The insurance and financial services industry’s near all-consuming focus on the Department of Labor’s fiduciary rule, handed down in April, might lead one to believe that running a profitable practice will be a heck of lot harder once the rule is fully phased in 20 17.
In the retirement space, the jury is out on this question. What should not be doubted is that are opportunities aplenty in other market spaces to serve clients beyond the DOL’s reach. Not least among these niches are the ultra-high net worth, many of whom need insurance and planning solutions to address the most difficult of their financial issues: transferring wealth to the next generation.
Big and getting bigger
For U.S. advisors, ultra-affluent individuals needing legacy planning are a burgeoning market. This much is clear in the findings of a new report from Wealth-X, “Preparing for Tomorrow: A Report on Family Wealth Transfer.” Sponsored by the insurance brokerage and consulting firm NFP, the study, “Preparing for Tomorrow: A Report on Family Wealth Transfers” details many of the challenges ultra-high net worth individuals (UHNWIs) worldwide face when planning for wealth transfer, from family disputes to global reporting requirements. The research also highlights best practices for preserving assets and facilitating multi-generational planning.
Just who are these folks? As the term suggests, UHNWIs have a lot of zeros attached to their portfolios. Wealth-X sets the bar at US$30 million. In 2015, they totaled 212,615 individuals (69,350 in the U.S.), a modest 0.6 percent increase over the number recorded in 2014.
In the aggregate, estate assets due to pass on to heirs and other beneficiaries — public and private holdings, real estate, luxury assets and cash — is staggering. Over the next decade, ultra-high net worth individuals (UHNWIs) will transfer $3.9 trillion, a number that jumps to $30 trillion if you add in bequests between now and 2046.
These numbers will only get bigger in the coming years. Wealth-X forecasts that the total wealth of UHNWIs will increase 54 percent to $46 trillion between now and 2020, with wealthy individuals residing in the Americas fueling about 30 percent of the total.
An eye-popping stat, indeed. But even the smallest of the aforementioned figures is gargantuan: Four trillion dollars (13 percent of all UHNW assets) would buy outright the 10 largest global companies, including Apple, Alphabet (Google), Microsoft, ExxonMobil, Berkshire Hathaway, Amazon, Facebook, Johnson & Johnson, General Electric and China Mobile.
Not surprisingly, those planning to create the largest legacies are also most heavily burdened by thoughts of mortality: individuals ages 80 and older. The average net worth of UHNWIs in this age bracket is $272 million, writes Wealth-X, well above the average for those in their 70s ($202 million), 60s ($146 million) and 50s ($114 million).
Advisors can help the ultra-high net worth market negotiate their liquidity concerns. (Photo: iStock)
Not holding enough cash?
Given these sky-high numbers, you would think that the ultra-affluent have few financial worries. If only it were so.
High on the list of concerns: liquidity (or lack thereof). UHNWIs holds an average of 34 percent of assets to be transitioned to heirs (about $92 million) in cash. But the largest part of their portfolios remains invested illiquid assets — public securities, real estate, luxury items and, not least, private companies on which many built their wealth.
“The dual importance of cash and private holdings, and the paring down of other assets, may suggest older UHNWIs are trying to have it both ways — wanting to hold cash to give flexibility, but remaining heavily invested in their primary business, of which they are reluctant to give up control,” the report states. “They also think about who will be inheriting their wealth and what effect the passing on of different assets to different inheritors will have.”
Deciding who owns and manages a business after a first-generation founder passes on raises its own conundrums. Among them:
Whether to keep the business in the family, go public or sell to a third party;
What extent will family members (versus professional managers) actively run the concern? And how can they equalize an estate for family members who will not be engaged in the business? (Though not addressed in the report, life insurance has a key role to play here.)
If these questions are not addressed early — well before the first generation owner dies — family conflicts can arise. That can place the business, and potentially much of the legacy of the UHNWI/company founder, in jeopardy.
“Family disputes for control of the primary business can become publicly acrimonious all too quickly, potentially leading to the dissolution of wealth,” the report warns. “For example, Summer Redstone, the 93-year-old founder of Viacom, has only recently laid out how he intends to transfer his wealth and control of the business. And, as a consequence, there has been a multi-billion-dollar lawsuit between family members and executives fighting for control of his empire.”
Such battles often extend beyond the family business to control of other assets destined for heirs, including real estate and luxury assets — collectibles, second homes, yachts and other personal property. Though not as large private businesses, these holdings are significant: $16 million on average within the UHNWI pool.
And as with private businesses, the Wealth-X report notes, the transfer of real estate and luxury items can be difficult to effectuate because of the liquidity and “indivisibility” of the asset class.
Advisors can help UHNW families avoid squabbles over asset distribution. (Photo: iStock)
Lending a helping hand
“For this reason, the role of advisors, be they independent financial advisors, family officers or lawyers, is crucial in helping families, and, as with other aspects of wealth transfer, in avoiding any surprises,” the report states. “This is especially true for international properties, where both the local and foreign laws can impact investments, and the full implications of this are not always considered.”
Top-of-mind for many ultra-high net worth individuals are estate taxes. Under the Internal Revenue Code, U.S. citizens and residents are subject to a unified estate and gift tax on net asset transfers exceeding US$5.45 million. The top federal estate and gift tax rate is 40 percent, a proportion that can rise to more half of a UHNWI’s holdings if you factor in state estate and gift taxes.
To protect against these and other issues that threaten UHNWIs’ legacies (among them growing global asset disclosure and reporting requirements and political instability in certain countries), the report recommends that the ultra-affluent adhere to several best practices. These include:
Plan early to set expectations for all family stakeholders and “prevent unwanted surprises.”
Diversify assets to guard against unexpected political, economic or market events; and
Leverage the expertise of professionals well versed in advance planning — insurance and financial service professionals, certified public accountants, estate planning attorneys and specialists with niche expertise — to navigate wealth transfer issues globally.
“The difficulties of transferring wealth are numerous, but, through efficient, early planning, the families of UHNWIs can leave a lasting legacy,” the report states. “The importance of early planning and education of all affected family members cannot be overstated. We find that setting expectations prudently can enable the creation of the long-term legacy and stability that is so important to many UHNWIs.”