Many families have built up significant wealth over their lifetimes, but this wealth can be “locked up” in several forms; for example, in the value of a business, properties owned, valuables collected or other investments. To enable a smooth transition of wealth, wealth planning strategies should prioritise the creation of liquidity in a way that provides the flexibility families need over time.
The true value of wealth comes from what it enables people to do. From funding education and business opportunities to helping future generations live with security, being able to utilise wealth effectively is an essential part of financial freedom. This can be difficult if the wealth of a family is tied up in illiquid assets, whether in the value of businesses, properties owned, valuables collected or other investments. This lack of flexibility becomes even more of a challenge when a benefactor passes away and leaves behind dependents that require support, tax and other liabilities that need to be covered, and an estate that must be shared out.
Wealth management tools that unlock liquidity are not only the key to ensuring seamless wealth transfers; they can also strengthen a family’s ability to access liquidity before a benefactor’s departure to enable financial freedom and self-determination throughout a lifetime.
As Swiss Life Global’s Head of Sales & Strategic Key Partner Management Veronique Simonin says: “High-net-worth entrepreneurs have different needs when planning the future, their own and that of their family, as well as of their business.” Doing this effectively often requires creating liquidity to manage tax liabilities, enable estate equalisation and position a business for the next stage of its development.
The effects of illiquidity
Wealthy families often accumulate a range of assets over time, such as real estate, houses and holiday homes, businesses, art collections, and other items like thoroughbred animals. The value of these assets can fluctuate significantly, along with their liquidity, making the estates of the ultra-wealthy particularly complex.
Gaining an accurate valuation of some of these items can also be difficult, and valuations must be updated frequently to gain a full view of the estate at any given time. This can cause problems when it’s time to share out an estate between multiple beneficiaries.
For example, if two beneficiaries are going to be treated equally as part of an estate plan, it is not as simple as leaving the illiquid assets to one and giving the equivalent amount in cash to the other. The first party may struggle to pay their tax obligations for the estate without access to liquidity. Meanwhile, the second beneficiary might feel that a valuation snapshot at a point in time is not a fair assessment of long-term value, if they do not benefit from the ongoing wealth generated by a profitable family business. Advanced planning is needed to determine a strategy that meets the needs of all beneficiaries and provides an important sense of fairness and transparency to the process.
Wealth planning strategies need to allow for wealth preservation while providing for the needs of a family over the long term. Prioritising the creation of liquidity can provide much flexibility and room for manoeuvre for the benefactor and their family. High cover life insurance policies can be helpful in providing additional liquidity to enable any wealth planning or transfer strategy.
Estate equalisation among multiple heirs is often an important strategic aim for benefactors looking to transfer their wealth seamlessly while maintaining family harmony. The high life coverage of life insurance is an effective way to generate the liquidity needed to equalise the value of assets that each beneficiary receives. By providing a large pot of cash with which to balance out the value of assets passed down, families can avoid the need to sell assets or break up a business to provide for an equal inheritance.
A high cash pay-out on decease can also help to service any tax and business costs that follow on departure and succession. Providing for liquidity to cover inheritance tax and other business costs allows more of the illiquid assets to remain with the family over the long-term.
In addition, flexible products that allow liquidity to be accessed throughout the policy term can ensure funds are available quickly, should the need arise unexpectedly.
Unleashing assets, securing self-determination
Wealth is a facilitator of choice, but only if it can be used as and when desired. Illiquid assets play a significant role in a diversified portfolio. But they can add complexity in planning to facilitate the transfer of wealth seamlessly. Wealth management tools that enable high liquidity can help smooth succession planning for illiquid estates, as long as they are also able adapt to the needs of a family over the long term and allow the flexibility to access funds when needed.
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