Published: October 01, 2012
By Eliane Chavagnon - Reporter
Although three-quarters of estate plans relating to high net worth clients are at least three years old, an overwhelming 95 per cent of these clients have experienced “significant changes” since the plans were drawn up, according to a new study by professional services firm Rothstein Kass.
In terms of the primary reasons why wealthy families do not have up-to-date estate plans, 42.9 per cent of 56 single-family offices said they“do not see the need,” while 26.8 per cent cited “lack of time” and 21.4 per cent said the topic was “too difficult to address at this time.” Under 10 per cent (8.9) cited “other.”
“Although many HNW families let plans become outdated due to time constraints or not seeing the need to update them, it is critical to do so, otherwise the benefits of advanced planning will be negated,” said Rick Flynn, a principal and head of the family office group at Rothstein Kass.
The study, Missing the Mark, surveyed 74 single-family office executive directors and also revealed that nearly 53 per cent of wealthy families do not have formal asset protection plans in place. In this respect, 41.1 per cent of 39 single-family offices “do not see the need,” while 35.9 per cent cited “lack of time,” 17.9 per cent claimed it is “too complicated” and 5.1 per cent said it was illegal.
The study may fuel debate on how effective wealth advisors are in ensuring their clients keep their estate plans up to date, particularly at a time when tax and regulatory changes are happening with increasing frequency.
“No legitimate excuse”
“The truth is, in this day and age, there is absolutely no legitimate excuse for not having an asset protection plan in place,” Flynn said in the report. “History has shown that personal liability policies are sometimes insufficient, and that in legal disputes, the righteous do not always prevail.”
The single-family office model is designed to find and fill cracks in the family’s defences, Flynn added. “Following through with other advanced planning functions while ignoring this critical component is equivalent to leaving one side off of a shark cage,” he said. “In general, single-family office executives need to do a better job of educating their clients regarding the benefits of asset protection planning.”
The survey also highlighted eight “core elements” of advanced planning. They are: flexibility, transparency, risk sensitivity, cost-effectiveness, discretion, cohesiveness, explicitness and legitimacy.
Additional findings include:
Nearly 84 per cent of life insurance policies have not been reviewed for at least three years
Over half of wealthy family members have been involved in unjust lawsuits or divorce proceedings
Over 90 per cent of wealthy families are concerned that family members will be involved in unjust lawsuits or divorce proceedings.
“Regardless of wealth, accidents happen, businesses sink, and marriages fail,” Flynn warned. Single-family office clients also understand that some will be emboldened to target them for their wealth alone. This knowledge has driven soaring interest in family security services among the ultra-wealthy, while also offering a powerful case for thorough and regular review of the family’s overall asset protection strategy,” he said.
Daily News Analysis
Published: February 02, 2012
By Harriet Davies
Gender has a “far reaching” impact on investment decisions and financial planning, a new white paper from Barclays Wealth shows.
Crucially, females are far less risk tolerant than men, with just 31 per cent of women prepared to take more risks for higher investment gains, compared to 49 per cent of men, according to the research.
The survey encompassed 2,000 high net worth women with over $1.6 million in investable assets from 20 countries across Europe, North America, South America, the Middle East and Asia-Pacific.
Female investors in the survey were more likely to admit they felt stressed, and say they had “low composure” than their male counterparts (39 per cent versus 29 per cent). This may arise from having a greater desire for self-discipline and control over their finances (45 per cent versus 39 per cent), said Barclays Wealth.
“Biologically, several studies have linked financial risk taking to testosterone. Cognitively, men are more likely to be confident, though not more accurate, in their financial decisions, and sociologically, women tend to value wealth as a source of security, not opportunity,” said Dr Emily Haisley, a behavioral finance expert at Barclays Wealth.
On inheritance planning, women were less likely to have a will in place, with over 30 per cent of women lacking a succession plan compared to 20 per cent of men.
However, Dr Haisley cautioned against using research findings as a basis for stereotyping men and women. She is wise to do so: other recent research, released in the US by the Family Wealth Advisors Council, found that one of the areas firms fell down on with their female clients was not listening to their unique needs.
As women live longer, and are attaining more in professional and business spheres nowadays than ever before, their share of the world’s wealth is growing. To put this into context, the World Bank predicts that women will control a GDP that is bigger than that of India and China combined by 2014, the report notes. Unsurprisingly, they are also becoming more engaged with their personal finances.
“As the rate of women’s wealth rises exponentially across the world, it is becoming increasingly vital that financial institutions and wealth managers address and understand these differences in order to cater for female clients more effectively, based on personality and lifestyle, as well as gender,” said Barbara-Ann King, head of the female client group at Barclays Wealth.
As well as establishing a female client group, Barclays Wealth last year initiated a program to address advisor training and create appropriate products and services, in light of a growing female potential client base. As part of this offering, the wealth manager has launched a magazine targeting women who want to know more about their finances, an example of which can be viewed here.
Published: January 20, 2012
By Harriet Davies
After a busy 2011 for trust and estate practitioners, 2012 will be “even more tax-driven,” says Dan Lindley, president of The Northern Trust Company in Delaware and chief fiduciary officer of its private client business in Guernsey and Cayman Islands.
“Generally speaking, what we see in Delaware is that clients’ planning initiatives are often framed by developments in the US tax code,” says Lindley.
Recent efforts got underway in 2010 when the Tax Relief Act ushered in “unprecedented” opportunities to make lifetime gifts – but only within a two-year window set to expire at the end of this year – explains Lindley. “What we are certainly going to see is a steady if not frenzied effort by our clients to use the exemption in this window.”
“So far in 2012 what I’m seeing is largely the creation of dynasty trusts,” he adds.
The pros of dynasty trusts
One thing clients can do of course is make an outright gift, but this comes with a number of disadvantages, so they are “wisely” using the trust option, says Lindley.
Dynasty trusts “last potentially forever” and avoid all future gift, estate and generation skipping taxes, as long as the assets are left growing inside a trust, which can have “a tremendous impact on wealth accumulation” over generations, he says.
Clients also opt for dynasty trusts to try and retain some control over the assets during the lifetime of those assets. In addition to tax savings, grantors use trusts to control and protect beneficiaries to some degree, he explains, sometimes because the beneficiaries might be infirm, or suffer from addiction, or be too immature to take control of the assets.
Dynasty trusts can also be used to motivate beneficiaries, using incentives to reward positive behavior (in the eyes of the grantor) and methods for deterring behavior such as gambling, criminal activity or addiction. A final aspect of control relates to a family business, where a patriarch or matriarch has built up an enterprise that he or she doesn’t want broken up. Where the interests in the business are passed directly to children or more remote descendants they can be transferred directly out of the family, so leaving it in trust can help keep the business together.
On the other hand, one can envision a situation where a grantor tries to impose too strict a set of rules on beneficiaries, sowing the seeds of discontent that may be destructive in other ways. However, Lindley says you can build the necessary flexibility into a trust instrument to ensure that if there are compelling reasons to allow a business to be sold, for example, then it will be.
He says an important aspect of Delaware law in the case of closely-held assets is the ability for trustees to work with investment advisors – not in any strict sense of the word, but an individual or committee made up of family members, or close family advisors, for example. This advisor can be vested with the power to direct the trustee with respect to all investment actions of a trust.
There are two alternatives for managing closely-held assets held in a long-term trust: 1) vest responsibility purely with a corporate trustee, such as Northern Trust, to use its experience with closely-held assets and family businesses to make investment decisions, or 2) if someone doesn’t feel comfortable with this, appoint an investment advisor to oversee the assets. In the second option the investment advisor can be self-replacing over generations, or a trust protector can appoint successor advisors.
Planning in an uncertain climate
But as clients attempt to make preparations, there is still “great uncertainty about the timing of the two-year window,” says Lindley. “There’s concern Congress will say ‘this is an area where we can pick up revenue’ by reducing the lifetime exemption limits.”
As readers will no doubt be aware, rumors swirled towards the end of last year that the Super Committee would act, and while this didn’t materialize, Lindley, like many of his colleagues in the trusts and estates planning industry, urges action “sooner rather than later.”
Luckily, while tax uncertainty abounds, the investment climate has calmed somewhat – when compared to 2008/09, that is.
“In the 2008/09 time I think many clients were paralyzed by what was going on,” says Lindley, who doesn’t think that’s the case anymore. He still sees lingering doubts, though. He hears from clients who see the sense of using the $5 million exemption but are worried that a repeat ’08 situation could leave them financially stressed without those assets.
“Typically when you create a trust you’ve parted with all interests and control but we’re seeing use of a technique of retaining a limited ability to get assets back,” says Lindley. He explains that this is a trust structured as an asset protection trust where the client is also a beneficiary, but the client’s ability to access the assets is limited to the sole discretion of a trustee or distribution advisor.
This arrangement can create “a completed gift, where the assets are out of [the client’s] estate” but where the client can get them back, and undo the careful planning, in an extreme situation like financial ruin, he continues. The client can only get these back as a last resort and it will mean the client’s exemption is wasted, but this won’t matter anyway if these assets are all that is left.
Growing need for asset protection
Another trend Lindley has seen is the growing awareness of asset protection, as distinct from estate planning.
“Domestically, we have had since 1997 asset protection trust statutes. Early on there wasn’t great acceptance of them,” he says, adding that nowadays “he couldn’t even begin to count” the number of clients trusts for asset protection, quite apart from estate planning. In his opinion, it is becoming increasingly popular to protect against unforeseen creditors and other incidents, as well as spousal interests.
Another side of this story is on the international front, as the world has just come to the end of a year mired by political and economic crises in regions as diverse as North America and North Africa.
“We’re also seeing international clients, who used to look very favorably on the US, who are starting to feel uncertain about the US tax code,” says Lindley. “Some have reached such ‘a level of discomfort’ about where the US tax code is going that they are turning to Guernsey and other Channel Islands to keep their asset farther removed from the US.”
But all these concerns aside, Lindley has one key message he really wants to get across to wealthy clients: “Use the various techniques you have to reduce your estate, and do it sooner rather than later.”
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