Do's and don'ts, wills and won'ts

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In the preceding chapters we have looked at the importance that the wealthy place on passing on assets to the next generation, and we have also explored some of the conflicts and concerns associated with this.

Words of wisdom 6 of 9 Making a success of successions 4 of 9

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

Another practical consideration before exploring how wealthy people can best accomplish the transfer of assets is the level of trust that wealthy parents have in their children/stepchildren when it comes to money management. Do they feel that the next generation will be wise custodians of their wealth? Our survey finds that across the world, 34% of respondents are either ambivalent or do not trust their children and stepchildren to protect their inheritance. Read in isolation this number looks worrying, but it is by no means solely a reflection of the perceived failings in the next generation. In some cases, children have yet to reach the age where they can earn their parents’ trust, and some parents will always fret about the temptations of modern living.

At a family level, we see that individuals in their first marriage tend to trust their children more, and generally those with stepchildren trust less: 47% of those with stepchildren do not trust their heirs to protect their inheritance, compared with the global average of 34%.

Seeking out professional help

 

These concerns relating to recipients are part of a much larger minefield of legal, financial and personal issues that the wealthy need to navigate when looking to transfer their wealth. Amongst other things, a failure to conduct proper planning can result in having assets frozen at the time of death, disputes over ownership, fragmentation of assets and needless erosion of wealth.

Given this context, many of the wealthy have grasped the importance of expert advice. Indeed, some 63% of respondents agreed that deciding on an inheritance plan for their children and stepchildren required a “great deal” of professional advice. This is particularly evident amongst wealthy women, who are more likely to seek general financial advice (Ledbury Research, Benchmark 2010).

But there are still those who fail to seek out professional advice. Catherine Grum comments: “It is an extremely complex task trying to plan for children’s futures and navigate the myriad inheritance options. Yet there are those who spend an hour on the Internet and think they have learnt all they need to know. An expert can tell you more in one hour than you could learn on the Internet in a year.”

Wills are the classic option for the wealthy

 

There are a number of different ways of going about transferring wealth to the next generation. The best known and commonly used option is a will. These legal declarations are extensively employed by the wealthy; our research establishes that more than three-quarters of high net worth individuals around the world have wills.

In the US, almost everyone has a will (94%) and this is only slightly less commonplace in Europe (87%), whilst in Asia and the Middle East this stands at around 50% on average. The uptake of wills within countries is influenced by whether or not “heirship” laws exist, which spell out how part or all of a deceased’s estate must be divided. Such laws are common in civil law jurisdictions, such as in France, Spain, Italy and Latin America.

In Japan, individuals do not typically write wills, instead they express their wishes in general and polite terms, and the family reaches consensus on how assets will be distributed. Birth order is a key determinant here, and sometimes all the property may go to the eldest son. This approach is in keeping with the culture in Japan. Shimon Takagi, Partner at White & Case in Tokyo explains that there is a common view across East Asia that, “property is not your property; you are only borrowing it… We don’t have a strong desire to control something after we die.”

Wills do, however, have a number of disadvantages. They capture thoughts at only one moment in time and in most countries they are public documents, meaning that details of the assets and the beneficiaries are accessible to anyone.

Trusts are the flexible wills

 

Trusts are an increasingly popular option for the wealthy. These legal agreements are like “three-dimensional wills,” in that they allow changes in parties (people can be added or removed) and assets over an indefinite period of time. Trusts also have the added benefits of helping to prevent asset breakups and avoiding probate procedures.

It is this flexibility that makes them particularly attractive for those individuals who may wish to influence how heirs manage wealth. The trustees can be empowered to limit and vary the amount that is dispersed to children, and help with any problems that arise with beneficiaries.

Historically, trusts have been particularly popular in the UK because of their ability to prevent the breakup of assets like large property estates. In the US, they have also become a standard part of estate planning. In other areas, such as the Middle East, there is a growing use of trusts, particularly for assets outside the country.

In Asia, the concept of trusts is still a relatively new one for most high net worth individuals. Instead, insurance can often form an important role in estate planning with some type of single-premium policy (universal life) used to provide a significant lump sum of money upon death. This gives the heirs much-needed liquidity if the deceased was asset-rich but cash-poor. One particular example of this plan in action can be seen with small businesses. Each partner can take out insurance on the other’s life; if one were to die, then the other could use the insurance to purchase the balance of the equity from the heirs, thereby providing for the needs of the deceased’s family and increasing their own business holdings.

Will revisions: will they or won’t they

 

Our research provides remarkable visibility into the extent of will revisions amongst the wealthy. Some 69% of wealthy individuals have revised their wills at least once and 26% have revised them three or more times. These will revisions are predominantly driven by financial reasons and life-stage events. The top four reasons for revising wills in order of importance are: an increase in wealth, tax efficiency/tax planning, marriage/new partners and birth of a child.

The importance of these different factors changes with age: tax efficiency is the most important for older respondents whilst the purchase of property and childbirth are key triggers for younger ones.

In terms of trying to avoid conflict, Gareth Morrell, Research Director in the Society and Change Team at the National Centre for Social Research, stresses the importance of letting those who are affected by will changes know in advance of any revisions. “I think the stories we heard (during research conducted in the UK) where there was particular conflict was where the division of an estate came as a surprise and I think that knowledge of will revisions would definitely alleviate conflict.”

Will revisions are not universal; for example, in many Asian countries there is an aversion to contemplating mortality, part of the reason for the low rate of will changes in places like Singapore, Hong Kong and Japan.

When it comes to disinheritance, we find that as many as 10% of the wealthy have disinherited someone or cut a family member out of their wills. The risk of this happening is fairly similar across the world, with people in India and Taiwan slightly more likely to be disinherited. Other interesting findings here are that natural children (rather than stepchildren) are less likely to be disinherited and that families who are willing to divide their inheritance equally are less likely to disinherit.

And the beneficiaries are...

 

Crucially for the beneficiaries of the next generation, we looked at wealthy individuals’ views on how assets should be divided amongst children. Overall, there is a strong tendency toward dividing assets equally, and this is evident in the US, Asia and particularly across Europe. Splitting wealth equally is associated with greater financial satisfaction and reduced family conflict.

Our research shows that 20% of high net worth individuals who want to leave a financial legacy think assets should be divided unequally amongst children. To our surprise, outside Asia, they do not think that a willingness to take over the business is an important basis to divide wealth. In most of the rest of the world, and notably the Middle East and Europe, the most important consideration for those who want to leave a business legacy is gender.

Having explored the many facets of succession, in the final chapter we peer a little further into the horizon to discuss the expectations that the wealthy have, not only for their children but for the world in general.

Prenuptials: the gap between attitudes and behaviours


Wealthy individuals generally think that prenuptials are important for the protection they afford, yet the number of individuals who use them is relatively modest. Just 15% have ever had such an agreement in place, although that number increases with wealth levels.

From an international perspective, a fundamental factor in the use of prenuptials is their legal recognition. In some markets, such as the UK and Hong Kong, they are not formally binding. However, in many countries, they are both recognised and enforceable: For example, a number of European countries have signed up to the Hague Convention on the Law Applicable to Matrimonial Property Regimes.

There are also many human factors that influence whether or not spouses agree to prenuptials. Research in the US by Heather Mahar, a Fellow at the John M. Olin Center for Law, Economics and Business at Harvard Law School, found that the two main reasons people don’t use prenuptials are to avoid sending negative signals to their spouses and over-confidence: only 12% of people believe their marriage will fail, whilst divorce rates are close to 50% (Harvard Law School).

A combination of these factors serves to determine the level of usage across the regions.

Protecting the family jewels - Experiences in England and Hong Kong

 

If you plan ahead with a structuring, and you are sensible in the provisions in the event of a divorce, then we think that we are able to protect people, so that the terms of the agreement are much more likely to be enforced at the end of the day by a court. — Marcus Dearle

 

In the last decade, marriage has become a much more serious proposition for wealthy individuals in both England and Hong Kong, with respect to their finances. Seminal legal cases in both locations have made it possible for financially weaker spouses to reach much further into their partners’ pockets and
take much more away.

“Prior to the year 2000 in England and 2009 in Hong Kong, the financially weaker party in a case with substantial assets would normally only be awarded his or her reasonable requirements. This would usually amount to a property and reasonable needs capitalised which would quite often be a small fraction of the total wealth,” explains Marcus Dearle, Managing Partner of the international law firm Withers LLP’s Hong Kong office. “The well-known cases of White vs. White (England) and DD vs. LKW (Hong Kong) changed the law, bringing in equality of division and throwing out the concept of reasonable requirements as it discriminated against the homemaker; the introduction of 50/50 asset splits in big money divorce cases has inevitably increased tensions in families.”

Not only do these changes increase the amount that spouses can potentially be awarded, but it means that now trust assets are being attacked by the financially weaker spouse to be included as part of the matrimonial pot for division. Under the old law those trust assets were often not touched because the lower level of capital awards meant that there would often be sufficient assets outside the trust to settle the other spouse’s claims. “It’s possible in England and Hong Kong for the court either to take that money (in trust) into account as a resource that can be drawn down upon, or, it has the power to vary the terms of the trust in certain circumstances and effectively make financial provision for a spouse who was not a beneficiary of the original trust at all.” This, in turn, has resulted in trustees being involved in divorce litigation and prompted families to think carefully before leaving too much wealth to individuals in difficult marriages.

These changes underline the importance of prenuptials and are prompting greater take-up amongst individuals; although as already noted, prenuptials are not binding in the UK and Hong Kong, so further steps are necessary. To provide better protection, Marcus Dearle advises individuals to consider legitimate restructuring of their assets in such a way that makes it more likely that a court may well ring-fence certain assets outside the matrimonial pot for division. Specifically, he encourages making reasonable provision for the financially weaker party within a prenuptial agreement, which means the agreement has a much better chance of being enforced in the event of a dispute.

“If you plan ahead with a structuring, and you are sensible in the provision you make in the event of a divorce with the use of a pre or post nuptial agreement, then we think that we are able to protect people, so that the terms of the agreement are more likely to be enforced at the end of the day by a court,” he adds.