Estate Planning with Insurance: Equalise and Amplify Your Legacy
07 Aug 2024 | 16 mins-read
Over the coming decades, one of the most significant factors impacting high-net-worth individuals (HNWIs) will be multigenerational wealth transfer. Cerulli Associates1 estimates that wealth transferred through 2045 will total US$84.4 trillion. Of this, US$72.6 trillion in assets will be transferred to heirs1. Nearly half of this wealth transfer is expected to come from high-net-worth and ultra-high-net-worth households1.
Estate planning, therefore, becomes not just a prudent step, but an essential strategy for HNWIs to ensure the seamless transition of wealth across generations. In this article, we go beyond the basics of estate planning and share how legacy insurance plans can help simplify what is a complex – and sometimes daunting – exercise.
Factors impacting estate planning
Estate planning involves navigating a multifaceted terrain. Legal and regulatory considerations intertwine, shaping your choices and influencing strategies. Understanding these intricacies is crucial for crafting a robust and compliant plan.
For example, many of the world’s major economies require the payment of estate duties or inheritance tax. In the US, there is an estate tax of 40%, meaning the value of a deceased person’s estate is reduced by 40% prior to distribution2. In Japan, the inheritance tax framework erodes more than half (55%) of the value of the estate prior to its division amongst beneficiaries2. However, in jurisdictions including Singapore and Australia, provided the estate plan is executed properly, heirs can expect to inherit the full value of the deceased’s estate, per their wishes2.
Of course, the regulatory landscape isn’t static, and new regulations and amendments can emerge, impacting your current plan. Staying informed is key. Regularly consult your legal professional about potential changes and their implications; a proactive approach ensures your plan stays adaptable and aligned with evolving regulations.
The make-up of assets and income sources within HNWIs’ portfolios also poses its own set of challenges. According to a PWC survey of HNWIs, 41% of respondents noted their primary source of investable assets stemmed from income from business ownership or sale of a business3. With a significant amount of wealth tied up in family offices, the challenge in estate planning is ensuring that the intentions of the surviving business owner(s) and inheritors are taken into account. For example, a business owner may wish to pass the running of the family business to one of their two children. But without effective planning, this may leave the second child without an inheritance.
In the same context, property ownership is a significant piece of the estate planning puzzle and needs to be considered in line with the rules that apply to the relevant country. This is particularly important when it comes to the transfer of businesses, because depending on how the ownership of a property is structured (ie: as a joint tenancy arrangement or a tenancy-in-common arrangement) the ownership of the physical property where the business operates may not be able to be bequeathed to the child4.
As you can see, while the wealth amassed by HNWIs promises a legacy of prosperity, the path to safeguarding this legacy is often complex. This is where insurance solutions can play a vital role in assisting HNWIs to pass on their wealth to the next generation.
Insurance solutions for estate planning
Estate liquidity
While we might all hope to clear our debts before we pass away, the reality is that nothing is certain, and our death may leave our family with financial obligations, such as debt repayments, funeral arrangements and settlement expenses. This is why planning for sufficiently liquid estate becomes important.
Assets will need to go through probate or administration before they can be distributed to your loved ones. However, with a valid nomination in place, a life insurance policy can provide immediate liquidity to your estate when you passed away. Estate liquidity refers to the ability of an estate to quickly and effectively convert assets into cash. A legacy insurance plan, such as Manulife’s Heirloom (VII), Signature Life Series or Signature Indexed Universal Life Select (II), can offer estate liquidity benefits (i.e.: death benefit). This protects your family from having to sell off any fixed assets in order to meet any outstanding financial obligations.
Business continuity
In an environment where family offices make up a significant portion of HNWIs’ interests, the planning for the impact of a death on the business cannot be understated. Consider a family office operated by a father and children. If the father was to pass away, could the children continue to operate the business on their own? Would they want to continue, or would they prefer to close down the business?
One simple approach to address business succession is to utilise a universal life insurance policy. Unlike other life insurance solutions, where a person (spouse or child, for example) is named as the beneficiary, in the case of business planning, the beneficiary can be the company or office. Such universal life insurance policy can payout the death benefit in case of any tragedy befalling the life insured.
Universal life insurance policies are the most appropriate tools for this type of planning, because they offer the large sums insured.
Universal life insurance is also very useful for business continuity because it can mitigate keyman risk. (Keyman risk is the reliance of the business upon one or two key personnel, without whom the business would cease to be profitable or even operational.) A company can purchase a universal life policy and name their keyman as the life insured. Should that keyman exit the business, the policyowner can change the life insured to cover the incoming key person.
Equitable division of estate
One of the reasons estate planning is so important is because it helps pre-empt familial disputes over assets. Imagine you pass away without having a written will. Would your children agree on how to share your assets? Would your business pass directly into the hands of the eldest child, leaving the younger children with less? Would your children have to sell off assets (real estate, business) in order to access a fair share?
According to Lombard Odier5, while children are reasonably comfortable expressing their wishes to the previous generation (62% of APAC HNWIs said they had shared their wealth goals with their parents), they are less likely to extend this conversation to their brothers and sisters (47% said succession and inheritance were rarely discussed among siblings). Similarly, a little over half HNWIs said they had shared their goals with their children.
Aside from illustrating the value of having open conversations about wealth and inheritance between the entire family unit, these figures also point to the need for a mechanism to distribute estate-owned wealth equitably.
A legacy plan provides a liquid benefit, upon the passing of the life insured, which can be divided across all beneficiaries through nomination, or the death benefit can be portioned to offset the value of illiquid assets (such as the family business) which may be gifted to one single person.
Some universal life plans allow the current policyowners to assign the plan to a new owner as he or she wishes, so it can be given to children or grandchildren. In some solutions, the policy ownership can be split across two parties, with the policyowner having the flexibility to decide the percentage. This feature can be utilised at any time.
Flexibility in retirement
Another factor to be considered in estate planning is the impact of the person’s retirement on their accumulated wealth. For example, a 65 year-old HNWI who has built up a business valued at $3 million. In addition to the business, the individual has investments through a diversified portfolio, totalling around $2 million. The individual has decided to retire, with the business being taken over by his eldest child. With no income coming from the business, the retiree must now fund his lifestyle through the withdrawal of invested assets. Over time, these withdrawals will reduce the investible wealth, impacting the legacy that will be left to the next generation. But, with a universal life insurance plan, the retiree can access the cash value to fund their day-to-day living expenses, while securing a death benefit to be paid upon his death.
Tips for estate planning
Just as there are no two HNWIs with the exact same path to wealth, there is no one-size-fits-all approach to estate planning. It's important to take your own unique circumstances into consideration, as well as the needs of your family.
Here are some tips to help you focus your thinking:
Needs of your family
What kind of future do you envisage for your loved ones? What support will you provide to keep them financially secure? Depending on the age of your children, your legacy may be used to fund their higher education, help them establish a home for their own family, or to provide care to other elderly family members.
Needs of your business
For business owners, the journey of legacy planning encompasses not just personal wealth but also the future of any enterprises established during life. Tailoring your estate plan to meet the needs of your business, as well as your legacy, may extend beyond standard wealth management strategies. Consider how the business will function after you are gone. Is there a natural heir or will the business be sold to another party? How much of your wealth is tied up within the business? Can you provide an alternative source of income for your children if they were not to inherit the business?
Needs of others
Are there any other people, organisations or causes that you believe strongly in? Increasingly, HNWIs are choosing to leave a portion of their wealth to those outside the immediate family. This may include education, arts and culture, and environmental causes, among many others. In this way, their legacy represents more than just familial wealth, but can work to help others on the path to prosperity.
Needs in retirement
Although not strictly part of a traditional estate plan, it is still worth visualising your own needs in retirement. Whether you are a salaried employee or self-employed business owner, when you retire from the workforce you will still need a source of income. Determining how much you are able to leave to others is predicated on how much you have acquired during your life. Therefore, it’s important to consider how much of your acquired wealth will be required to fund your retirement plans. Perhaps you want to gift your wealth to your loved ones before you pass, so you can see them enjoy it. Or maybe you want to use your wealth to acquire physical assets (such as real estate) which you can then bequeath to family so they have a secure roof over their heads.
Seeking expert advice
Engaging with a skilled financial consultant can provide invaluable insights into crafting a comprehensive legacy financial planning strategy that simplifies the process of wealth transfer. Moreover, open and transparent communication with family members about the intentions behind the distribution strategy can significantly reduce misunderstandings and foster an environment of trust and respect. Incorporating cultural considerations and family dynamics into the planning process further personalises the approach, ensuring that the legacy plan resonates with the family’s values and expectations, reinforcing the bonds that tie the family together through generations.
Remember, a successful estate plan is an ongoing project. By understanding your goals, choosing the right insurance tools, and seeking expert guidance, you can build a robust and adaptable fortress that protects your legacy and secures your loved ones future.
Footnotes:
2. https://taxsummaries.pwc.com/quick-charts/inheritance-and-gift-tax-rates
4. https://singaporelegaladvice.com/law-articles/estate-planning-in-singapore-tools
Product footnotes:
6. Allowed two years after the date we issue the policy to you. We will decide whether to accept the new life insured and it will depend on whether we can insure this new life insured and on other terms and conditions we may decide. The policy charges will be based on the new life insured’s age, gender, country of residence, underwriting class and any other ratings. For more details, please see the policy contract.
Important Notes
Signature Indexed Universal Life Select (II), Signature Income Series, Heirloom (VII) are underwritten by Manulife (Singapore) Pte. Ltd. (Reg. No. 198002116D). This advertisement has not been reviewed by the Monetary Authority of Singapore. Buying a life insurance policy is a long-term commitment. There may be high costs involved if you terminate the policy early, and your policy's surrender value (if any) may be zero or less than the total premiums paid.
This article is for your information only and does not consider your specific investment objectives, financial situation or needs. It is not a contract of insurance and is not intended as an offer or recommendation to purchase the plan. You can find the full terms and conditions, details, and exclusions for the mentioned insurance product(s) in the policy contract.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact us or visit the LIA or SDIC websites (www.lia.org.sg or www.sdic.org.sg).
We recommend that you seek advice from a Manulife Financial Consultant or our Appointed Distributors before making a commitment to purchase a policy.
Information is correct as at 07 Aug 2024
Thank you for contacting Manulife Singapore!
Our Financial Consultant will be in touch with you soon.
Here are some links you might find useful.
