Asset classes that require specific attention in your estate planning

Estate planning is complicated enough. However, it gets even more demanding for asset classes such as alternative investments.

Ultra-high-net-worth individuals (UHNWI) and their family offices have exceptionally high allocations to alternative investments.

Their popularity stems from exciting return opportunities, entrepreneurial investing, wealth owners' passion for specific asset classes, and promising industries.

While this requires specific dedication from an investment management perspective, estate planning challenges for alternative investments are often overlooked.

In particular, liquidity constraints may impact the transfer of assets. Furthermore, questions of shared ownership and tax issues may arise.

This post will guide you through the most prominent alternative asset classes and cover the correlated estate planning issues.

Without proper estate planning, family members might not receive what they deserve or what you'd hoped for after you're gone.

Read on to learn more about tackling estate planning for alternative investments.

Estate planning for digital assets

According to the BNY Mellon Wealth Management White Paper Shifting Horizons: Insights Into How Family Offices Are Responding to Rapid Economic & Social Change, over two-thirds of family offices actively invest in cryptocurrency and are likely to increase their holdings soon.

Although most invest through public markets, exchange-traded funds (ETFs), and trade exchanges, around 40% directly own cryptocurrencies in cold wallet storage.

Cryptocurrencies and Non-Fungible Tokens (NFTs)

Cryptocurrencies are tokens used or intended as a means of payment to purchase goods or services or are designed to serve the transfer of money and value.

To carry out transactions on the blockchain, an individual digital key pair comprises a public and private key.

These keys enable access to the token and execution of transfers.

If the private key is lost, you risk a definitive loss of access to the token. Tokens, or their keys, are held in digital wallets.

While cryptocurrencies are fungible tokens identical to each other, NFTs are unique.

Token custody options

With a custodial wallet, token owners rely on a third party, such as a broker or bank, to hold the tokens.

Like in a traditional custody relationship, the token owners will need a third party for transactions but keep the right to receive the keys or the tokens.

Since the blockchain is a decentralized peer-to-peer network, many token owners keep their assets in their wallets without the services of any intermediary.

These non-custodial wallets are software (hot wallets) or hardware wallets (cold wallets) to store the keys, and token owners effectively become their own banks.

As mentioned above, around 40% of ultra-high net worth individuals working with a family office hold their tokens in cold wallets.

They must ensure that their successors can access their private keys or seed phrases for wealth succession.

Wealth owners in testamentary dispositions (gift of property under the terms of a will) should precisely describe where and how they store their digital assets and how the beneficiaries can access them.

However, private keys and passwords should never be included directly in a testamentary disposition, as several people may access such information in probate procedures.

A secure solution is the storage of private keys and passwords in a notebook in a safe deposit box.

The industry is responding to the needs of wealth owners with several digital asset storage solutions, including private key management.

Working with a financial intermediary may provide peace of mind and ensure a smooth wealth transition if you are concerned about what will happen to your crypto assets after your lifetime.

Another option is to structure and hold digital wealth under a trust or foundation where a professional service provider takes care of the administration.

Estate planning for art and collectibles

Art is associated with beauty and joy and its aesthetic value. Often, it is also a solid investment.

The Art Basel and UBS Global Art Market Report 2022 finds that global collectors have a relatively high proportion of their overall portfolios of wealth invested in art, with 64% of art collectors reporting an allocation of over 10%. In addition, 27% of collectors allocate around 30% of their wealth portfolios to art.

Gen Z collectors have the highest average share of wealth dedicated to art, with over a third having an allocation of over 30%.

The age and lifecycle stage of Gen Z collectors shows the significant position that art holds at an early stage in the wealth portfolios of some young collectors.

Documentation is key

Comprehensive documentation is essential for any art collection. It includes the catalog, provenance documentation and bills of sale, certification of authenticity, condition reports, appraisals, and insurance documents.

Structuring art and collectibles

You can curate your collection and structure it in a specific vehicle, such as a trust or foundation. It should hold sufficient liquidity for maintenance, management, and coverage of tax bills.

Retaining a professional manager during your lifetime ensures the ongoing management of your art collection.

Involving your family 

A core question in estate planning is whether your heirs have the same feelings towards the particular item as you have? You will only find out if you discuss the topic with them.

Our evergreen advice for estate planning is to involve your family in the process as early as possible.

How will division happen? This will be straightforward if your art collection is structured in a specific vehicle, such as a company or trust. In all other cases, obtain clarity on division and the respective procedures.

Other estate planning options

Selling your collection should be done during your lifetime to ensure that the right price can be obtained. Otherwise, auctions out of a need may result in lower prices.

Placing a mandate to sell off-market takes time and must be coordinated early enough.

Planning must start well in advance if you wish to donate your art collection to a third party.

Museums are selective and have strict policies regarding donations since your collection may, for instance, exceed their budget for insurance coverage.

Donating art with a disposition upon death, such as a will, even with the best intentions, may lead to unexpected outcomes.

Specific appraisals may be required for tax purposes, and it would be best if you get clarity about exemptions and conditions for favorable tax treatment during your lifetime.

Another option is setting up a foundation and making your art collection available to the public.

The foundation could run its own museum depending on the value and importance of the collection or collaborate with another museum.

In both cases, planning must start early enough and requires extensive communication with all involved parties.

Estate planning for real estate

Real estate remains a cornerstone of many UHNWI investment portfolios, accounting on average for 27% of the investable wealth, according to the Knight Frank Wealth Report 2022.

UHNWI real estate investors have tended to invest directly into bricks and mortar, but this is changing due to an increased financial product offering, with 20% planning to make indirect investments via the likes of funds and real estate investment trusts in 2022.

Indirect investments provide greater liquidity and similar returns over long-term periods to direct investments.

International scenarios

Real estate may trigger the so-called scission of an estate.

While usually, the country of your last residence is responsible for your entire estate, a foreign country may also claim jurisdiction over your estate due to real estate that you own in that country.

Such a foreign country may also apply its succession laws to real estate, and if you don't consider this in your estate planning, it may lead to a surprising and undesired outcome.

Next to legal issues, this could also trigger higher costs for foreign procedures.

Structuring real estate with a corporate vehicle may be necessary to avoid such scenarios.

With a corporate structure, the company's shares would be part of your entire estate and usually subject to your last residence's jurisdiction.

Avoiding property disputes

Leaving a property to several heirs may lead to disputes. We recommend that estate planning considers how properties will be divided among heirs and gets clarity on future ownership.

Depending on the individual situation, you could consider compensation payments during or after your lifetime to avoid co-ownership and correlated potential conflicts.

It would help if you asked whether the family should keep the property in all cases. If not, there is no need to transfer it, and your heirs may appreciate receiving liquidity after your lifetime.

Again, an open conversation within the family should enable clarity on the destiny of specific properties and avoid potential conflicts.

Structuring of real estate

Transferring real estate can be subject to lengthy and costly procedures, including additional exposure to eventual taxation. Owning your real estate portfolio via corporate vehicles may enable a smooth transfer at a lower tax cost.

You may also leverage low interest rates and consider transfers to benefit from specific tax exemptions during your lifetime.

If your estate plan is implemented with a trust, holding the shares in a company rather than directly owning real estate will facilitate future generations' straightforward administration.

Establishing trusts is an essential step in creating an effective estate plan. It allows you to preserve wealth for future generations while protecting your assets from creditors.

They usually further avoid probate procedures and transfer your wealth directly to beneficiaries.

Lifetime giving

Another efficient estate planning technique for real estate is to transfer bare ownership while keeping the usufruct during your lifetime. With that, you can avoid probate procedures and still maintain control over properties.

You keep the right to live in the properties and may rent them to third parties to generate income. In such a scenario, you still have to cover costs and taxes but may deduct them for tax purposes.

Estate planning for private equity and venture capital

Private equity invests in a company to make an acquisition or sell off parts of the business. In contrast, venture capital provides financing to a new business.

The issue with private equity and venture capital investment solutions for individual investors is that they are semi-liquid in the best case and require long holding periods.

According to the Goldman Sachs Widening the Aperture: Family Office Investment Insights report, family offices tend to implement aggressive asset allocation strategies where private equity currently accounts for 24% of investable assets.

This is even more so than UHNWIs, who already have a high allocation to alternative asset classes.

The industry is also becoming more accessible to individual investors. Furthermore, banks are offering feeder vehicles to invest in the asset class.

In particular, for private wealth owners, it's challenging to access investment funds due to ticket size and investor restrictions.

In addition, holding private equity and venture capital investments may lead to tight liquidity in wealth transfer scenarios.

The private banking and wealth management industry seems aware of the downsides of long lock-up periods for individual investors and developing new offerings with liquidity mechanisms.

Liquidity planning

As appealing as the asset class may be, estate planning for private equity and venture capital should focus on liquidity to cover eventual estate taxes and further costs. It would be best if you planned for liquidity early enough.

Also, for direct investment strategies, liquidity should be considered in light of potential transfers since exiting a direct investment may take long periods.

Structuring of private equity and venture capital

The above considerations for other asset classes regarding trusts, foundations, and corporations can help smoothly transfer private equity and venture capital investments.

In addition, diversification over fund strategies and vintages enables and prepares for exit scenarios if needed.

Life insurance policies offer the benefit of combining estate and liquidity planning. You'll achieve a set-up that enables a smooth transfer of assets and a flexible tool that provides access to liquidity when needed.

With life insurance with a death benefit in the range of the expected liquidity required, you can keep things simple and streamline the succession process. 

In particular, private placement life insurance is a flexible and popular vehicle to structure, protect, and transfer wealth. It's a mixed life insurance that combines death coverage with a saving and investment component.

It may even be possible to hold alternative investments under a private placement insurance policy, which opens additional estate planning opportunities.