Key points:
- While less than half of Asia’s high-net worth individuals have done any legacy planning, the Covid-19 pandemic has pushed many Asian business families to seek out expert advice on wealth transfers.
- Failing to plan for retirement and legacy planning can pose risks to family harmony and businesses.
- Life insurance is increasingly becoming a popular tool among affluent individuals for building a legacy that lasts – whether for your family or business succession plans.
Keen to build a legacy that lasts?
While family-owned companies in Asia are astute at growing their businesses, they haven’t been as quick at legacy and succession planning1. In fact, many Asian families are only just starting to seek expert advice on wealth transfers1.
Common reasons for this hesitance to discuss financial matters and succession planning: Cultural taboos, fear of successors’ readiness, and concerns about potential disputes within the family2.
What are the key considerations when managing wealth for the next generation, or inking a legacy that lasts?
Failure to plan is ironically planning to fail
Nobody sets out planning to fail at succession planning. But sometimes other priorities get in the way, and legacy and succession planning may fall by the wayside.
The failure to engage in legacy and succession planning can lead to various pitfalls, including:
- Your assets may not be distributed according to your wishes. Without a plan, assets in Singapore will be distributed according to the Intestate Succession Act or the Islamic Inheritance Law for Muslims. The actual distribution process could take months longer, with outcomes that may differ from your wishes.
- Estate duty may still be imposed on overseas properties and investments, potentially reducing the value of assets upon death. Estate tax in the US ranges from 18% to 40%, which applies to US securities and US-domiciled investments. In Japan, the estate tax ranges from 10% to 55%.
- Inadequate guidance on asset distribution can result in tension and disputes within the family, particularly regarding ownership and guardianship of surviving children. The super-rich in Southeast Asia are more worried about succession disputes than other regions3.
What is one to do?
Open communication with your heirs to pass on core values and wealth communication philosophies can help them understand what wealth means to them and their family, and help them achieve financial longevity.
If a large proportion of your assets comprise of fixed assets or businesses, it may be difficult to fairly split your assets among your beneficiaries. As such, where family businesses are involved, it is key to put in place the right structures and governance.
Using life insurance in legacy and succession planning
Life insurance has become a popular legacy planning tool among affluent individuals for these reasons:
- Prevent wealth erosion. As life insurance pays out a lump sum upon death, it creates value for the estate and provides liquidity in retirement without sacrificing your current lifestyle.
- To equalise the distribution of assets. By providing immediate liquidity for loved ones and helping to distribute illiquid assets more fairly.
Universal life insurance and participating whole life insurance products are commonly used for legacy planning. Both provide lifelong death coverage benefits and savings elements within the policy.
Differences between Universal Life vs Whole Life Insurance
| Universal Life | Whole Life |
|---|---|
| Flexible premiums | Fixed premiums |
| May allow you to increase or decrease the death benefit | Guaranteed death benefit |
| Offers potential cash value that you can use while still living | Offers guaranteed cash value to use while you’re still living |
| Interest rates can change over time | Some returns are guaranteed |
| May become underfunded and lapse | Can never become underfunded |
(Read more: Strategies for successful wealth transfers to your next generation.)
Insurance as part of business succession planning
In addition to leaving a lasting legacy, HNW individuals can find that insurance brings value to their business succession plans.
One effective way is by using universal life insurance to protect against the loss of key talent within a company. In the unfortunate event of the sudden death of a crucial employee, clients may lose faith in the company, and/or creditors may demand immediate payment as they fear that the company will become insolvent.
By insuring the key employee, the company can receive a lump sum payout from the policy. This infusion of funds can address the company’s additional liquidity needs, reassuring clients and creditors while also facilitating the hiring of a replacement.
This added liquidity can also be used to demonstrate the company's continued ability to operate smoothly. Thus, avoiding a crisis of confidence that results from the sudden loss of a key employee.
With a clear business succession plan in place, heirs can be assured that the value of the business is maintained hence protecting wealth within the family.
Getting started
Legacy planning can be complex to navigate due to the intricate strategies involved, and it may not be advisable to attempt a do-it-yourself approach.
Those who are serious about passing on generational wealth can benefit from collaborating with professionals to maximise the effectiveness of their plan.
At DBS Treasures, your relationship manager can access intelligent wealth management tools to better identify your needs and develop a meaningful legacy plan that works for you.
Protect your family wealth and enhance the value of the legacy you built with our legacy planning solutions today.
