summarise, I mean the purpose of this discussion was to talk about are you ready for the unexpected? I mean the current situation is one which is unexpected to all of us and almost hard to believe it happened if we were to go back six months, but I think what we’ve tried to do here is to give you an idea of some of the short term sort of contingency planning situations you need to make sure that you have covered, from power of attorney through to lasting powers of attorney.
And I would reiterate again, and in particular when you have illiquid assets and other participants or other families or other shareholders, how important that is. I think the second thing is that there has been an extraordinary time when we have been probably spending more time with some of our closer families than we normally do, and a lot of people have used that time, because the luxury of time is the one that we can’t purchase, to actually go through some of these discussions and to do some of the scenarios around what might happen. Some people’s perception of the world has obviously changed during this process and what they value has changed, but I think there is a great value to role playing out what the different scenarios might look like.
It becomes quite difficult when people are “stuck in other jurisdictions”. We’ve never been in a position where we can’t travel before, so those have consequences that might impact what you’ve currently got in place.
What I would encourage you to do is if you’d like to have any of these discussions further or spend some time with Maya, James or your banker going through the structure of some of the slides we’ve used is to get in touch with us, and we’d be very happy to facilitate the discussion. The only people who can decide on the right plan and the right structure is you, not us. The only thing we can seek to do is to share our experience from other families, and also hopefully avoid some of the pitfalls, because there are many pitfalls and there are many examples of how not to do it. And often how not to do it more valuable to go back to how you might want to think about your own situation.
I think the last point is probably the most important, which is do not let the structure determine your desires. There is very often an example of people where I might say the cart is put before the horse with a structure that then changes. And the last few months have showed very clearly the desire for some people to have flexibility. The overriding principles of simplicity, flexibility and ease of operation are probably the three things that we seek to work with clients to determine first. Then there’s the question of what that looks like from a plan. And then finally, what type of structure suits that scenario and what are the pros and cons of it.
It just leaves for me to thank you for all joining us this morning, and to thank James and Maya for their time. And we wish you a good rest of the day. Thank you very much.
END
J.P. MORGAN: ‘ARE YOU READY FOR THE UNEXPECTED?’
JOHN DERRICK:
Welcome everyone to the J.P. Moran webinar. As mentioned, ‘are you ready for the unexpected?’ as the topic will cover this morning with my colleagues from our Wealth Advisory teams.
So beyond the historic market volatility we’ve seen in the last few months the personal nature of Covid has clearly affected all of us. What is clear is that a number of our clients were not prepared for the unexpected, and the crisis has highlighted the importance of having a plan to deal with such circumstances.
A number of our clients have taken the extra time they’ve had with their family to talk through their contingency plans and put in place measures to ensure the family is secure should anything happen to them.
Today we’ll share with you some of the options available in the UK and some of the things that we’ve learnt working with clients in the last few months. For many, the opportunity to review the short term options has clearly led to a broader discussion with their family about strategy and the value of wealth. How should a family even begin to have the discussion, how should you communicate this plan to the next generation? These are some of the questions that we’ll cover this morning.
To review some of these issues and share with you our experience of working with families on these topics I’m delighted that we’re joined by Maya Prabhu, who leads our Wealth Advisory practice in Europe and James Chilvers from our Wealth Advisory team in the UK. Together they help families craft their short and long-term strategies with us and ensure that clients are informed on the options available to them when structuring their wealth to meet the needs.
If you’ve any questions during this discussion that you’d like me to bring up at the end then please send them through to Courtney [t/c 01:48 Uttom], whose details can be found on the screen and on the original invitation.
So without further ado I’ll hand over to James, and the first question really, James, is a number of clients have asked us about the immediate question as they saw friends and family fall ill, so what would happen to their bank accounts if they’re incapacitated. Could you tell us a bit more about how to approach this type of contingency planning in the UK, and how we work in this situation at J.P. Morgan.
JAMES CHILVERS:
Thank you very much, John. And you’re absolutely right, we’re seeing this question being raised by a range of our clients over the last few months, and it’s brought to the forefront of people’s minds the importance of having an effective emergency plan for the short term. And turning to slide 3, we’ve got a very simple visual representation of what successful families need to do to be well-prepared. We’ve got the short term or contingency or emergency plan, whatever you want to call it, and then you’ve got your medium to longer term plan. The longer-term plan Maya will speak to later in this session.
There are some key questions that we see families ask themselves and guide families to ask when thinking about these considerations and when wondering what an effective short term or contingency plan looks like. So turning to slide 4 I think there are some really important things to think about.
So the first is if something happens to me, if I’m incapacitated or fall ill does my family have sufficient access to wealth, in the short term at least, to keep the household running during that difficult time. So that’s sort of 101. Do other members of the family have sufficient liquid cash to continue to fund the day to day should the person that otherwise would hold the wealth fall ill?
The second is where is the cash held and is it safe? This is something that during significant market volatility we see lots of clients turn their minds to. Is the money that my family needs to keep going in an organisation that is safe and secure, particularly during these extremely volatile times.
Finally, whose name is that money in, and we’ll come to the options avail to clients in a moment in relation to access to wealth. Who should the family call? So this seems straightforward and it seems pretty obvious, but actually it’s something that the next generation might not know the answer to. There is a list of people that we would expect in an emergency other members of the family might need to call to make sure everything can continue to function as it should. So the lawyer, the accountant, a banker or bankers if a family has more than one relationship. Trusted family members or friends that have been identified as the first generation. If there’s a family office the key family office representative, and if there’s a business that the principal is involved in, a trusted member of that business to discuss how it might continue during a period of incapacitation or illness.
So that’s sort of access the money and who to call. The other two sort of shift slightly into the medium-term plan and we’ll come to that later, but there are two key questions. One is if you have existing structures that hold your wealth how will they continue to operate should you be unavailable to continue to participate in the administration of them, and who understands them, knows what they do and how they should operate. Have you communicated that to anyone in the family? And then finally, and I say this to all clients in every meeting I have, is do you have an up-to-date will and lasting power of attorney? The answer is often maybe and, in some cases, people might be surprised to hear I don’t actually have a will. That’s a really common answer in the UK. In fact, a very small proportion of individuals in the UK have a valid will in place, so it’s always worth thinking about that and also dusting off any old ones you might have and making sure they’re up to date.
JOHN DERRICK:
James, quite a lot of people have used this time to review their structures and a number of my clients have put in place, general or limited powers of attorney on their accounts. Could you just talk us through the pros and cons of these, please.
JAMES CHILVERS:
Sure. So just turning to slide 5, look, I think it’s a bit of a spectrum of options available to families in relation to bank accounts, and this is worth thinking about before you even turn to the medium to longer term considerations around wills and lasting powers of attorney and so on.
So on the left you have other family members holding cash in their own name, so from the left you have given away control, and as you move across the slide to an account in your name you’ve retained control, but others don’t have access to wealth. So I’ll start from a family member holding cash in their own account.
Look, this is an option lots of families put in place. It requires, of course, trust in that other family member that they are going to maintain that pot as an emergency pot of cash to sustain the family should something happen to the main wealth holder. If you’re giving away money to another family member who isn’t your spouse or civil partner you may have Inheritance Tax considerations to think about with your tax and legal advisors. And also, you’ve just got to bear in mind that if you’re giving away to, say, the next generation, it’s theirs, it’s in their hands and they could do with it what they like. So for many families that’s fine, and the conversation’s been had and the next gen understand that, that this pot is for an emergency only. But it’s something that does play on many of our client’s minds when thinking about these sort of short term emergency options.
The second option, and we’ll come to GPOAs and LPOAs, general powers of attorney and limited powers of attorney in a moment. The second sort of most common option and perhaps most straightforward is having a joint account. Two individuals of the family holding cash jointly, both can access that account as they please, transact and instruction on that account as they wish. It’s worth bearing in mind that both the default position in the UK from a revenue perspective is that that account is owned 50/50, so any interest made on that account needs to be reported in both account holders tax returns at the end of the year and divided by two, unless some other arrangement has been put in place in relation to the ownership of the assets within that account. So it’s worth noting that there’s, again, possibly some tax implications, both from a tax return sort of income perspective, but also if the other joint account holder isn’t your spouse who’s likely to benefit from an unlimited exception from Inheritance Tax when assets pass from one to the other, if it’s the next generation who holds a joint account with the first generation that could also have some Inheritance Tax implications. Again, you’re giving away control here. The other account holder can access those funds as they please and transact as they please. So the up side to this though is if something happens to you should you be incapacitated or die the other joint account holder has total and complete access to the wealth and you don’t need to go or your estate doesn’t need to go through a complex probate procedure in order to allow access to those funds.
So just continuing to move across the options here. The general power of attorney is actually something that banks can put in place in relation to bank accounts held with them. It allows the legal account holder to identify an individual who has a range of powers over the account, as though they are an account holder themselves, so they can essentially transact on that account, they can withdraw money from that account, and they can place instructions on that account as they wish if they are a general power of attorney. The downside here is that in order for this to continue – sorry, let me rephrase that - the downside here is should something happen to you, should you die, a GPOA or a general power of attorney is immediately revoked on death. So a GPOA is useful for incapacity but it isn’t as useful if the worst happens. And if the worst happens then GPOA is immediately revoked, and the account which is legally in your name needs to then go through the sort of standard probate procedure in the UK, which I think John you’ve had clients, and I’ve certainly come across clients over the years where the probate procedure for complex estates can take many months if not years. So it’s worth noting that the GPOA although useful during a period of incapacity the downside is it is of no use should you die.
JOHN DERRICK:
James, one of the things we sometimes come across is the issues of powers of attorney outside the home market, and by that I mean it can be someone in Europe or someone in the US, and two of the issues that we sometimes can encounter is either cross-border issues or sometimes tax issues from that perspective. I just wondered if you can just touch on that when people think of who they might use for power of attorney.
JAMES CHILVERS:
Yeah, this is more of a banking regulatory point than tax or legal to your first comment, in that if an individual sits outside of the market in which the account is held, any bank will have as a result of the regulations that apply to all of these institutions, will have strict rules around what that individual in another jurisdiction is allowed to do in relation to the account. And also what you, John, as a banker will be allowed to talk to them about given you’re based in the UK and they’re based elsewhere. And you’re absolutely right to raise it, because all of this other good stuff is very interesting, but practically we have seen non-UK based GPOAs struggle to have the range of powers that I’ve described as a consequence of those regulatory issues that you raise.
JOHN DERRICK:
One other question I was going to ask you, James, is the advantage of the current crisis, in one way, is it has accelerated digital access, it’s accelerated the speed with which all of us have efficiently sometimes organised our affairs digitally, however, one of the challenges of being “all digital” is how do you record all this information for others, and how do others access it in times of difficulty? Because with paper files it’s relatively easy, there is a record. When things are digital where do you even start? What type of things should people think about with the digital sphere and security?
JAMES CHILVERS:
It’s a great question and it forms today part of any conversation a lawyer will have when discussing wills and powers of attorney. I think 101 is take an inventory. And that sounds very analogue given the context of the question, but it’s the starting point that most are advised to begin with. What access do you have digitally? What is your online footprint? And what access would you need other members of the family to have and to which accounts? And that can range both from the sort of financial, which we’re talking about at the moment, but also to the sentimental. I don’t know about you guys, but I probably have 10,000 photos stored in some Apple Cloud somewhere, which if they were lost I imagine it would be as upsetting as anything. So it’s very important to have an inventory that’s stored safely and securely that the family know to look at. And make sure you tell someone where that inventory is and explain to them how they ought to gain access.
Now, of course, in this day and age and when cyber security’s so high up people’s list of priorities, particularly during Covid-19, there’s been an increase in cyber risk, how you allow people to access those accounts without compromising that security is a complex and difficult question. There are online password manager tools that can be used for which a master password is required. That might be one way that individuals could think about allowing trusted members of their family or, indeed, their lawyer or attorney to be able to gain access to the most important accounts they hold. I think the other thing is to make sure that the lawyer that has done your estate and will plan knows about this inventory and if there’s sort of password manager type solution has an understanding of that.
And then finally, and it’s administratively burdensome, but keep an up-to-date inventory of your access and your online footprint. It is a moving feast unfortunately, so it does need to be sort of kept up to date throughout the course of your life, a bit like your will should be reviewed relatively regularly.
JOHN DERRICK:
Thank you, James. And if anyone is interested in a further discussion on the cyber aspects I’m happy to organise that with one of our cyber security teams as well to think through how you might think of your digital footprint so that people can access what they need at the right times.
We’ve covered powers of attorney, James, we’ve covered the shorter term aspects, are there any final comments you’d make around other things that we need to think about within the shorter contingency area?
JAMES CHILVERS:
Yeah, sure. Just very quickly on limited powers of attorney and lasting powers of attorney. A limited power of attorney is something a bank can put in place in relation to an account. The problem with the limited power of attorney is it doesn’t really give the holder access to funds that need to be withdrawn from an account, so it does as the name suggests, have limited use in the event of an emergency, and again is revoked in the event of death. And then finally, we mentioned an account in your own name. No-one will have access to that, and it will be subject to the standard probate proceedings. A lasting power of attorney in the UK is a separate document outside of these GPOA and LPOA documents that I’ve mentioned today, which is executed with your lawyer normally, although you can do it yourself, with the course of protection. Now this is a separate sort of government document that essentially can give trusted members of your family the right to access all of your accounts across the piece, across banking relationships in the event that you’re incapacitated. So that’s worth thinking about. And many lawyers alongside a will will suggest that one of these is put in place in relation to financial affairs. And second, you can also have a lasting power of attorney in relation to welfare, so your health and how you’re looked after if you’re unable or don’t have the capacity to take those decisions yourself. So that’s something certainly to think about.
I think the key thing, and this might be a good moment for you to ask a few questions of Maya, John, the key point of all of these practical solutions is that they’re only as good as the conversations you’ve had with the members of the family they affect and the communication that you’ve had with those other members of your family. So it’s those foundational sort of elements that I think Maya will speak to as we move forward.
JOHN DERRICK:
Thanks, James. I think the only comment I would add is that when you have illiquid assets or private assets these matters become even more important. And I’ve certainly been in a scenario where we’ve had an entrepreneur selling a business and obviously there’s quite a long completion time for that transaction in the same way as there can be for some properties. And where there was more than one shareholder one of those other shareholders became incapacitated and so the entire transaction was held up. So it is important when you look at illiquid assets in particular because of the time periods they last, not only to think of your position but the position of other shareholders or co-owners of assets as well, because a co-owner not having any powers of attorney in place can equally freeze your ability to actually execute. But your markets which are more volatile makes it much harder to do.
Thank you, James.
So Maya, one thing we’ve most certainly learned recently is life is not a dress rehearsal. We get one chance and actually none of us will probably have gone through an experience where we are effectively confined by government to our own houses in our lifetime and hopefully won’t again. That has meant a lot of people have spent time together. For some that’s good, for some it’s not so good. So the real question to you is when is the right time to discuss these matters of wealth and generation and when do you start to broach these subjects with your family?
MAYA PRABHU:
Thank you, John, and good morning to everyone. I think that’s a very good question. The first thing I’d say is that research shows and actually our experience shows that it is amazingly common not to talk about money and wealth and future plans within families. And I mean I work across Europe and the Middle East and that is incredibly common, and the topic is avoided. And the reason for that is that, you know, people are fearful. I mean how do you talk about money? They’re fearful of having that conversation. And what sits behind that is that parents and the rising generation, the next generation, have their own sets of concerns. Parents, for example, their number one worry is if I start talking about money to my children will it take away their sense of purpose and direction and motivation, and to do something for themselves and to reach fulfilment in their own lives by being productive.
They’re also worried about well, what roles can my children play? Well, they’re very different personalities. I’ve got someone who’s a spendthrift, I’ve got someone who saves every penny. How do I have the conversation when them when they’re so different?
A third concern could be I don’t want the talking about money to be a burden to my children. A client I’ve worked with his children were in their mid to late 30s and he said their lives are carrying on and I don’t want to burden them with this.
And finally, one of the other concerns is well, what if my children get divorced, what will happen to the money, and how can I discuss that with them. It’s a very difficult subject. The children themselves have their own concerns, the first being how will I live up to the success of my successful parents, or successful family ancestors. Will I know what to do? Will I lose it all? Some feel a sense of guilt, have I won the birth lottery, do I deserve this, do I deserve to be here? And if I raise this subject with my parents because what’s keeping me up at night is I kind of know there’s some money and if there’s an emergency situation what will happen? And if I raise this subject with my parents then will they think I’m trying to be greedy or grasping or wanting money? Whereas what I want to do really is just to be able to sleep at night.
So these are the reasons why people find it hard to have the conversation. So turning to your question about so what should people do, I think the first thing is that sharing any kind of information needs to be appropriate by age and maturity of the next generation, and needs to be well described and handled. And it doesn’t need to start with talking about your balance sheet. I think that’s what people are most worried about, although I would say to James’ point on cybers, Google is quite an informant, often incorrectly, to parents as to the next gen, as to what balance sheet might be. So you don’t need to start with your balance sheet is the first thing.
And when to approach it is so different in every family, and most commonly we see these conversations starting when the children are mid to late 20s, and it really starts with, if we can move to slide 11, how to start is we suggest a framework that you can use. I think we’re moving a bit further on on the slides, next one, this one, yes, please, thank you.
So this is a framework that we suggest that clients use to have conversations around their wealth. And what it is is starting with not numbers or who gets what, how much and when, but with what is our vision for our wealth? What is its purpose, what is it for, and what values really underpin our success and our approach to money as a family? And these values and this vision and this sense of purpose is really what guides the conversation and the decision making. You can then talk about what are the risks to our family wealth. Is it that people might get divorced, is it that we don’t have a will, is it that people are not financially educated? What do we need to do to be able to change those things and mitigate those risks.
And the third thing is how do we organise ourselves, how do we make decisions? Should we have a family meeting, for example, once a quarter? Should we meet our bankers together once in six months, whatever it might be, and how do we talk about this?
And finally, how do we continue to learn and develop our relationships as a family? Because particularly if wealth is considered to be multi-generational, so lasting more than your next generation, and for many of our clients the quantum of their wealth is such that it does form part of their vision and their plan, then it’s important that the next generation practices working together and strengthening their relationship. So that’s just a very quick canter through that in a nutshell.
JOHN DERRICK:
So Maya, you talked about discussions in the mid-20s, but actually quite a lot of us have spent a lot more time with younger children around and often sort of 16, 17, 18 year olds, some of whom couldn’t even go to university. So mid-20s sounds like quite late for some of these discussions to me, what’s the consideration around those who are younger?
MAYA PRABHU:
Yes, I think for younger children, obviously it’s never too early to start. And I would say almost as if a partnership, so as a couple, if you can be quite intentional when your children are young in thinking about what is our vision for our wealth then it means that you can start to role model the values around money and how we approach money as a family and give money messages that are linked to the vision that you have in mind. So that’s the first thing.
The second very practical way that you can start doing that is actually philanthropy is a great gateway and entry point to talk about what money means to us. It’s a great way to also talk about family values. So we’ve done family workshops around philanthropy where the youngest child might be as young as 8 or 9, and they can talk about values. They can talk about what it means to them. They may not use a word like integrity, but they understand telling the truth and things like that. So even young kids have passions and things they know are right and wrong and you can start to have the conversation using philanthropy as a base.
And for parents to during these workshops share, when we think about our wealth we have several buckets, we pay for our expenses, we think about our holidays, we think about our business interests, we save for the future. So you start to set that kind of, I guess, training around money, but if a very soft way without talking about numbers or balance sheets.
JOHN DERRICK:
Thank you. So one of the most challenging discussions really comes about this topic of equal verses fair when it comes to financial benefits. So we’ve all read articles about disagreements between families, you see it in newspapers they like to draw this out, so could you just touch on how do you approach this concept of equal versus fair, and in particular look at multi-generational families, when it comes to financial benefits?
MAYA PRABHU:
Well, I’ll ask you a question just to kick us off. So you’ve got two children and if I said to you today, just off the top of your head, how are you going to divide your money, what would you say?
JOHN DERRICK:
Equally.
MAYA PRAHBU:
Of course. And that’s because that’s what most parents think and that’s because you love your children equally, so therefore you would not want to make any difference in financial benefit between them. But it’s a bit more complicated than that and let me explain why this becomes a bit complicated. It’s so because over time children there are a wide range of circumstances they might find themselves in. For example, and there are an infinite number of scenarios we can talk about, but let’s talk about two or three examples. Let’s say you had one child that decided to pursue a double PhD in Harvard and you had another child that went to the University of Sussex and did a bachelor’s degree and got started in work. And you paid for the education of both of them. There is a differential created straightaway there because of the choices that they have made in terms of their education. For example, could the one at the University of Sussex think well, to compensate for that maybe I should get some money to start up a business. Why not? So how do you sort of have that conversation?
Secondly, you may have a child who decides to start their own business and you invest in that, and you have another that decides to be a teacher. Let’s say the business does exceedingly well, would you kind of compensate the teacher and feel like they needed to get some extra money because you provided that business start-up money?
I had a situation, it was quite difficult actually, where the client had a son and daughter. The son was getting married, they suggested to the son and his fiancé when they were planning the wedding that maybe they’d like to consider a pre-nup, and the parents would very much like them to consider a pre-nup. The fiancé was absolutely beside herself. He was beside himself because he felt that his parents were trying to say that he hadn’t chosen someone appropriate. And anyway, they decided to elope. And the younger sister sort of saw this and when it was her turn to get married she happily signed the pre-nup. So what they decided over time was the properties that they had gifted to the son they actually withdrew, as it was a gift that the used to the property but it wasn’t in his name. They actually withdraw that. Whereas the daughter had properties in her name. And there was a great sense of… The parents thought that well, the rule was around pre-nups, one has signed it, one has not, so therefore there’s no problem. But you can imagine, the son felt a great sense of unfairness in relation to how he had been treated. And there’s a difference in financial benefits.
And another final point I’d make on that is that there are some assets that are very hard to divide equally. For example, a family I worked with the mother played the piano, that was her great hobby, and the home was always filled with music because she would tinker on the piano. As it happened, the two sons also took up that interest and they loved playing the piano as well. So when you think about the piano and the future, you can’t cut it in half. It has a huge amount of sentimental value for both.
So that’s why having the conversation and talking about what does fairness mean to us in our family is really the key topic. On what basis will we judge fairness and how are we going to achieve that? Because if the family’s involved in that conversation they’re less likely to feel they’ve been treated unfairly and therefore they’re more likely to be collaborative with the family discussions rather than thinking they have to just look after themselves.
JOHN DERRICK:
Thanks Maya. I mean things obviously go wrong. One of the key learnings is how does one avoid these mistakes, and maybe you can also touch on defining what success means to different families that we’ve talked about. How do you balance out someone running a business versus someone with three PhDs who’s a scientist but earns very little? But more importantly, what framework can people use to think of righting these wrongs, because they’re not impossible to change.
MAYA PRABHU:
Yes. I think it important to have financially similar - if we can just keep the previous slide please, that’s fine – financially similar opportunities are important, not the same, but similar. Secondly, what families have done is they say let’s have different pots of money. We have a pot for education, we have a pot for business start-up, we have a pot for philanthropy, we have a pot for health, and that is accessible to all members of the family. Now who is family is a good question to define as well. Do we mean children, grandchildren, spouses, adopted children, godchildren, close friends, it depends entirely on the family, that’s for them to talk about. But having different pots means that everyone has equal access to education should they wish it. Everyone has equal access to getting business start-up money. Obviously, they would need to have a business plan and you’d have some sort of procedure and process in place to be able to do that. But everyone has access to that, everyone has access to health. That’s one way in which people do it, rather than trying to say that it has to be – so there’s equal access to the money for those purposes, rather than getting down to dividing up dollars and pounds.
JOHN DERRICK:
Thank you. So once you’ve got a plan in place, how do you actually sustain that?
MAYA PRABHU:
I think, yes, you see that’s the most important thing, because a bit like a good marriage this is about on-going nurturing and on-going work. You asked about successful families, what would successful families do. So this is what the research shows. They think about their wealth in three dimensions. So one is that they work on their financial wealth. Clearly, if there’s no money to talk about then there’s nothing to talk about. So they invest well, they manage their properties well, they manage their leverage and debt well. So good financial investment, that’s the first thing they think about.
The second thing they think about that is critical is how do we build the capabilities and nurture members of the family. So nurture them as individuals, their passions, their interests, et cetera, and their ability to work together and their capability to be able to manage the money, because no-one is born knowing how to manage money. So you build their capability over time on how to manage money. And the third thing they think about is their social capital, which is no-one makes money in a vacuum, how do we link with society, whether it’s through philanthropy or volunteering, or any way that they think about it, but what is their connection with that? So that’s in terms of success.
And how to sustain this takes a little bit of effort. Having regular family meetings, for example, with several topics on the table, which could include your point earlier, what’s happening with our financial investments, what’s happening with our philanthropy. It could be around planning a family holiday. It could be around the philanthropic side. So all of these things, what can we learn together, what more do we need to learn about? Do we need to learn about sustainable investing? Do we need to learn more about what’s happening in the private market? So this continual - do we need to know about pre-nups, do we need to know about lasting powers of attorney? So having these topics on the table and having on-going family discussions is really what sustains it.
JOHN DERRICK:
Thanks Maya.
So one of the questions that we’ve been sent is around engaging all the family. So some of my family members want to engage, but one of them doesn’t, what do you do in those circumstances?
MAYA PRABHU:
Very tricky. I would seek to understand why they don’t want to engage, because sometimes it’s a case of I find the topic of money really difficult. And so we need to kind of delve into that a bit. The second, sometimes it is because they feel I’ve been treated unfairly and if this topic comes up again then I’m not sure how I might emotionally react. And so I think it’s sort of trying to understand why and then start with topics that are a relevant interest.
In fact, a family that I work with, the sons – they have two daughters, I beg your pardon – are in their early 20s, they’re like 20 and 22, the parents are very keen to get them involved but you know what the daughter said, she said that I’m just starting my graduate traineeship or I’m just applying for grad roles and I know that what I’m going to earn is not even what you make of your investment income, I just want a couple of years to be able to get started in my role, feel a sense of, I guess, satisfaction with it and then I will be ready to engage with it. So I think it’s great that the parents brought it up, but that’s a really interesting reason why. And so you defer for a couple of years. Instead they focused on philanthropy as topics that they want to continue to engage around. So this is a bit of a process.
JOHN DERRICK:
I think one of the other questions is around structures. What is the best structure, what are the optimal structures to use and how do I think about the right structure for our family?
MAYA PRABHU:
So I’m going to hand over to James in a second, because he’ll be able to go into the detail of that very well. I’ll just start by saying at a principle level is it’s important to know what is our vision for the future. What is the purpose of our wealth? Is this for one generation, two generations, multiple generations? And I think once you have got that in place then the choice of the structures becomes driven by what you’re trying to achieve as a family rather than simply the various pros and cons of each structure of which they will each have pros and cons. But how to choose is defined by knowing what your vision is as a family.
And James, maybe you can shed some light on some of the options.
JAMES CHILVERS:
Thank you, Maya. I 100% endorse what you’ve said. I mean often in the conversations we have with clients many people are very solution oriented, so they want to know the answer before you’ve done all of the sort of quite difficult and quite challenging ground work that you’ve touched on, Maya. And actually, understanding all of the objectives, the visions and the value that the family holds for wealth matters when thinking about which structure might best suit that family.
Like all good former lawyers, the best answer I can give here is it depends. It depends on each family member’s and family’s circumstances, both from a tax residence and in the UK, at least, domicile perspective. It can depend on where the children are, so say, for example, you have members of the family who find themselves in the US being educated, but then stayed there to work, that can affect how a particular structure can operate and should be operated moving forward. So I can’t give a specific answer to this without, frankly, speaking to every client and outlining their options.
I mean just a high level the options range from your traditional sort of trust structure, they still exist. They have been around for many centuries. There was a period where perhaps they were used aggressively in relation to tax, but I think today they are continuing to be used for family succession planning as a first principle, and that is an important thing to think about it with your sort of independent tax and legal advisors.
Family investment companies are a corporate structure that we’ve seen a number of our clients use, particularly UK based families without the sort of international footprint that many of our client base have. They’re a corporate structure with special shareholding arrangements that allow for control to be retained by gen 1, you know, the parents, whilst sort of future value in the assets held within it are given away to the next generation. There are loads of pros and cons in relation to all of these structures that would need to be spoken about in detail with your advisors.
There are other structures, such as family limited partnerships, even off-shore bonds for UK based clients, which if anyone on the call would like to have a more detailed conversation about I’d be delighted to go through the options based on their specific circumstances. But the key principle is raised by Maya, you need to understand the destination before we can help you figure out the route and figure out which structure might be one of the preferable options for you to speak to your independent advisors about.
JOHN DERRICK:
Thank you both.
So I think if we summarise, I mean the purpose of this discussion was to talk about are you ready for the unexpected? I mean the current situation is one which is unexpected to all of us and almost hard to believe it happened if we were to go back six months, but I think what we’ve tried to do here is to give you an idea of some of the short term sort of contingency planning situations you need to make sure that you have covered, from power of attorney through to lasting powers of attorney.
And I would reiterate again, and in particular when you have illiquid assets and other participants or other families or other shareholders, how important that is. I think the second thing is that there has been an extraordinary time when we have been probably spending more time with some of our closer families than we normally do, and a lot of people have used that time, because the luxury of time is the one that we can’t purchase, to actually go through some of these discussions and to do some of the scenarios around what might happen. Some people’s perception of the world has obviously changed during this process and what they value has changed, but I think there is a great value to role playing out what the different scenarios might look like.
It becomes quite difficult when people are “stuck in other jurisdictions”. We’ve never been in a position where we can’t travel before, so those have consequences that might impact what you’ve currently got in place.
What I would encourage you to do is if you’d like to have any of these discussions further or spend some time with Maya, James or your banker going through the structure of some of the slides we’ve used is to get in touch with us, and we’d be very happy to facilitate the discussion. The only people who can decide on the right plan and the right structure is you, not us. The only thing we can seek to do is to share our experience from other families, and also hopefully avoid some of the pitfalls, because there are many pitfalls and there are many examples of how not to do it. And often how not to do it more valuable to go back to how you might want to think about your own situation.
I think the last point is probably the most important, which is do not let the structure determine your desires. There is very often an example of people where I might say the cart is put before the horse with a structure that then changes. And the last few months have showed very clearly the desire for some people to have flexibility. The overriding principles of simplicity, flexibility and ease of operation are probably the three things that we seek to work with clients to determine first. Then there’s the question of what that looks like from a plan. And then finally, what type of structure suits that scenario and what are the pros and cons of it.
It just leaves for me to thank you for all joining us this morning, and to thank James and Maya for their time. And we wish you a good rest of the day. Thank you very much.
END
