After two of the most difficult years of our lifetimes, and with a turbulent future ahead of us with inflation ever-increasing and a recession looming on the UK, many people have reassessed their priorities with protection and future-proofing becoming higher on the agenda than before the pandemic.
But while people start looking at how to plan for the future, when is the right time to look at how wealth is passed on after death?
According to Steve Sokic, group head of private wealth at IQ-EQ, “once someone’s ill or worse, they’ve passed away, it often may be too late”.
“Illness comes in different forms, it could be mental illness, it could be physical illness, it could be incapacity, mental or physical, which then makes decision making either very difficult or impossible for the person involved.
“So, if you do nothing, or even do a little, what you think you want to happen to your wealth may not happen, essentially.”
That is why Sokic believes people should set up a succession plan as soon as possible and “when the skies are clear”.
He believes clients should set up a structure with good governance and stewardship – with trusts being the more common especially in the US – so that “what you want to have happen to your wealth” actually does happen.
Protection
But this is not only a way to make sure a client’s wealth is passed as they see fit; setting up such structures can also help protect their wealth.
For instance, he said, if wealth is passed on to the next generation and then the children or grandchildren in question get divorced, that slice of wealth is up for grabs.
“If you’re concerned about that wealth, or part of it, being at risk and you don’t do something, well, it is at risk, because that wealth will pass to them personally, which then becomes part of their asset base, and it might be subject to splitting up on divorces.”
But having family members involved in the conversation and subsequent planning is just as crucial, because that way everyone knows what is going on and what will happen once their family member dies.
This can also avoid nasty disputes as well as increase transparency on how wealth is being managed, he added.
Generations
Unsurprisingly, however, Sokic noted that there are different approaches as generations change.
“Younger generations, especially over the last decade, are more demanding in terms of transparency. They want to be more involved, and they are more diverse as well. It’s not just the sons anymore, which was the case across cultures around the world.
“Now, the senior generations almost have to involve them, and then the question is, to what degree and when. And those are interesting questions that vary, especially on age.
“What I’m seeing, also from talking to financial advisers, is a gradual programme of education [of beneficiaries around] what they have, how to manage it, how to keep a certain standard of living and so on.
“I think these days it’s less of a question of if [younger generations will get involved in the succession planning] and more of a question of when and how.”
Even though younger people may see things differently, their involvement can be greatly beneficial down the line.
This is because, once part of the conversation, “the next generation will already be in tune on why this structure is there and how it works,” Sokic said.
“Quite often, if I go back to the old way of doing things, I remember many situations where the patriarch passed away, and then the next generation found out they were beneficiaries, and [the problem wasn’t just] dealing with the wealth, maybe they already knew what roughly the wealth level was, but quite often there’s a sense of distrust.
“They used to ask, ‘Why was this [investment made], do I really need it’, but by involving them early, they understand the process, they appreciate it, and can have input. These are all mitigating factors on future disputes, and ultimately, wealth depletion.”
Changes
But once they’re involved, how can advisers and wealth managers deal with the differing needs and/or priorities of different generations?
According to Sokic, the structure has to represent that type of ‘conflict’ by providing as much flexibility as possible “to reflect human life and behaviour”.
From issues such as living in different countries or moving to different jurisdictions to different marital or legal regimes in the country of residence, the structure needs to be able to cater to those evolving needs, he said.
Changes could also be more drastic such as a shift in how beneficiaries may want their wealth to be invested.
“For example, in the last few years, and I think this is only going to accelerate, there has been a rise in ESG and impact investing. Whereas quite often, the older generations wanted bricks and mortar and more traditional asset classes, the younger ones want either a theme to the investing, like impact investing, or approach.
“Sometimes they may just want a different type of investing or different sectors, like technology.”
As part of this, younger generations may also want to change the way financial statements are reported, how often, or how to access them – as the shift to digital is definitely rising on this front too.
But there may come a point when, in order to cater to all of the beneficiaries’ needs, just the one structure simply won’t suffice, Sokic said.
“Sometimes we need to break the trust up into three trusts, because the family members have such different circumstances that it can be punitive to them if they keep it in one.
“So, it’s either a structural change, or how the existing structure operates, or reports, or invests.”
But if there’s one thing Sokic wants to get across is that succession planning “has to be done not when someone’s passed away, but when the skies are genuinely clear”.
