In a record-breaking year for elections the debate over the appropriate taxation of wealth continues to be heated. With over two billion voters taking to the polls in 50 countries the issue is taking on new, and more widespread significance as historic quantities of wealth are expected to be handed down to the next generation in what is coming to be known as ‘the great wealth transfer’, says the team at Saffery Trust.
With the eyes of the world now on President Trump’s return to the White House, it remains to be seen how his second administration will build on the 2017 Tax Cuts and Jobs Act which effectively doubled the amount allowed to be given by individuals in gifts to family members to US$13.61 million for the tax year 2024, and which many believed would not be renewed under a Harris Presidency.
Likewise, in the UK there has been a great deal of speculation as to what tax changes the recently elected Labour government may make, as it seeks to fund a hole in public finances. This may potentially include new levies on the wealthy and internationally mobile.
There has also been talk in Switzerland of the raising tax on inheritances worth over $56 million to 50% following an initiative launched by elements of the Social Democratic Party. The revenues raised from this would be deployed to fund measures aimed at tackling climate change.
While predictions around tax tend to grab headlines, this is just one of many factors affecting how the wealthy approach the ‘great wealth transfer’. The topic has wide-ranging and complex implications for those who are looking to pass on assets in an efficient and effective manner.
The Great Wealth Transfer: An Update
There has been plenty of speculation around the direction in which some of the world’s major economies are heading when it comes to increases in taxation on inheritances. However, independent of the current media discussions a great deal of attention continues to be paid to wealth preservation more broadly. This is evidenced by the interest expressed by families in jurisdictions where inheritance tax is not a consideration.
A family in the Middle East, for instance may be concerned about wider issues ranging from the continuation of a family business legacy through to the mitigation of the risk of family disputes or the equalisation of inheritances between siblings. It is worth noting that the absence of domestic inheritance tax does not necessarily mean that foreign assets such as real estate would not be subject to taxation in some form on, or immediately following the transfer between generations.
More personal issues may also arise such as how to pass on assets to the next generation in a way that reflects and preserves the values of the previous generation, whilst maintaining flexibility to evolve with the changing needs and goals of the next generation. These themes continue to evolve in line with both societal and cultural change with a shift being seen from “patriarch-led” to “family-unit” approaches in discussions on the topic of wealth transfer. The outcome of this a marked increase in the proactive involvement of female and next-generation family members in succession discussions, which are typically taking place much earlier.
Strategic Succession Planning
With increased trends towards globalisation, the introduction of new technologies, and more unstable economic and political outlooks, ensuring that wealth will endure across generations requires wealth holding and management strategies to be more bespoke and flexible than ever.
The fact that many wealth creators are now much younger and tech-led means that wealth structures need to be accommodating of potentially faster evolving family situations and higher risk or non-traditional holdings such as digital assets. Younger wealth creators, for example, may still be building their business, and indeed their family, and require solutions that balance wealth creation risk appetite with the safeguarding of family security and legacy.
Wealthy families are now more complex. Factors such as greater international mobility, blended family arrangements, and rising trends such as surrogacy or gender fluidity, require wealthy families to take appropriate advice in relation to their wealth structures. This advice should ensure they are effective in relevant jurisdictions, and that they cater for non-standard family dynamics and interactions. There is no longer a one size fits all. Good advisors and a flexible approach are key.
Social and generational shifts may also heighten the risk of disputes and a lack of common understanding across generations. With greater accessibility to information generally come demands for increased transparency. This can, however, be viewed as positive for problem-solving and mitigating risks, as conversations tend to be more open and start sooner.
The increased involvement of other family members besides the patriarch can help to identify and resolve issues quicker, lessening the risk of a serious fracture after the lifetime of the wealth creator. Difficult discussions over family dynamics raised thoughtfully in neutral or mediator-led forums and dealt with through tools like family constitutions, can prevent years of unspoken personal tensions and conflict.
Wealth preservation and risk management
Tension is frequently seen in wealthy families between the instinct of the older generation preserve, secure and pass on wealth and the younger generation’s tendency towards risk-taking and expansion. This can lead to concerns surrounding the appropriate time to involve children in the processes surrounding the management of a family’s legacy, including the family business.
Indeed, it is no longer expected that children will simply take over the reins of the family business. On the one hand families are realising that a life of privilege is often not a great training ground for producing next generation of business leaders, whilst entrepreneurial children are often motivated (and supported by their parents) to pursue their own dreams. This leaves family business owners in a sticky situation of how to manage their business succession, a matter which is best not left to the last breath.
The sooner discussions around these issues take place, the greater the chance the younger generation will have to develop an appreciation of the value of accumulated wealth and the difficulties associated with maintaining it. The earlier that businesses continuity or exit plans can be practically agreed upon, the greater their chance of success.
In some cases, intergenerational wealth transfers may need to be harmonised with the family’s existing values or ethical aims. Such intangible goals might be set out in the family constitution or similar document and might include the relationship between the family business and individual family members, support for philanthropic ventures or investment philosophy.
The appropriate structuring of wealth, in whatever form this takes, allows individuals to have robust and valuable conversations about succession planning, safe in the knowledge that the family’s assets are safeguarded – supported by a qualified, experienced trustee or other guardian.
With increasing global economic volatility, uncertainty over future regulation and fiscal policy, and as political regimes shift around the world there are real advantages to establishing wealth structures in reputable and well-regulated jurisdictions. Professionally managed structures can enhance adaptability to volatile economic situations and support wealth preservation today while ensuring the smooth transfer of assets to future generations.
