application of trust and other tools for high net worth ...•to ensure certain assets, like family...

Application of Trust and Other Tools for High Net

Worth Client's Wealth Management

藉信託、財務計劃，開拓高端市場之路

Presented by W. Yee (2013)

Content

• Some Practical Tools

• Why “Trust”?

• Example of trust application

• Trust’s ABC

• The potential problems faced by HNW Clients for wealth management and transfer

• Is Professional Trustee a Must for All Trusts?

• Different Trust Structures for Special needs of HNW clients

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Some practical tools

• Gift

• Joint tenancy

• Insurance

• Wills

• Trust

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Comparison of tools 4


Life insurance policy

• Many want to leave a legacy and pass on a portion of their assets to their family, favorite charity or other non-profit organization.

• A simple strategy is to take a portion of your inefficient assets and repositions them into a life insurance policy that offers more attractive financial results, as well as providing a simple and sure way to immediately increase your estate.

• If you have assets such as cash or money markets, you can significantly increase your ultimate value with a Whole Life Policy.

• Obvious advantages include: – Immediate increase in your estate – Tax-deferred (if any) accumulation of money – Avoidance of market risk – Participating policy – pays dividends

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Role of Life Insurance

• By shifting a small portion of your current assets into a life insurance policy for your heirs you create freedom to utilize your remaining assets any way you’d like. You may invest it, spend it, play with it, or give it to charity – all without concern over the inheritance you’ll leave to your children and grandchildren.

• It divides your personal balance sheet into two categories: 1) An inheritance for Heirs; and 2) Assets you are free to utilize for your own purposes.

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Mr. Lee and Mrs. Lee 7


Flexibility of Universal Life

• Transparency: expenses and investment capital

• Ability to vary and skip premium

• Flexibility of death benefit

• Death benefit options (with or without accumulated cash value)

• Right to withdraw cash value


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“Free” Insurance?

• The mechanism is through borrowing money to pay insurance.

• The loan proceeds can be used to pay insurance premium. With insurance, you have dividends, cash accumulation, and a death benefit.

• May provide your heirs a “free” death benefits

• “Financial Insurance” is a growing trend with many multimillionaire families and businesses because these clients don’t want to write checks for tens or hundreds of thousands of dollars for life insurance premiums out of their own pockets.

Why “Trust”?

7 purposes of trust formation

Presented by W. Yee (2013) 10

Purpose 1

• to protect assets for family members - by transferring the ownership of some assets to a trust, a settlor may be able to undertake a higher risk occupation or venture knowing that those assets will not be put at risk;

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2

• to ensure certain assets, like family business, are transferred intact to the next generation;

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Analysis 13


3

• to make sure some assets are retained for other family members when one or more members need rest home or hospital care;

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• to protect family members or a family business from possible relationship property or family protection (contesting a will) claims;

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• to manage the assets of someone who is unable to manage their own affairs, perhaps through age;

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• to assist with estate administration and cost savings by transferring assets to a trust before death;

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• to change tax liability. More or less tax may be payable. Tax liability should be reviewed regularly.

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Examples of Trust Application


Will Trust - Examples 20


Living Trust

• These trusts may be created during life or by will.

• Under the living trust arrangement, an individual transfers property to the trust and specifies in writing how the trust income and ultimately the property itself are to be distributed.

• The distinguishing characteristic of a charitable remainder trust, as the name implies, is that a charitable organization eventually receives the trust property.

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Trust’s ABC


Legal implication

Legal requirement of a trust

1. legally valid： the purposes and objects are for charity

2. Simple and ease of understanding： ensure cost effectiveness without worries about court proceedings.

3. Initial cost and asset requirement should be fulfilled.

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Mechanism – 3 parties

• The settlor: The person (or people) who makes the initial transfer of property, which may be as little as $1, to the trustees of the trust.

• The trustees: One of the matters to look at when choosing trustees is how the trust is to be managed. Will the settlor do this or will a professional trustee have a continuing involvement with the management and account keeping? Unless the trust deed provides otherwise, the trustees have a duty to act prudently in the management of the assets subject to the trust.

• The beneficiaries: People for whose benefit the trust has been established. They can be either named individuals or a class, such as "children" or "grandchildren". There are generally two types of beneficiary - (A) discretionary beneficiaries and (B) final or ultimate beneficiaries.

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Beneficiary Designation

(A) Discretionary beneficiaries have a right to be considered by the trustees for payments from the trust property but they do not have an automatic right to receive payments from the trust. Followings are examples:

– the settlor’s spouse, children, grandchildren, parents, brothers and sisters,

– any spouses of the children and grandchildren,

– any future spouse of the settlor,

– the settlor’s any charity.

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Beneficiary Designation

(B) Final or ultimate beneficiaries have a legal right to the trust property on the date the trust finishes. They are often named and are often the settlor’s children with provision for grandchildren if a child dies before the trust finishes.

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The Potential Problems faced by

HNW Clients for Wealth Management

and Transfer


Pitfalls in wealth transfer planning

Common pitfalls - often come to the surface with a transfer of wealth:

1. Possibility of capital loss because of downturns in the market. 2. taxes and fees will take too big a bite out of an estate 3. bequests will not remain private, 4. delays will hold up estate distributions, and 5. certain beneficiaries might squander their inheritance.

• These are very real concerns. The good news is that they can

often be addressed through proper estate and financial planning.

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(Source: Bernstein Wealth Management Research)


29 Presented by W. Yee (2013)

Define core and excess capital is the first step



Things to avoid when planning your estate

• Have You Reviewed Your Insurance Portfolio? Is Your Life Insurance Out-Dated?

• So what are the challenges that different families face?

• Governance and education

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For business owner

• Business owners feel their goals will be met, whether those goals include a positive cash flow that will support them in their next phase or a continuation of their legacy.

• You need an impartial review of all of your business and personal matters, including: – Corporate documents and business plans – philosophical considerations – coordination of estate planning documents

with the business succession plan – Real estate holdings – life insurance and liquidity needs

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Sound Business Insurance Planning

• This type of key man insurance and buy sell agreements in business insurance planning results is a responsible way to protect the interests of the family members of each business partner, as well as the best interest of the company and all surviving partners.

• Various factors should be considered when determining the dollar value of coverage to include in your business insurance planning efforts, including the cost of coverage, the financial impact of losing a partner, and the costs associated with enacting the terms of your company's buy sell agreement.

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Buy-Sell Agreements

• A buy-sell agreement is a legally binding document that stipulates what will happen to a business when a business owner or partner becomes disabled, dies, retires or decides to sell his or her interest in the company.

• Buy-sell planning is an extremely important part of long term business continuation planning. The common types of buy-sell plans include the entity plan and the cross purchase buy-sell agreement.

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How a Buy-sell agreement work?


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Entity Plan

• An agreement between the company (Entity) and the business owners or partners whereby the owners agree to sell their ownership interest back to the company if they become disabled or wish to retire.

• If there is a death of an owner, the owner’s estate is required to sell the deceased owner’s interest back to the company.

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Advantages of Entity Plans

• A properly drafted entity buy-sell agreement that is funded with life insurance will have the following advantages:

1. Creates a binding plan for the efficient transition of a business interest in the event of an unforeseen death.

2. Easy to implement and cost effective. 3. Creates an instant market for the business at a pre-arranged fair market

value. 4. Policy cash values can be listed as an asset on the company’s balance

sheet. Cash values may be accessed by the company for other business uses.

5. Only one life insurance policy is required for each business owner. 6. Business owners are not responsible for premium payments. 7. Provides liquidity for the deceased owner’s estate.

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Disadvantages

The disadvantages of entity buy-sell agreements include:

1. There is no step-up in basis. If a business owner dies, each owner’s business interest increases but their basis remains the same.

2. Policy cash values are subject to the creditors of the business.

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Business owner

• The HNWI of today knows that secrecy is not a plan • The traditional family business owner is often described as an

investor with an unhealthy focus on a single asset; they invest far too heavily in a single stock, fail to diversify by continually reinvesting the profits (for future growth, of course) and rarely have a profit target (exit strategy).

• Though on the face of it this may sound unflattering, it also shows how much of the first generation wealth has been created in Asia; identify a market that is being under-served, find a niche where you can add value, keep building expertise and capacity and finally, when you own that niche, hand over to the next generation for them to continue. It is a simple strategy that has worked well and will continue to do so, especially if the next generation is equally driven, focused and capable.

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Business owner

• The traditional wealth accumulation model required assets to be generating as high a return as possible, often through judicious use of leverage. Not a single dollar is allowed to sit idle. Profits from business, to the extent it was not immediately returned to the business to fund growth, tended to end up in real estate for the lure of regular income from rentals.

• And so the generations passed, growing the family business year after year, while steadily increasing the real estate portfolio. Eventually, the family would reach HNWI status and be on the receiving end of much good advice regarding investment opportunities, frequently funded by loans, as the profits from the business were returned to the business and the real estate rentals were not always enough to fund a large-scale, diversified portfolio.

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Wealth Management Problems

• With the volatile markets of recent years, now is a good time for anyone to revisit their portfolio and make adjustments as needed to stay on track with their goals.

• But those who are nearing—or already in—retirement have some unique challenges and opportunities that make a portfolio review even more critical.

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Problems

• That is why a thorough portfolio review is so critical. The review needs to take into account not only what you have now and how it is invested, but also what you are going to need in the future. Unfortunately, in the current economic environment, determining how much you need can be a challenge. There are a wide variety of factors to consider when analyzing portfolio longevity, such as:

– inflation (especially healthcare costs)

– tax effects on your portfolio and potential tax law changes

– market volatility

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What you have now?

• The first step in a portfolio review is to inventory all the assets you have available to fund your retirement years and wealth-transfer goals.

• There are many ways to think about your assets, but one helpful strategy is to look at them based on income-tax treatment.

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Factors Affecting Your Portfolio’s Longevity

• Once you have defined what you have, you should consider the factors that will have an impact on how long your assets will last during the decumulation phase—the period during which you are living off your retirement plan assets and other investments rather than earning income and building these resources.

• Three major factors to consider are inflation, taxes, and market volatility.

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Inflation

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Market volatility

• During the accumulation stage, as you are saving and investing for retirement, you are less dependent on each year’s return on your investments as long as the long-term average of these returns is positive.

• In other words, there may be periods of positive returns and periods of negative returns, but if they average out to a positive long-term return, you benefit from the long-term compounding effect of your savings and have the potential to increase the size of your portfolio.

• However, during the retirement, or decumulation, phase (when you begin to withdraw assets from your retirement portfolio to create income), the magnitude of those negative returns—as well as when they occur—significantly affects your overall plan.

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Return volatility

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What You Need: Identifying Core Assets vs. Surplus Assets

• How do you determine if, given the various factors that will affect your portfolio’s longevity, you have what you need to fund both your retirement and wealth-transfer goals? You can distinguish your core assets from surplus assets. You can better determine how much you may need to ensure a greater probability that you will be able to maintain your desired level of income during retirement and achieve your wealth-transfer goals as well.

• These may include basics such as housing and medical care coverage, as well as other expenses that will help you maintain the lifestyle you desire, such as travel and entertainment. Other inputs include sources of risk and your personal risk tolerance. The goal is to make sure your resources outlive you. So constructing a fundamentally sound portfolio that neither overestimates returns nor underestimates lifespan is likewise critical.

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Insufficiency?

• If your retirement resources are insufficient to meet your desired lifestyle or your wealth-transfer goals, it may be necessary to consider the following:

– increasing pre-retirement savings

– retirement date adjustment

– reducing retirement spending plans

– adjustments to the portfolio allocation, including enhancing liquidity where possible

– part-time employment during retirement

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Is Professional Trustee a Must for All

Trusts?


Professional Trustee

• The trustee provides all the services required for the establishment and ongoing management of your Trust. They will:

• Identify your objectives and analyze your needs and concern;

• Recommend the suitable type of Trust;

• Prepare all the necessary documents;

• Assist in the preparation of the Letter/Memorandum of Wishes;

• Arrange for the transfer of assets into the Trust;

• Provide full day-to-day ad-ministration of the Trust;

• Arrange the distribution of assets according to the Trust Deed.

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Professional Trustee

• They can also advise on individual and corporate financial planning, auditing, corporate finance and consulting practices to offer “one-stop” premium services that address all your personal and business needs.

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Different Trust Structures for Special

Needs of HNW Clients


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Protective trusts

• These are trusts set up to prevent a beneficiary disposing of all or any of his beneficial interests so long as the trust subsists.

• Such trusts are designed to ensure that, for example, a spendthrift beneficiary does not dissipate the trust fund.


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Secret trusts

• A secret trust usually arises under a will and is intended to enable provision to be made for an object or purpose without this being revealed on the face of the will. Such trusts divide into fully secret and half secret trusts. The former appear as an absolute gift on the face of the will and the beneficiary under the will is informed of the trust outside the will.

• The latter appear as a trust on the face of the will but the details of the trusts are revealed outside the will, for example, ‘$100,000 to X upon trust for the purposes I have communicated to him’


Q & A


Thank You


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