As Wealth Advisors, we work with clients who have global needs and concerns around the questions of how and when to implement an effective succession plan.
In 2020, many clients shared with us how they recognized the fragility of life and the reality of mortality. This led many of them to reconsider and review their succession plans. Many clients were also taken by surprise when borders were closed, and how this impacted their ability to deal with assets and accounts held in different locations. Has this also been your experience in 2020?
In this episode, we will talk about the importance of succession planning and share some lessons learned from our conversations with clients in 2020. After all, thorough and thoughtful planning can help preserve your legacy and pass your vision on to generations to come.
The Importance of Succession Planning
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Klemens Zeller: Welcome to our Wealth Advisory Series, where we discuss topics related to Life and Legacy. Today, we will be discussing the importance of succession planning and how it impacts our clients, their families, assets and businesses. As Wealth Advisors, we work with clients who have global needs and concerns around the questions of how and when to implement an effective succession plan.
I’m Klemens Zeller, and today I’m excited to be joined by my colleague Elvin Ho to talk about succession planning and share some lessons learned from our conversations with clients in 2020. Welcome Elvin.
Elvin Ho: Thanks Klemens. I am really glad to join you today to discuss this topic that I am sure has been on the minds of many of our clients. In 2020, many clients shared with us how they recognized the fragility of life and the reality of mortality. This led many of them to reconsider and review their succession plans. Many clients were also taken by surprise when borders were closed, and how this impacted their ability to deal with assets and accounts held in different locations. Has this also been your experience in 2020?
KZ: It definitely has been my experience too, Elvin. I also saw a heightened sensitivity to incapacity, which is sometimes overlooked as a serious problem that can cause family assets to be inaccessible for a long period of time. We recently saw an example of a family who named five members as account holders, requiring all five to act jointly. When one of them became incapacitated, the assets were unavailable until the process of appointing a guardian was complete. The situation got worse, unfortunately, when the incapacitated person died shortly after the guardian assumed her role. Elvin, does this issue resonate with the conversations you had around incapacity?
EH: Definitely, for sure. COVID-19 made many people realize that incapacity due to a serious illness can strike even the young, and that it is never too early to make the necessary arrangements to manage this risk. For example, in Singapore, we have seen clients consider Lasting Power of Attorney to appoint nominees to assume responsibility for their medical and financial affairs in the event that they should be incapacitated. While incapacity was a key concern of many of our clients, quite a number of them also had time to consider the consequence of death.
KZ: Well, for many, death is harder to address than incapacity, although most recognize the need for properly planning the succession of assets and liabilities. I have seen fewer wealth owners saying something like “après moi, le déluge,” which in this context would mean not creating a will or other basic form of succession planning. I think that what our clients are experiencing during the pandemic is having an impact on them and making them reconsider their plans. However, many don’t know where to start, and keep putting off having these discussions.
EH: Yes, this reminds me of a client that I encountered some years ago, Klemens. This client held all of his assets through various offshore companies where he was the sole shareholder and director. I had a first meeting with him to share how he might use a trust to plan for the distribution of his assets. Unfortunately, before we could meet again, he unexpectedly passed away from a heart attack, and his children, who were then in their early 20s, had to deal with the legal probate process in each of these offshore jurisdictions. They not only had to find and appoint lawyers halfway around the world, but it also took a long time, and cost quite a bit in legal fees for them to finally get access to his accounts and assets. All this occurred at the same time that they had to take over the running of the family business, and it was a tough time for the entire family.
KZ: Wow, Elvin, what a predicament! I see that all of our clients worry about the needs of their children and grandchildren, and are seeking advice in order to determine the best course of action. Every family is a small world of its own, and estate planning is important no matter how old your children are or whether you have any at all. I’m working with a client who is not married and has no children, and he wishes to leave his assets held in an offshore company to his grand-nephews. Unless he implements a proper succession solution, maybe via a trust, his wishes are highly unlikely to be fulfilled.
Or the example of another family with six minor children, with the youngest having the Down syndrome. The difficulty was to have enough financial means available for professional treatments and assistance for the girl’s life without disadvantaging her siblings. In this case, we considered creating a separate sub-fund in the trust and life insurance on the parents’ lives to secure additional liquidity.
EH: Klemens, I think that your example highlights the key principle that families need to consider the specific needs of their children and that an equal distribution of assets may not be a fair distribution. Unfortunately, even when clients have set out their plans in their wills, the harmony in the family may be impacted by disputes after their lifetime, which could also arise from legal requirements under Sharia or Forced Heirship rules. I recall an incident where the discovery that part of the estate was to be given to a second family not only led to much unhappiness, but some beneficiaries even contested the validity of the will. Unfortunately, this resulted in a very public court case, which led to a loss of confidentiality and damage to the family’s reputation.
KZ: Indeed, Elvin. This reminds me of something I learned early in my career: Death and divorce are public events, which is why many clients are concerned about preserving confidentiality. Where possible, they would opt for planning approaches that enable them to avoid the probate process, especially where they have assets all over the world. They may be willing to use a will in their home jurisdiction to transfer ownership of their house and cars to their children, but may wish to use a more confidential transfer process for assets in other jurisdictions. For example, the client I mentioned earlier, who wishes to leave assets held in an offshore company to his grand-nephews, faces the risk of a costly and time-consuming process to transfer the shares of the company on his death. We have therefore recommended that he consider creating a trust or family foundation to more efficiently organize the transfer to his grand-nephews. This is all especially relevant when the asset that is to be transferred is the family business. Many of our clients are entrepreneurial families, and the trickiest succession is from the first generation to the second. If a family can pull that off by adopting good practices around family and corporate governance, subsequent handovers are likelier to succeed.
EH: That is so true. A successful succession plan goes beyond implementing the legal process to transfer ownership, but instead family harmony and wealth preservation are often the most important considerations of our clients. On the topic of wealth preservation, I have also observed that many of our clients are concerned that their children are not ready to inherit great wealth, or wish to ensure that their wealth stays within the family and to protect their assets from potential legal claims. To achieve such goals, I have seen clients use structures such as trust/foundations that are administered by professional institutional trustees/foundation boards to control the distribution of assets over time. Klemens, have you experienced any clients express such concerns or concerns with raising a generation of “trust fund children”?
KZ: Absolutely, Elvin. Many parents worry about the burden of wealth on emerging generations. This is what many know as “don’t spoil the kids,” meaning leave them enough to live a comfortable life, but not too much to possibly encourage an unproductive lifestyle. But how much is enough? Once family and friends are taken care of, what about creating a legacy? I’m currently working with a client who has several trusts in place that provide for bequests to family, trusted business partners and friends, and we’re now looking to create a separate vehicle that will carry his name in order to incorporate his philanthropic goals that are intended to last 30 to 50 years beyond his death.
EH: That is a really noble plan of your client. There are indeed many things for clients to consider when they plan for succession, and sometimes it may seem daunting to even make a start. However, the experiences of 2020 have shown that one should not put off planning. So, Klemens, any suggestions on how our listeners can begin the planning process?
KZ: Starting on this journey can begin with a simple exercise to create an inventory of assets, including digital assets and liabilities. This helps one understand the question of who owns what at what cost basis, how the assets are titled and in whose name the liabilities are held. With that information, you can then assemble a team of professional advisors, such as lawyers and accountants, to help you develop your plan, especially if you have multi-jurisdictional exposure.
EH: That is absolutely right. Taking that first step is very important. Our team of Wealth Advisors at the J.P. Morgan Private Bank is here to help guide you on how get started, and how to structure your assets with an eye on your global balance sheet. We believe this kind of thorough and thoughtful planning can help preserve your legacy and pass your vision to generations to come.
That’s it for this episode. We hope that you will join us for more upcoming episodes where J.P. Morgan Wealth Advisors will explore some of these issues in more detail. Thank you for listening to our Wealth Advisory Series on topics of Life and Legacy.