Consider Your Legacy

Some observers of wealth and its associated behaviours refer to a well-known wealth cycle:

• The cycle begins with wealth creation where you derive income from various avenues – an employment, a business, or possibly an inheritance.
• The next stage is wealth enhancement and this is when you grow the returns on your accumulated and invested assets
• This is followed, usually in later life, by a wealth protection stage which is about ensuring that the funds and assets are safe and can’t be easily lost
• Finally, the cycle ends with the distribution of that wealth, usually to the next generation

This model is a useful reference point for advisers to identify the likely needs and areas of interest of clients at different life stages. However, as with every model, it is limited.

For instance, often in Asia the wealth creation mode doesn’t stop. The wealth creators enjoy what they are doing and just keep going. I once met a very elderly gentleman who was fabulously wealthy. He was repairing a machine in an old machine-parts factory in Taipei. When I enquired, as politely as I could, about why he was still working, he simply explained that this was what he loved doing.

However, even though the desire to continue a business may never stop (and so the wealth enhancement stage of more passive investment may never totally come) we all eventually become aware of our mortality, and should think about what we will be leaving behind.

But when is it the right time to do this?

Planning Early is Always Good

Your 'estate planning' should not only affect what happens after your lifetime but it should also serve to protect your assets from external threats while you are alive, and takes into account a period of your life when you may be elderly.

Wealth is threatened by a vast number of things today. Many countries around the world are suffering unrest or near-war conditions. How safe is the currency you’re holding? How safe is your bank? The weakening of bank secrecy, and recent cases where information has been stolen from banks, threatens not only those who have failed to report their income for tax purposes, but also those who live in countries where the perception that you are wealthy can lead to physical dangers such as kidnapping.

Despite all of these ever-present threats, the greatest destroyers of wealth are often those we don't think about or anticipate until too late. Divorce, illness, sudden death, freezing of accounts pending probate, family disputes, unexpected litigation, being cheated during old age, business failure, personal guarantees being called on, and claims for past tax. All these situations can be added to the everyday familiar investment wealth destroyers of volatile markets, over-leverage, and over-concentration.

The best time to manage financial disasters is before they happen. Putting a structure in place that can protect your hard-earned wealth from unexpected threats can make a lot of sense.

So, what does such a plan look like? Most effective succession plans involve transferring ownership of assets during your lifetime to a holding entity such as a company, a trust, a foundation, an insurance policy, pension plan, or some combination.

The concept of ownership brings benefits but it also brings problems. If I am the owner of assets, those assets are exposed to my creditors, my personal taxation, and are frozen if I die or am unable to exercise control. They may even be given by law to someone I would not have chosen (check the intestacy provisions of the country housing your assets). The essence of the succession plan will be to move legal ownership to a structure that can last a long time but one which will still respect my wishes and give me some of the benefits of control that I had before. Essentially, the idea is to keep the benefits of ownership, but lose the problems of ownership.

However, such structures do cost money to set up and maintain. There are legal fees, trustee fees, cost of tax opinions and many other fees. So, a certain level of wealth is necessary before these become practical options. There are options for more humble planning solutions but these are driven by the laws of the country you are subject to, and also by the nature of your key concerns.

For example, for tax purposes, a number of countries will have tax efficient investments (often pension related) or simple structures such as private placement life insurance that can provide tax deferral for reasonably modest sums.

Making lifetime transfers to your children can also be tax effective, and can help your children at an important stage of life (such as buying their first property) but if you are concerned about a possible divorce under which your gift could become part of your child’s divorce settlement, then the transfer to your son or daughter could be structured as a loan, repayable on demand.

If your concern is old age, possible incapacity or illness, then a simple lasting (enduring) power of attorney can be put in place very cheaply, and joint accounts to replace any single name accounts. A will is essential. However, the planning can quickly become fairly complex if you or your assets are subject to different legal systems – civil law, common law, sharia law.

The planning is an art rather than a science and good advice is essential.

Planning Later is Good Too

Planning later does have some advantages. You may wish to protect your assets as early as possible but, when it comes to making decisions about your family, some things can get easier with time.

In time you will be able to make better assessments about your children's capabilities; perhaps with respect to the family business.

Perhaps they or their children will have specific needs at a later time. Or one of your children will be in more need of help than the others. Perhaps one will be showing character traits unsuited to taking responsibility with wealth. Would you prefer for your children's inheritance to be protected from their future spouses and possible divorce? Might they go and live in high tax countries? Maybe none of your children will need an inheritance from you, and you can focus on other uses like supporting your favourite charities.

It is also important to think about the impact of wealth on your children. If they have an expectation of receiving considerable sums in the future, or do indeed receive such sums in their lifetime, it can often have a radical impact, and not necessarily a good one. I have seen several examples of children becoming completely demotivated by the prospect of wealth, becoming unwilling to make an effort to be successful in their own right, and ending up with living a life of pleasure and distraction. There are several examples in very wealthy families of dysfunction and drug abuse. Wealth is generally considered to be a good thing, but not only can your family destroy your wealth (especially when it is in a family business) but wealth planned badly, or not at all, can destroy your family.

One of the saddest things to observe is a family split by dispute, argument and jealousy over a badly planned, or unplanned, estate.

So, for all these reasons, you may be in a better position to assess the needs of your family later in your life.

How do we then combine these two thoughts? Early vs Late Planning.

Here is a suggestion:

1. Don't do nothing. (Doing nothing leaves everything to chance and threatens your life's work)
2. Plan early to protect your assets, but keep your plan flexible so you can change it over time.
3. Review your estate plan on a regular basis — every year or two — to ensure it remains current and reflective of your family situation.
4. Don't forget about it.

But before you start, here is one more important question to ponder (and it may take a while) – what is your wealth for?

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It’s such a simple question, but it goes to the heart of our values, motivation, what we want our legacy to be, and how we might want to be remembered.

Is your wealth for you? Is it for your family? Is it partly for the society you live in, the people who helped you to create it? Is it for those who did not have the chances you had? Those who may come later?

If you can answer this, it will give you the shape of what you might want your final estate plan to look like. The end result should be a lasting legacy, that has protected your wealth, safeguarded and motivated your family, and left (perhaps) some contribution to society that will leave you peace of mind, and proud of your lifetime’s work.

Another related philosophical question for us to ponder is: which is the most important legacy? Is it the wealth we leave our families, or the example we set by our behaviour, our relationship with money, our view of philanthropy, and the help we extend to others? We have been primarily considering here the issues around a financial legacy, but our real legacy will be broader than that, and even those of modest means will be leaving a significant legacy in the sense of example and values; and even this is worth giving some thought to, sooner rather than later.

Whatever your legacy means to you, the most important thing about planning your legacy is to make a start.

Many families never do.