Succession planning. It is often a topic that is little discussed or ignored by many, as it can result in some difficult conversations. However, for families with inter-generational wealth and entrepreneurs looking to preserve wealth, it is vital to know what the options are and the pitfalls to avoid.
There are a variety of different ways to approach succession planning, all very much dependent on a family or individuals’ circumstances, including time horizons and what they are looking to achieve.
For many years, families and individuals have used investments at Lloyd’s of London, the world’s leading insurance market, as a way of passing on wealth through generations. Investors at Lloyd’s of London pledge their capital to a pool of around 90 specialist insurance syndicates, all of whom underwrite a variety of different risks across the globe. In good years, premiums exceed pay-outs and investors profit, while in bad years, pay-outs exceed premiums, and a limited loss is incurred.
Robert Flach, managing director of Argenta Private Capital (APCL), an adviser to investors in the Lloyd’s insurance market, says the structure of these investments makes them extremely well-suited to being passed through different generations.
Flach said that “Lloyd’s tends to operate on long-term investment horizons, and the way that we set up investment vehicles is with the expectation that they will form part of a wider estate and be passed through generations.”
Over the past 15 years, investors have enjoyed an average 10%* rate of return on capital, and that’s not including the income and capital gains earned from the double use of assets that an investment in Lloyd’s allows.
The low-correlation of Lloyd’s investment returns compared to traditional asset classes such as equity and bonds makes it an extremely attractive tool for wealth managers looking to create long-term balanced strategies that will bridge the generations. There is also a tax advantage.
“From a UK perspective, vehicles usually qualify for Business Relief, which provides 100 per cent relief for the value of the assets for Inheritance Tax purposes, which provides further benefits from a succession planning perspective.”
People with substantial wealth should be doing the planning when they generate the wealth, not when they start thinking about death.
It is not unheard of for some Lloyd’s vehicles to be passed down through “three or four generations,” according to Flach, who says APCL has clients who have done just this.
Andrew Palmer, partner at LGT Wealth Management says whatever tools and investment opportunities people choose, time is essential.
“There are so many opportunities to start planning earlier. People with substantial wealth should be doing the planning when they generate the wealth, not when they start thinking about death,” says Palmer.
William Stevens, head of financial planning at Killik & Co, agrees, saying that the longer you leave it “the bigger the implications might be of getting something wrong.”
Stevens also believes that making sure families are aligned on what to expect from the process is crucial “so there aren’t any surprises later on with people not getting what they expected to.”
One of the simplest ways to pass wealth through the generations, Palmer argues, is through gifting amounts and passing surplus income down so it is immediately outside of your inheritance tax estate.
This exemption allows you to give away any sum of money free of inheritance tax, providing the money comes from a source of surplus income, such as your salary, pension or dividends. It must also be a regular payment, rather than a one-off sum, and the payments must not reduce your standard of living.
“I've got examples of clients who have given millions of pounds to their children through surplus income,” says Palmer. “That is one of the most powerful inter-generational gift mechanisms you can have, but you must be able to demonstrate that you do it all the time and it is not just a one off.”
Another consideration for anyone evaluating their succession planning is deciding on a general trade-off between how much to give away against what they need to live comfortably. Shaun Robson, head of wealth planning at Killik & Co, says that one of the biggest mistakes that individuals can make is “giving away too much of their asset base and not ensuring they have sufficient income, capital and assets for the rest of their lifetimes.”
This is a point that Flach also takes up, adding that a Lloyd’s portfolio provides a degree of flexibility as it can be passed through the generations tax free after two years, or sold if circumstances change and assets need to be returned to the individual.
The conversation around succession planning is very important and has a multitude of different angles to it. There are several options and opportunities for individuals to consider, and what is clear is that the more open the conversations you have with successors and advisors, the better the outcome.