Life & Legacy Podcast Series
This podcast is intended for informational purposes only, and is a communication on behalf of J.P. Morgan Securities LLC, a member of FINRA and SIPC. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
Views may not be suitable for all investors, and are not intended as personal investment advice or as a solicitation or recommendation. Outlooks and Past Performance are never guarantees of future results. This is not investment research. Please read the important information section.
Felicia: Welcome to the newest episode of the Life & Legacy Podcast Series. My name is Felicia Law, and I am based in Hong Kong running the North Asia Wealth Advisory Team for the Private Bank. Today, with my colleague Daniel Fleming, a Senior Wealth Advisor based in Geneva, Switzerland, covering our clients in the Middle East and Turkey, we will be discussing issues to consider when setting aside assets for future generations beyond the next. Hi, Daniel!
Daniel: Hi, Felicia, and thank you all for joining this podcast! In previous episodes of this series, our Wealth Advisory colleagues discussed topics covering when families should start thinking about putting in place an estate plan, and how does one go about doing that, and this very much focused on the very next generation. What about generations beyond that? What sort of planning could be done to ensure wealth can be sustained beyond the next generation?
Felicia: Yes, this is indeed a great topic! I once had a client who shared with me that “this is too complicated. Let’s focus on my children and let them deal with the rest. I am confident that they know what’s best for their own children.”
That’s certainly one way of looking at it! However, what if after his passing, one of his children goes through a nasty divorce and ends up losing half of what she inherited to her ex-husband? Would she still have enough to adequately provide for her children and grandchildren? Wouldn’t it be better if some assets were left in a perpetual fund, just in case a family member loses their inherited wealth due to unexpected events?
Daniel: I’ve had the same type of conversations! However, for those that do commit to plan for generations beyond the next, I find that they put in much more thought and passion in providing for their grandchildren and beyond in comparison to how they approach planning for the very next generation. Perhaps this is because in most cultures the transfer of wealth to the next generation is expected, whereas it is not at the level of grandchildren, and thus there is a real sense of gifting to beneficiaries not expecting anything at all!
Felicia: That’s absolutely true, Daniel! So how could we help those clients that want to plan beyond the next generation?
Daniel: First of all, it is important for the client to try and define his/her objectives and answer as best as possible the following simple questions:
· In what way do you want to assist future generations? Is it for education, health and entrepreneurship? Emergencies?
· Should certain criteria or rules be applicable in order for future generation family members to benefit?
· How far down the generations does he/she want to provide for?
Felicia: …and answering those questions will drive how much he/she should set aside for this!
Daniel: I was hoping you were going to say that! It is very much a “chicken and egg” situation. Does defining the objectives first define the amount that you want to set aside, or does defining the size first give you a better way to focus on clear objectives? To be frank, there is no right answer as to which end to tackle first.
Felicia: Yes, I agree! One question that I often get asked by clients is: “How do you plan if you don’t even know how many descendants there will be in the future?” We certainly do not have a crystal ball that gives us the answer to this question. But I imagine that we as Wealth Advisors are naturally going to get the client to speak about objectives first, and then ask the “how much” question after. Following that, we can go through some financial projections with the client so that he/she can decide whether he/she needs to top up the pot or dial down the objectives.
Daniel: And these financial projections will not just include outflows to beneficiaries, but will also take into consideration investment returns. The investment profile will need to be considered carefully, and it will change over time. I imagine that at the beginning, the focus will be more on growing the initial pot, and as time goes by and as we get into the future generations, the focus will be more around producing steady income.
Felicia: So, Daniel, let’s discuss one of the potential objectives the client might want to meet for future generations. Let’s pick a straightforward one like “education.” Can it simply be “to pay for all the education for my descendants until the money runs out?” Or should there be some rules/criteria?
Daniel: I think there should be some rules to keep it fair and sustainable. The term “education” needs to be defined, for example. We mostly see funding for university or post–high school education as the primary focus.
Felicia: And I guess we want to avoid the serial student!
Daniel: Yes, and I would even go as far as capping the contribution as a percentage of total tuition fees, and having the remainder paid by the parents, who themselves would have benefited from the same education fund. This puts a little pressure on both the student and the parent.
Felicia: That is a very interesting way to look at it. Wouldn’t some of the family members view this as unfair? There could be a huge disparity between different schools when it comes to tuition.
Daniel: It is true that there may be some inequalities in monetary terms, but the opportunity to benefit is the same for everyone.
Felicia: I remember a family that had four children in the third generation. One of them left school at the age of 15 to start his own business, and his startup was doing really well. Another one is visually impaired. The remaining two are twins and they were both accepted into Harvard Business School. The younger twin earned a full scholarship, so all her tuition fees were paid for. This is just one example to highlight that each child is different:
· What the first child really needs might be seed capital for his next startup.
· The second child may need more support on top of funds to pay for tuition fees.
· The older twin may need to draw more funds to pay for tuition fees at Harvard Business School.
It is important that families recognize this and take this into consideration when planning for future generations. For this family, I worked with the family’s legal counsel on the design of an education fund, an entrepreneurial fund, a special needs fund and an emergency fund. For each fund, the working group drafted very detailed terms of reference, setting out guidelines and circumstances where the advisory committee should exercise discretion in utilizing the assets and income generated from those assets to support the family. The members of the advisory committee are also carefully chosen to ensure that each branch of the family participates in the decision-making process.
Daniel: Indeed! The establishment of these sub-funds encourages certain behavior amongst the family members. Some even set up charitable foundations to encourage family members to think about how to give back to the society and to leave a legacy for the whole family. Another example would be the entrepreneurial fund that encourages future generations to start their own business.
Felicia: This is so true. I also remember working with a patriarch who wants to encourage all his descendants to have more children. He set aside a special “new baby fund” in his family trust, and each time a family gave birth to a child, he/she would receive a cash reward of US$1 million.
Daniel: I don’t know how effective this incentive scheme has been, but this is certainly an interesting one. Felicia, let me ask you this question: “What if we got this wrong?” How do we deal with a situation where a family needs to recalibrate either the amounts or the objectives?
Felicia: Families do this all the time. The key is to ensure that whatever system or framework that families put in place are flexible enough to allow adjustments to be made. In fact, I often remind our clients to conduct regular reviews to gather the most up-to-date information about the family, track usage of funds, revisit or challenge assumptions that were used in calculating the portions allocated to each sub-funds, and make appropriate adjustments to ensure the family’s objectives are met.
Daniel: I cannot agree more. Flexibility is key, and planning is certainly a continuing process.
On behalf of J.P. Morgan Private Bank, thank you for listening to this episode. We hope you have found this useful, and please do not hesitate to reach out if you have any questions. We will be delighted to get in touch with you to discuss this topic in more detail.
Felicia: Thank you, and please stay tuned to the upcoming episodes in this Life & Legacy Podcast Series.
Some families focus on putting in place an estate plan for the immediate next generation. Some others like to think beyond that. For most people, though, multigenerational estate planning raises important questions around objectives and assets: Should wealth be used for specific purposes only, such as education or entrepreneurial projects? What about emergencies? How to draw an effective plan without even knowing how many descendants there will be in the future? What does it take to ensure wealth can be sustained beyond the next generation?
In this episode, our Wealth Advisors answer these and other questions, and discuss why it is key to ensure that families put in place frameworks flexible enough to allow for adjustments in the future.