Since the booming 1990s the number of wealthy individuals has risen dramatically and the succession planning services provided by the private banking sector is evolving to meet their needs
Succession planning is gaining a higher profile in the range of services offered by private banks. Traditionally, succession planning was a discrete service as a number of private banking clients were family connected and had already made succession arrangements, or at least were familiar with the issues.
Since the boom of the 1990s, however, a new generation of self-made high net worth individuals (HNWIs) have come into the market and are now starting to confront the issue of succession planning.
As with all new trends this is presenting private banks with opportunities ' and challenges. Former private client services director for a South Pacific private bank, John Corfe, explains the dilemma: 'Unlike many clients from an earlier period the new generation of HNWIs often made their money quickly, and to an extent, unexpectedly. Consequently, persuading them to look forward to their retirement and provision for their descendants, can be delicate.'
However, as delicate as the issues may be, they have to be faced, and early on. John Ruddy, managing director of Bermuda Trust (Jersey), explains: 'Whatever your age, succession planning can make life much simpler for heirs by avoiding probate delays, minimising taxation, high costs and complications, and the possible freezing of assets.
'People should definitely consider succession planning early on. If left too late, families can find themselves needing to establish title to assets in many different jurisdictions, and it can take years before they get the benefit of those assets.'
'There are common issues in all parts of the world,' says Bernard Rennell, head of the Bank of Bermuda's private client services, Asia. 'But an additional factor in Asia can be significant probate complications. In Hong Kong, for example, it can be common for bank assets to be frozen for a year or more, and there can also be significant estate taxes which can be legitimately avoided through effective succession planning.'
The first step in succession planning is to compile an inventory of assets, which may be spread around the globe. It is then necessary to 'simplify' those assets in terms of long-term objectives. The use of a holding company could be useful for this purpose as it can include both private and business assets.
The next thing is to identify the best way of achieving succession planning objectives. One option to avoid probate and similar formalities may be through the use of a trust, which is a relatively simple way to:
• Ensure confidentiality.
• Achieve long-term effectiveness.
• Obtain protection from adverse change, taxation and exchange controls.
• Ensure chosen heirs benefit according to stated wishes.
Offshore trusts can be attractive for clients in jurisdictions where trusts are not available. For example, where clients are subject to Sharia law or in European civil law countries where tax-free gifts can be made during one's lifetime, but not upon death.
'The type of trust chosen will depend on personal circumstances but discretionary trusts provide flexibility as circumstances change, which is a vital aspect of succession planning,' says Ruddy.
'People may also begin a trust with one set of objectives, and find that it continues to offer benefits if, for example, they move to a new place of residence.'
Nicola Jones, senior legal adviser in Bermuda with a special interest in family issues, feels succession planning should be a natural part of HNW family matters, with education, awareness and communication being vital elements of the whole process.
If families can be encouraged to discuss their issues it can help break down any anxieties they may have about succession planning. She says: 'The unity of a family and the preservation of relationships can be undervalued. The biggest issue is lack of communication about the extent of the wealth and how it should be managed through the generations.'
As well as requiring flexibility within a trust to take into account changing requirements, individuals and families should also consider other financial planning tools which have succession benefits.
Transferring ownership of assets during the lifetime of the HNWI (known as inter vivos) can include the purchase of life insurance policies. 'Trusts can be established where the assets are life policies thereby complementing the insurance policy and, in some cases, providing an added layer of tax efficiency,' says Tom Davis, global head of product development for private client services.
'Insurance can be used as an effective form of inheritance tax planning, particularly in the US and in some Asian jurisdictions.'
If possible, succession planning should be addressed early on.
Education, awareness and communication are vital elements of succession planning.
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