The UBS Billionaire Ambitions Report 2023 underscores a critical and urgent need — over the next two to three decades, more than 1,000 billionaires will transfer an astonishing USD $5.2 trillion to their children. This monumental transfer of wealth highlights the importance of meticulous inheritance planning.
More than two-thirds of billionaires who participated in the study, both first-generation (65%) and those with inherited wealth (60%), identify “enabling future generations of my family to benefit from my wealth” as their primary legacy-related objective. With such a massive intergenerational transfer on the horizon, careful planning to preserve and grow this wealth for future generations has become a top priority.
Understanding what constitutes a large inheritance is crucial to ensuring that wealth not only endures but also flourishes across generations. This article provides a comprehensive guide on enabling future generations to benefit from existing wealth, whether through inheriting money from parents or other means. It addresses key strategies for protecting and preserving wealth, emphasizing that thoughtful and well-structured management is the cornerstone of a prosperous legacy.
Related: The 8 Things You Need to Do to Preserve Your Wealth
Diversify your assets (something that family-owned businesses fail at)
This is the most important yet the most overlooked principle of inheritance management.
The research suggests that 56.6% of wealth held by UHNWIs is concentrated in the form of family-owned assets — for example, principal residence (usually located in a single country) and business equity. On the other hand, a Fund Europe survey suggests 78% of HNW investors hold significant cash reserves, which, although most individuals think is the safest investment, yield too little in comparison with other asset classes (including stocks, bonds and commodities).
Such levels of wealth concentration expose investors to significant risks, whether inflationary, liquidity, country, business or default risk, that may take over 50% of the wealth.
Mitigating these risks requires diversification across multiple asset classes and geographies. A sophisticated, balanced portfolio might include a mix of domestic and international equities, suitable bonds for income and real estate. Alternative investments such as private equity, hedge funds and commodities can provide unique opportunities and less correlated returns, resulting in higher risk-adjusted returns.
Additionally, incorporating assets from emerging tech industries like climate tech, artificial intelligence (AI), biotech or neurotech can offer further diversification and impressive potential for growth.
Choose your tax residence wisely
Different countries and regions have their own tax laws, and understanding any that apply to your situation is vital to avoid unnecessary loss. For example, in Belgium, tax rates can range from 3% to 80%, depending on the region and relationship to the deceased. In Spain, these rates can reach up to 87.6%, and in Switzerland, they can vary up to 50% depending on the canton. These variations highlight the need for tailored tax strategies.
Key strategies include using trusts and other legal structures to manage and distribute assets while providing tax benefits. Gifting strategies, like annual gift tax exclusions, can gradually transfer wealth tax efficiently. Managing capital gains taxes through careful timing of asset sales and tax-loss harvesting can also reduce the tax impact. Additionally, tax-advantaged investment vehicles, such as retirement accounts, play a significant role in strategic tax planning.
Consulting with an inheritance tax advisor can provide tailored advice and strategies to enhance tax efficiency, ensuring that more wealth is retained and passed on to heirs.
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Establish strong family governance
Family governance involves processes, structures and agreements that guide the management and protection of family wealth and ensure alignment with shared values and goals. While it may sound complex, having these governance structures is crucial, and this is where Family Advisory Services can help.
Another critical step is succession planning, which prepares the next generation to manage the family’s wealth through education, mentorship and involvement in financial decisions. The 2023 UBS survey found that 58% of billionaires see a major challenge in instilling the necessary values and experience in their heirs.
In addition, 68% of billionaires with inherited wealth want to continue the achievements of their ancestors, and 60% want future generations to benefit from their wealth. This underscores the importance of family governance and education in ensuring a seamless transition and preserving generational wealth.
Insights from JPMorgan highlight the importance of integrating family governance into wealth planning. Effective governance preserves wealth and strengthens family unity and legacy. Clear structures and open communication help manage the complexities of managing family wealth and ensure benefits for future generations. Addressing questions like “Is generational wealth bad?” and creating solid family wealth plans can help maintain and protect generational family wealth.
Opt for active management
Passive capital management has long been viewed as a reliable strategy for wealth preservation. However, in the face of heightened geopolitical risks, volatile inflation and transition risks, the era of passive management appears to be waning. This sentiment has been echoed by leading asset managers such as BlackRock, JPMorgan Asset Management and Mercer.
In the current market landscape, active management is becoming increasingly crucial for long-term capital preservation. By dynamically adjusting strategies in response to emerging risks and opportunities, active managers can effectively navigate turbulent conditions and safeguard capital. Unlike passive management, which allows capital to “drift” with market movements, active management enables proactive risk management and the ability to capitalize on emerging opportunities.
I believe that an active long-short strategy is the optimal approach for capital preservation. This strategy offers flexibility by enabling the exploitation of diverse market inefficiencies, allowing you to profit from declining prices in equities and ETFs, increase exposure levels when assets are oversold and reduce exposure during periods of irrational market exuberance.
Adjusting our positioning based on market conditions, the long-short strategy provides a robust framework for preserving capital while capturing upside potential.
Related: A $60 Trillion Financial Dilemma is Coming — How to Keep Generational Wealth from Disappearing
Wealth that not only endures but thrives
Preserving and growing intergenerational wealth requires a comprehensive strategy. Asset diversification mitigates risk exposure, enhances return potential and facilitates the exploitation of diverse market opportunities. Strategic tax planning optimizes liabilities, thereby maximizing wealth retention and intergenerational transfer. Robust family governance fosters cohesion and transparency, aligning family members with shared values and objectives.
Integrating these principles into a comprehensive strategy ensures wealth not only endures but thrives, benefiting future generations. You can create a lasting legacy by focusing on transferring wealth to the next generation and understanding how to build wealth for your children.
Disclaimer: The information contained in this publication does not constitute financial advice. This publication is for informational purposes only and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer.
