Why is Succession Planning so Important for High and Ultra-High-Net-Worth Individuals?

Over the next 25 years, $85 trillion will be transferred from one generation to another, and yet 58% of wealthy individuals only review their succession planning on an ad hoc or as needed basis.

Succession planning is crucial for wealthy individuals to ensure their assets are managed and distributed according to their wishes after they pass away. It helps minimise estate taxes, provides financial security for heirs, and can prevent disputes among family members. Succession planning, also known as legacy planning, is a financial strategy that helps you plan how best to move your wealth on to future generations. These affairs are usually planned and organised by a financial adviser.

Often, a review is only triggered when an event happens such as a marriage or birth, or a crisis such as a health scare, or perhaps a major financial event. But this really isn’t the best time. Succession planning should start as early as possible and be an ongoing consideration.

Several celebrities have made headlines for their decisions regarding their wealth and legacy plans. Anne Robinson famously told the media in 2021 that she’d given her £50m wealth away already to her children to ‘avoid the taxman’ by distributing ownership of her assets amongst them. Ashton Kutcher and Mila Kunis have stated that they won’t be leaving their wealth to their children, preferring to encourage them to be self-sufficient. Likewise, Daniel Craig, has mentioned that he finds the idea of inheritance ‘distasteful’ and plans to give away his fortune rather than leaving it to his children.

But of course, most of us want to provide a secure future for our next of kin, children, or grandchildren. Sadly, however, a lot of mistakes are made when it comes to succession planning, including not having an estate plan, failing to update your will, choosing the wrong executor, or not planning for disability or incapacity - which may leave your affairs in limbo if you’re unable to make decisions. Both Jimi Hendrix and Bob Marley died without a will, causing a long-drawn-out battle over the rights to their estates.

So, how can I get my succession planning right?

An audit is particularly important for high-net-worth individuals who have many assets, especially if your portfolio is continually evolving and changing. It helps ensure that your assets and investments are accurately documented and allows for a thorough review of your financial situation. Insights from audits will help shape the strategy for your inheritance management so it’s a key place to start. But don’t worry, you don’t have to approach this alone, a good financial adviser will be able to help coordinate an audit on your behalf, ensuring everything you own is taken into consideration.  By doing this you will also benefit from a truly objective perspective on your circumstances.

1. Define and discuss your objectives

Succession planning is all about defining what’s important to you, such as family, philanthropy, or business continuity. Consider who you want to inherit your assets and their capability to manage them, and what you’d like these assets to achieve, for example supporting a worthwhile cause or providing for a loved one. Consider what you want to happen to assets after your death, for example, if you run a family business if you’d want this to remain in operation or would be happy for it to be sold. Some people want their legacy to live forever, and therefore it needs to be structured in a certain way for this to happen. These are all things to consider when defining your objectives.

Remember, who you want to benefit economically from your legacy is not necessarily who you want to manage and control.

2. Ensure you have a will, held in a secure location

A will protects your loved ones and makes things easier. It informs those dealing with your estate about where you want your wealth to go after you pass away. By putting your wishes in writing, everyone is clear, and it saves your loved ones time, money, and stress. Without a will, your estate will be distributed according to the Laws of Intestacy, which may not be as you intended or very tax efficient, and this can cause serious conflict among family members. It’s important this will is formally documented, with the original copy held in safe storage.

It’s also important to consider legal measures, such as Power of Attorney, which allows you to assign someone to manage your finances and healthcare if there comes a time when you are unable to do so for yourself.

4. Start early

It’s never too early to start thinking about succession planning, especially if you have significant assets or wealth. Many financial advisors suggest beginning in your 50s or when you start to seriously consider retirement planning, but it’s generally advisable to start as soon as you can and continue to review as your financial situation grows and develops. It’s much better to consider this when you’re fit and healthy and in a good frame of mind to do so, rather than leaving it to the last minute.

5. Mind the tax

There are a number of planning considerations that can help you with wealth preservation when it comes to succession planning. A good financial adviser can help you make use of exemptions and reliefs that may apply to your situation. We outline some examples below.

Trusts help with tax efficient legacy planning and allow for greater control over asset distribution and control of how and when assets are used. Life insurance is a common example of an asset placed in trust. Assets placed in a trust usually bypass probate because they are not considered part of the estate. This means they can be distributed to beneficiaries without court supervision, which can save time and money.

However, bear in mind that when assets are placed within a trust, you will usually release full of partial control of them, so you’ll need to ensure the time is right to do so.

Gifting money during your lifetime can also reduce the size of your estate, and saving more into your pension, can also be a tax-efficient way to pass on wealth. Donating to charitable causes can reduce your taxable estate while supporting important causes. Foundations are a great way to support charitable causes, offering a lasting legacy and potential tax benefits.

Identifying an Ultimate Beneficial Owner (UBO) for your assets can help mitigate any uncertainty or confusion. This sets out the person(s) who ultimately owns or controls a legal entity or arrangement such as a company, a trust, or a foundation. The purpose of a UBO is to allow for the transfer of assets to the intended beneficiary upon death.

Of course, not all of these tools are suitable for everyone, and your financial adviser will guide you on the best strategy for your situation.

6. Communicate your wishes

Communicating your wishes is key when it comes to succession planning, as it helps ensure the process runs more smoothly. The family will already understand the rationale behind your decisions, which will help avoid any disputes later on. 

7. Speak to an expert

Succession planning is a complex subject. Choose a financial adviser that has experience of dealing with the estates of high-net-worth individuals and has experience in complex legal planning and wealth preservation, so you can ensure your inheritance management is in the best hands.

Enness has recently introduced a range of high-net-worth services to complement its existing portfolio, including success planning. Contact us to find out more about legacy and succession planning for high-net-worth indivudals.

Perhaps we should include an additional line here on how often an audit should be conducted, but I’m not sure on the timeframe.

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