despite their neglect by many associated with guiding wealth owners through the asset-protection and succession process.
International taxation was the primary focus of my career, and clearly tax issues are relevant to most families considering the succession process and the protection of their wealth. Tax laws are ever-changing, and in too many countries unfair approaches to taxation are part of the political risk, making the navigation of the tax world a critical thing for any wealth owner. My view, however, is that all too often tax is a distraction in the succession-planning process. An over-focus on tax minimization leads to the neglect of what may be more important issues to the family. Where the wealth owner does not fully understand the tax planning being implemented, dangerous losses of control and other consequences result. All too often it is the tax advisor, obsessed with taxation and ill-equipped to address other areas, who handles succession planning for a family. The inevitable result is an insufficient focus on the many other needs of the family.
This book addresses the fast-changing global tax landscape, and my hope is to equip wealth-owning families with the information they need to understand the advice they receive, and to permit them to ask the right questions. But it is important to understand that tax is only one of the many needs families have, and this book also focuses on some of their other needs, ranging from protecting assets from political risk to dealing with second (and subsequent) marriages, divorce, and the many other challenges to wealth and family harmony that lurk around the corner. All wealth owners have needs, but many of these needs are latent – needs the wealth owner has but does not know he has. And if the need is latent, and the right questions are not asked, the succession and asset-protection plan may fail a family that neglected to address a need that only comes to the surface when it is too late.
Some of the needs of wealth owners are shared by all wealth owners, while others are needs particular to a family. Yet other needs are driven by the laws and circumstances of the countries to which the family is connected by residence, citizenship, or investment. Growing tax transparency, technology, and other developments are challenging the human right to privacy – and making the maintenance of privacy a key need of families globally. But is it politically correct to champion privacy in a world of growing wealth inequality? Or is privacy a real need in a world where dangers to those with wealth are increasing? The issue of inequality of wealth is a growing topic politically and otherwise around the world. What does this mean for the wealth owner, and are there risks of increasing taxes, overnight capital levies, and other means of wealth redistribution that may arise? Can a wealth owner protect their family against populist governments that may have other than the genuine best interests of society in mind? Has the abuse of secrecy laws in Panama, Switzerland, the British Virgin Islands, Singapore, and elsewhere created an environment where governments will over-react, against the interests of not only wealth owners but also their own economies?
How does the wealth owner address their needs? This is done using the help of advisors – lawyers, accountants, private bankers, trustees, and others. Advisors who, in turn, use the “tools” of wealth planning to address the needs of their clients. The “toolbox” is a big one, containing trusts, foundations, onshore, “midshore,” and offshore companies, partnerships, insurance strategies, and many more structures and approaches that can be mixed and matched and adapted to meet changing circumstances. It is these too that the wealth owner and their family need to understand to be able to ask the right “what-ifs” and to make sure that the succession plan will do its job in addressing the holistic needs of the family. What is a trust, and how does it work? What are the right checks and balances to protect the interests of the family for the long term? Not every trust or foundation is the same – there are huge differences from one to the other, given how they are set up and maintained, and because of who is involved. This book discusses the various ways the tools of wealth planning can be used, and also how they are all too often misused.
Relevant to the use of wealth-planning tools and how they work is an understanding of the business of wealth management. Private banks, insurance companies, trust companies, lawyers, accountants, family governance advisors, asset managers, and many others participate in the process. Advice and help for many families is a real need, but it is key to understand the conflicts of interest that inevitably exist, and how those advising families should best be managed by the families consuming their services. Here, I try to shed light on an opaque industry, hopefully helping families to ask the right questions and make the right choices.
At the end of this book is a short glossary, designed to help readers in their understanding of some of the terms that are used in dealing with the succession and planning approaches taken – trusts and foundations, the role of the settlor or protector, retrocessions (a nice word for the kickbacks an asset manager may get for introducing an unwitting client to an investment), and so on. Hopefully the glossary will provide some help in allowing the owner of wealth to ask the right questions and to demystify the succession process.
Finally, a bit more on the soft issues. When should the older generation discuss succession with the younger generation? Should the details of assets be provided, and if so when? Should in-laws be involved in family retreats that are organized to allow the older generation to communicate matters relevant to succession to the family? Will wealth destroy the dreams of the younger generation, or are there ways to avoid this happening? Are there ways to avoid wealth coming in the way of family relationships, or is it normal for a parent to encourage their child to call their elderly aunt on her birthday because if you don't, your cousin will get her money when she dies? As wealth owners age, is there a risk of their becoming paranoid about staff and family members stealing, and are they afraid that if they give up their wealth their family will no longer visit? Do failing memories put assets at risk? Are the grandchildren only spending time with their grandmother for fear that if they don't, their cousins will, and that they will be disadvantaged in an inheritance? At what age should the younger generation come into wealth, and how do the decisions their parents and grandparents make affect their life? Is it fair for a grandparent to spoil a grandchild with money, destroying a parent's attempt to help their children lead a fulfilled life?
There are no right and wrong answers here, but what is clear is that the soft issues count. The families that get it wrong in dealing with the many issues that come up are the families that allow wealth to destroy relationships and enrich the lawyers who make a living from disputes among the younger generation.
Is it possible for a family to get it right?
Chapter 1
Any Amount of Wealth is Enough to Destroy a Family
The Chadha Brothers – Could Thoughtful Succession Planning Have Avoided Their Deaths?
In November 2012, two brothers, Ponty and Hardeep Chadha, were shot and killed in a fierce gun battle at one of their family farmhouses in Chhatarpur, Delhi, in the Indian countryside. Kulwant Chadha, Ponty and Hardeep's father, had recently died without having left much clarity regarding how significant family business and personal assets were to pass to the next generation.
Accompanied by their bodyguards, Ponty and Hardeep were arguing over their inheritance and a settlement that had been brokered by their mother. The brothers were obsessed about a particular family farmhouse that their father had left to Hardeep. Ponty, the eldest son, had contributed hugely to the family business and believed he deserved the property. Hardeep felt that he had not only been bequeathed the farmhouse by his father, but that the overall deal on his father's estate brokered by his mother gave him too little.
For a family reported to have assets worth more than US$10 billion, it would be hard to imagine that Ponty and Hardeep's father had ever dreamed that his sons would die in a gun battle over an asset of relatively irrelevant value.
Jessica Schrader – Do We Need to Do Our Planning Much Earlier?
Jessica Schrader made a will in 1990 leaving her home, Southend Farm House in Essex, England, to her two sons. At her death at the age of 98, the house was worth just under US$500,000. Two years before Jessica died, at age 96, she made a new will leaving the house entirely to her older son, Nick.
A court dispute between the brothers resulted. With legal fees of close to US$170,000, Nick lost the battle, with the court reinstating Jessica Schrader's earlier