What is Wealth Planning and why do wealthy families need it
23 August 2017
Wealth planning is the care given to examining the worldwide assets of a family, the family composition, its desires, values and outlook and combining all of these together in a comprehensive way to create an umbrella solution that will fit the family’s needs as closely as possible given external constraints.
Many families in the Middle East do not consider Wealth planning as a necessity given that most either have their wealth in companies, taken care of by a single will or are Muslim and expect their wealth to be divided amongst their heirs according to sharia inheritance rules. While these might be useful devices to rely upon in case of families with moderate wealth and small number of heirs, it becomes a less meaningful solution when the family is extremely wealthy and has worldwide assets or has a large number of heirs involved.
Time and time again when discussing with large families in the Middle East, I have noticed that even though the family sees itself as tight knit, the younger generation’s opinions on what needs to happen in a crisis situation (demise, creditor issue, incapacity of the main patriarch/matriarch) differs significantly from what the older generation thinks fit. It is obvious theoretically that upon the unfolding of a crisis event, such situation would give rise to complications that a simplistic solution would not have embedded and therefore this situation would not be catered for in a satisfactory manner.
With several demises occurring in the past few years, it has become evident from case studies that families that go for simplistic solutions find themselves fighting over what the patriarch had found satisfactory and they agreed to but only out of respect for the patriarch. Another matter to consider is that families with wealth all over the planet might be losing out on certain advantages because they do not ask for wealth planning solutions. One such family which had significant equity in France had been losing 25% of the equities dividends in taxes deducted at source that were actually reclaimable upon request using a special process with the french tax authorities.
With governments everywhere stepping up the requirements on transparency together with binding regulations on taxes, there is a clear need for implementing a proper strategy to cater for source taxes when investing abroad. Sometimes, more than taxes, there is the requirement to preserve family cohesion and comfort leading to a structuring including higher taxes because the next generation wishes to live in a jurisdiction where taxes are higher and yet be part of the structuring. Aside from the source taxes, there is also the question of proper applicability of one’s desired succession in the case of assets located out of one’s home jurisdiction.
All of the above are just a few reasons that come to mind when thinking about why wealth planning is important. There are a number of other situations (giving the right to manage the company to a particular heir, compensating special needs heirs, etc) which require proper planning. There was a time when compliance had a small role in the financial industry and now this role has been steeply stepped up with the burgeoning of all kinds of regulations. There will come a time when most wealthy families will have dedicated wealth planners to advise them in order to avoid losing out on advantages and also to avoid being in a non compliant situation in foreign jurisdictions. For now, this is offered mainly by banks, law/accounting/tax firms as most clients do not find the in-house estate planner a viable option although they could be surprised just how much could be done when opting for an in-house expert, especially for the wealthier ones.