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Residency Options and Succession Planning for High Net Worth Individuals

Living, working and dying in the digital age

The baby boomers of the 1960s will have the dubious distinction of being the first generation who will continue to live on long after they’ve died – accolades traditionally associated with pharaohs and dictators.

Many high flyers in their twilight years have acquired digital assets that have often amassed considerable wealth during the past two decades. For instance, the owners of the website insurance.com sold the domain name for a breath-taking $35 million 10 years ago, which is an illustration of how valuable certain digital assets can become. And this amount pales into insignificance compared with the super-rich owners of successful e- commerce platforms and social networking sites.

The problem for these wealthy boomers is how do they pass on their digital assets to their families or future asset holders? They may well live on in their digital profiles, but unless they’re careful the wealth they’ve created will be squandered by the next generation. So, how simple is succession planning in the digital age, particularly post Covid-19?

The answer is that despite endlessly inventive ways to make money, the problems with succession planning are actually as old as the pharaohs themselves. It’s never been more important for successful business people to plan ahead and to clearly understand the nature and future wealth of the assets they own – brick and mortar, and digital. An issue that has always worried wealth creators regarding succession planning is who to trust to do a decent job with the inheritance – and this has never been more relevant than with today’s self-made entrepreneurs.

According to a recent report by Barclays, 67% of highly successful first-generation wealth creators are very cautious about giving away their authority. These people often retain their position as head of the company into old age. The report said that 63% of elderly first-generation entrepreneurs did not consider their heirs committed to the business or have an ability to manage the business (57%). The 400 wealthy people who were polled across the globe were generally very pessimistic about leaving their wealth to be managed properly.

Nevertheless, with the recent Covid-19 pandemic, succession planning by wealth creators has come back into focus, according to a number of legal and financial advisors who are seeing a spike in private clients reassessing their business interests. The Barclays survey confirmed this by pointing out that 70% of first-generation entrepreneurs were reconsidering wealth transfer plans in light of the pandemic and were asking legal and financial professionals the best way of passing their wealth on to the next generation. The huge spending by all governments during the pandemic was a particular worry for wealth creators who see significant tax rises on the horizon and want to act now to find the most tax-efficient way of passing on their assets.

For first-generation wealth creators another method of passing down money is through trusts. This is not so much business planning but typically more funding for a grandchild’s education and lifestyle – and this will be particularly relevant given the serious impact the pandemic has had on many parents’ finances.

Trusts come into their own when the financial requirements of families are not clear – so a trust can become a sort of emergency fund. Nevertheless, legal and financial advisors also warn that trusts could be impacted by future government tax increases given the current global economic downturn. Indeed, even before the pandemic, the number of trusts in the UK alone had declined for the fifth year running as trusts started to fall foul of governments that no longer wanted them to be a shelter for wealth from inheritance tax.

Similar issues are now impacting business people – from first-generation wealth creators to directors in large corporates – who are working from home, often in different jurisdictions, because of the pandemic. This has been helped by the increasing use of digital technology to allow everyone to work more effectively away from their company headquarters.

Legal and financial professionals are seeing a big rise in private clients who need advice on the tax implications of taking up a semi or even permanent residence away from their office and closer to home. As with all overseas residency issues, there are tax implications depending on length of stay and the timing of tax payments and relief can still cause significant tax headaches. Other complications include social security if the person continues to work in the different jurisdiction and even the possible
taxation of the business – even though it could be mostly based in another country. For example, if the business owner or director is taking important decisions, signing contracts etc, company profits could be taxed at a local level.

In the following publication you’ll find a wealth of information by IR Global’s Private Client specialists who build a picture of what wealthy individuals should be looking for when addressing issues such as succession planning, trusts and overseas residency.