August 2, 2022
Managing financial and non-financial assets, preservation of wealth, succession planning and wealth transition, tax compliance and efficiency, retirement planning remain some of the many key objectives of High Net worth Individuals (HNWI) and family businesses. Recent developments such as the Covid-19 pandemic, rapid changes in international tax rules etc. has raised the importance of these subjects. Without careful planning and stewardship, a hard-earned fortune can easily be dissipated within a generation or two. This is so well-recognized that it inspired a proverb “Shirtsleeves to shirtsleeves in three generations” which describes the propensity of family-owned enterprises to fail by the time the founder’s grandchildren have taken charge. According to the Family Firm Institute, only about 30% of family businesses survive into the second generation, 12% are viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.
In this article, we have highlighted some key issues that High Net Worth Individuals should be paying attention to. The concluding part of the article focuses on stay awake issues for family businesses in order to mitigate the shirtsleeves to shirtsleeves in three generations syndrome.
Establish an effective wealth transfer mechanism – It is the wish of most High Net Worth Individuals to see that the wealth that have been acquired over the years are transferred to the right person, at the right time and in an effective and efficient manner. As much as these objectives are on the minds of High Net Worth Individuals, it is usually not top priority. In some instances an event (which may be internal or external) are triggers for conversations around wealth transfer. For instance, the recent covid-19 pandemic has forced people to either establish a succession plan or review existing ones. Establishing an effective wealth transfer mechanism will involve taking a holistic look at your circumstances and plans and determine which of the options or a combination of options is more likely to yield the desired outcome. Some of the options available include Wills, Deed of Gifts, Trusts etc.
A carefully planned wealth transfer structure provides a lot of benefits. They include ensuring that there are no ambiguity about your intentions, your assets can be easily and quickly transferred to your beneficiaries, minimizes expenses and fees that may be payable during property transfers etc. The process can be complex, but rewarding. For instance, the nature of an individual’s asset and size, the extent of their footprints globally could determine the complexities that will be involved.
Keep abreast of tax obligations and changes in tax laws – It is not uncommon to see High Net Worth Individuals have investments across multiple jurisdictions. These may create multiple tax foot prints for them and keeping up with the compliance obligations can be quite onerous. HNWIs must continually review their portfolio and work with a reputable advisor to determine the compliance obligations and take necessary steps to ensure that they are discharged. They must also have mechanisms in place to ensure that changes in the tax laws and their implications are being evaluated on an ongoing basis. Most often, the penalty for failure to discharge your tax responsibilities are usually steep. There are also tax reporting legislation such as the Common Reporting Standards and Foreign Account Tax Compliance Act which are aimed at increasing the global transparency of tax reporting.