Planning for the future: When a will is not enough

It’s never easy to think about what might happen to your estate after you pass away, which may be why so many people have difficulty finalizing wills and creating a comprehensive estate plan. While this a problem in nearly every part of the world, new figures from RBC Wealth Management show only 31 percent of people in Asia have a full wealth transfer plan in place.

In a part of the world where so much wealth created over the last few years is from the first generation, families typically have no wealth transfer frame of reference.

One reason why families in Asia haven’t created plans is because much of the wealth has been accumulated relatively recently — families simply aren’t used to thinking about wealth transfer, says Iggy Chong, managing director and head of private wealth, greater China, at RBC Wealth Management. “The first generation has never had the experience of inheriting,” he says. “So they had no inclination to do this planning before.”

Many cultures dislike talking about death, which is something other cultures share, but it’s even more of a taboo topic in Asia, says Chong. There has also been less of an urgency to plan, adds Vivian Kiang, RBC’s head of wealth planning in Asia. “They have been thinking more about needing to grow their assets, instead of succession planning,” she says.

Over the last few years however, conversations around wealth transfer have started to increase. That’s partly because wealthy individuals in Asia are aging and facing health issues, says Kiang.

Another reason wealth transfer discussions have increased is due to estates becoming far more complex over the years, adds Chong. Asia’s wealthy families are global with children living in other countries, homes in North America or the United Kingdom, which necessitates a need to protect wealth across borders.

Additionally, many wealthy parents are concerned about increasing divorce rates — they’re on the rise in Singapore and China, among other nations — and want to protect their assets from a breakup. “They want to protect their assets from a spousal claim because more kids are getting divorced,” says Kiang.

Start with a conversation

While creating a wealth transfer plan can be complicated, depending on the size of one’s portfolio and where those assets are located, it’s not rocket science. The first step may be having a conversation with a professional. While that may seem obvious, with many wealthy families having complicated financial situations, talking through wealth planning options is a must.

Kiang considers traditional wealth management questions important to address in a clients’ financial picture: How much does the client have? Where do they own property? Do they have any businesses? However, she also delves into family dynamics too. How a family gets along? How do they view the family wealth? What are their personal priorities? “There is no plug and play here,” she says. “You really need to understand the dynamics.”

One way to help understand family dynamics is to ensure all individuals are included in discussions. Additionally, according to the RBC APAC Wealth Transfer report, 67 percent of individuals who have been included in general family wealth conversations say these discussions have boosted their understanding of their family’s financial picture.

Wills, trusts and other strategies

After these initial discussions take place, individuals usually start addressing wealth transfer strategies. Most plans will start with a will, which is something historically many wealthy families in Asia don’t have in place, says Chong. The will can be key though, as it can spell out exactly how assets should be distributed after death, he says, adding those who have assets in other countries may need to file a will in multiple locales.

Chong cautions against making a will overly complicated and not including family input. “Wills can be the victim of increasing complexity,” he says. “There could be a lengthy process in probate and families could end up fighting. Have family discussions and dialogue before making it.”

The next step, Kiang says, is to figure out what kind of account structure you want your assets to be held in. The most basic is an individual account, which is essentially a bank account where assets can be stored. While it costs nothing to set up, any assets in the account get frozen and are subject to probate upon death of the account holder. Stocks inside of the account will still fluctuate, but no one will be able to manage those assets until probate is complete, says Kiang.

An alternative to a frozen account is to set up a joint holding, where assets automatically transfer to another named holder – usually a child – following a death. “This is very common in Asia,” says Kiang; however, there is one potential drawback: the joint account holder has full control of those funds. If the family dynamic is complicated, or there are disagreements among siblings, creating a joint account could become problematic.

Another option is to set up a corporation, which allows wealthy individuals to appoint directors and shareholders. This can be helpful in situations where families get along — everyone has a share in the business and knows how much they’re entitled to. But it can also cause stress. “Directors can take out assets of the company, and there have been situations where one sibling sues another because of what’s been removed,” says Kiang.

One way to help prevent contentious family disagreements is to set up a family trust. Trusts allow the parent to dictate who gets what assets and when. “It’s the most comprehensive solution for transferring assets,” says Kiang. Trusts can stipulate assets can only be released when a child reaches a certain age and even how they should use the money.

According to the APAC Wealth Transfer report, setting terms on the next generation’s wealth is not unusual in Asia. RBC found 64 percent of beneficiaries in Asia had conditions attached to their inheritance, compared to 26 percent of inheritors in the West.

In North America, the person who administers the trust is often a family member; however, in Asia, some wealthy individuals tend to use professionals to oversee their estates. “It’s a legal agreement between a trustee and a settlor,” says Kiang. “The settlor is saying these are my assets, I give all the legal title to you as a trustee and you will hold the assets for the benefit of the beneficiaries.”

Give a little more with insurance

Many wealthy Asian families buy insurance to give more money to their heirs after they pass away. “Why would someone buy an insurance policy for $20 million when they already have $50 million?” asks Chong. While that may seem odd to some, many wealthy people want to give something extra to the next generation.

For larger families, it can allow children to have a net worth equal to that of their parents. If “That will extend the wealth and multiply it,” suggests Kiang.

Insurance may also help pay estate taxes, especially on properties in other countries that may have varying tax rates. In Canada, for instance, high-net-worth individuals could end up paying capital gains taxes on the sale of certain properties. Insurance dollars can help pay those taxes, says Kiang.

As time goes on, and as more wealth is accumulated, more of these strategies will be employed. “It’s still early stages, but Asian trends will catch up with what’s happening elsewhere in countries where wealth has been around for more generations,” says Chong. “The evolution of wealth planning is speeding up.”