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16.12.2020

Wealth planning: a risk perspective

As a wealth owner, you face many threats and challenges. To grow, preserve, protect, and smoothly transfer your wealth, you will need to develop a strategy, orchestrate wealth planning experts and tools and stick to your long-term plan. While building wealth is already a challenge, preserving and protecting wealth require champions league levels of wealth planning discipline. Your needs and goals are fundamental to your individual wealth planning strategy, but you should also view things from a risk perspective and think in scenarios that may jeopardize your wealth. In today's post, we will touch on some of them and elaborate on how you can best protect your fortune.

Litigation

Entrepreneurs and professionals are typically exposed to liability risks in their business and professional life. Although corporate structures and insurance coverage may limit exposure, there are many scenarios where creditors may want to go beyond them to satisfy their claims. Malpractice and directors and officers liability litigation has become mainstream, and it is a common strategy to go after business owners or executives in corporate liquidation and bankruptcy proceedings. Court orders may freeze your assets until a final dispute decision has been reached, even with insurance coverage.

If the above strikes a chord, you should evaluate your legal system's asset protection options. A modern economic and legal environment acknowledges the risks wealth owners face and safeguards their family members' financial interests in bankruptcy and third-party enforcement proceedings. Life insurance policies and asset protection vehicles such as trusts and foundations are legitimate tools to provide for your loved ones' financial security and protect family assets from third-party claims. However, the effectiveness of such tools is restricted. In basic terms, you need to give up control over the assets, there are no pending or contingent claims at the time of settling, and you have to remain solvent. Let us get this straight: only an irreversible legal separation from your assets for the benefit of your family will protect such assets from future claims.

Asset protection does not have the best reputation since abuse cases to hide assets are a reality and often reported in the media. That's only one reason we believe in simple wealth planning and asset protection tools such as life insurance policies that are understood globally. Keeping things simple is an excellent way to legally future-proof wealth and most helpful if your reputation becomes at risk. We also recommend considering asset protection for future generations. Keeping a part of family wealth reserved for your next generation's children is often overlooked but an effective way to preserve wealth over generations. Again simplicity will lead to the best results.     

Family litigation

Sometimes litigation arises within the family itself. The reasons are many, and before assessing the legal aspects, you should perform the groundwork and define your family's values, purpose, and governance together with the family members. In our experience, robust values-based governance with open and transparent communication is the most effective tool to prevent litigation and protect family wealth. Family dynamics are a human process, and you cannot focus enough on the human element in wealth planning and correlated risk management. Conversations about wealth preservation and asset protection may be challenging, but, at the same time, crucial to anticipate potential risks. If you have been busy making money during your life and career, you can start the risk assessment with yourself and your closest relationships.

What's the legal take on this? Divorce is a most common threat to family wealth, and a prenuptial or postnuptial agreement may be an option to consider. It's essential to understand which laws are applicable and which courts potentially have jurisdiction over a divorce. This may sound trivial, but with a global lifestyle and international assets, you run the forum shopping risk. Your spouse may try to bring you in front of the most favorable judges to rule over a claim. Even if you created the family wealth and have asset protection tools in place, such a court might not uphold the expected wealth protection. Even if you are not married, the break-up of a relationship in some countries may still have financial consequences. Suppose the financial part cannot be managed upfront. In that case, you may want to consider any other non-financial element of a marriage or relationship that can be amicably clarified if things get wrong. Again, each jurisdiction has different rules, and you will need specialist advice for your situation. With clear agreements and expectations set out, storms will be more comfortable to navigate for all involved parties.

The next step is to plan for the relationships of successive generations. A family may develop principles for relationships and the associated agreements as part of their governance framework. These demanding conversations should happen early. In particular, for a family business, succession planning needs to consider the next generation's partners' rights and entitlement. You may consider transferring a family business to a trust or foundation rather than directly to the next generation if there are signs of risks that cannot be limited. There are many other scenarios such as second marriages, children who may not be happy with your last will, a conflict between family members, and many more that may put the family wealth at risk. You cannot plan for all of them. You can still start somewhere and let the conversation evolve into an ongoing process to strengthen risk management with wealth structuring and family governance. Wealth protection awareness within the family contributes to results and starts with the conversation about expectations and risks.

Political risks

International wealth owners are affected by political risks at different levels. It can arise from citizenship or residence, the location of investments, and the jurisdiction of wealth planning vehicles. Political populism and multipolar perceptions of wealth owners are not exclusively reserved for emerging countries. In its current Rule of Law Report, the European Commission identified significant challenges regarding judicial independence and corruption prevention in some member states. Such a combination can be a substantial risk for wealth owners who are not part of a governments' political camp and may lead to relocating family businesses and wealth or even the family itself.

Even if you live in a safe and stable country, the hunt for yields and the trend towards direct investments may expose your foreign investments to political risks. Most OECD countries and many non-OECD countries provide investment guarantees and have entered into bilateral investment protection agreements to prevent non-commercial risks. Still, depending on where you invest, political risk insurance may be an option to consider in light of potential war damages, currency inconvertibility, or remittance restrictions.

Finally, wealth planning and holding vehicles should be assessed through the same lens. Diversification is vital to manage political risk exposure. A balanced mix of wealth planning tools and jurisdictions may also be beneficial to hedge your wealth against other risks we discuss in this post.

Cybersecurity risk

Your wealth plan should include cybersecurity risks. According to the 2019 UBS Global Family Office Report, 20% of the global family offices suffered a cyber attack. You don't need to own a family office to be exposed to phishing, malware, social engineering, or ransomware. Your wealth may attract cybercriminals irrespective of the organizational setup, and extorsion or fraud can put it at severe risk.

The first step in wealth planning and risk management is awareness. A professional audit will reveal potential targets and is not limited to technology but should include assets and behaviors in light of potential cyber-enabled physical threats to your wealth. If you share your life on social media, that's an ideal source for criminals to gather information about your homes, vehicles, and other valuables. With a classification of digital assets and sensitive data according to their importance, specialists can evaluate a back-up and recovery solution. The next step is preparedness due to a technical protection system, incident management plans, and user education and awareness throughout the family. Lastly, ongoing monitoring ensures the resilience of the framework and identifies new or emerging threats. Although not a mainstream product, personal cyber insurance, including specialist assistance coverage, can complete a robust defense framework.   

To sum up

You cannot control every potential risk in wealth planning, but you can prepare for many events by considering them in defining and implementing your strategy. Some topics are uncomfortable, and other risks may currently seem far away. However, we have come across all of the above and many more we plan to cover in future posts. We want to stress that when it comes to asset protection, simplification is often the solution. Start with what's most apparent to you and the people surrounding you. An initial assessment leads to understanding and a decision basis for further analyses. Where needed, get specialist advice to define risk mitigation measures and communicate outcomes with your family to raise awareness and ensure resilience. Finally, regular reviews and stress testing ensure that your wealth plan protects and preserves wealth over generations.

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