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Liquidity Planning & Trust Structure for High-Net-Worth Individuals

As high-net-worth individuals (HNWIs) transition through their wealth cycle, they inevitably face numerous challenges relating to the creation, accumulation and preservation of their family wealth.

Most HNWIs are successful business owners who either inherited the family’s business or started from scratch. Reality is success does not suddenly knock on one’s door, it entails dedication, commitment, perseverance and determination of the entrepreneur to walk the journey of building a meaningful and fulfilling business. Against this backdrop, it is not uncommon to see HNWIs devoting 110% of their time focused on managing their business and reinvesting their profits back into their business because their attitude is, there is no other investment that could generate a better return than their own business. However, they sometimes forget that business has attendant commercial risks which are not always easy to fathom or hedge against in the longer term.

While focusing on one’s business and reinvesting into it seemed logical, many HNWIs, tend to overlook the importance of allocating time and attention as to how best t1. He is the sole breadwinner of his young family. Should unexpected misfortunes happen to him, he would not be able to ensure the family’s standard of living can be maintained.

2. Majority of his assets are relatively illiquid, e.g. his businesses in China, properties in China and Singapore. The asset investment portfolio with the financial advisory firm and other banks comprises an insignificant part of his total net worth.

3. Furthermore, Mr A’s investment portfolios with the banks are leveraged, hence, a need to include a financial instrument with certainty in value. A life insurance policy is an appropriate asset class to add to Mr A’s asset mix because the sum assured is determined at time of purchase. It allows for risk diversification and creates another asset class which has liquidity in his total portfolio.

4. Life insurance policy is an efficient way for HNWIs to create additional liquidity based on their gender, age, health and net worth.
hey can protect their wealth and family members during vulnerable and challenging times. Tying down their liquid funds in businesses and fixed assets such as properties may create inconvenience or even chaotic situations when adverse circumstances arise unexpectedly. As a result, the problem of “Asset Rich but Cash Poor”, has become an inevitable phenomenon that some HNWIs would undoubtedly encounter.

To better illustrate the above scenario and provide a suitable liquidity planning and legacy planning solution, let us take a look at the following case study:-

Mr A, a Chinese entrepreneur, has been a client of ABC Financial Advisory firm in Singapore for over 5 years. In his mid-40s, he is the founder of a power generation company in China and another company that manufactures energy savings appliances for exports to North America and Europe.

Married with two young children aged 8 and 11, Mr A’s wife is a homemaker. As Mr A’s two children are currently studying in Singapore, Mrs A has been accompanying them whilst Mr A visits Singapore whenever he could prior to the COVID-19 pandemic, including travelling regularly to US and Europe to visit his customers.

Other than maintaining sufficient funds to meet his banking needs, Mr A often retains an extensive portion of his earnings in his businesses to cater for future expansions. He believes both of his businesses are extremely promising and felt since he is the owner of both companies, he can easily withdraw cash from the company’s account for his personal use, if required.

Mr A’s financial advisor, Ms X has been servicing his account since its inception. Mr A has found Ms X responsive and responsible; hence, a good rapport has been built between them over the years. As Mr A’s trusted advisor, Ms X feels that it is undesirable for Mr A to devote all his attention and financial resources to his businesses to the extent he does not realise he has to plan for long-term needs for his family. Ms X raised the subject of liquidity planning and Trust whenever the opportunity arose from time to time to raise Mr A’s awareness it is imperative for him to have a structure that will provide his family with liquidity and protection. The rationale she presented to Mr A include :

1. He is the sole breadwinner of his young family. Should unexpected misfortunes happen to him, he would not be able to ensure the family’s standard of living can be maintained.

2. Majority of his assets are relatively illiquid, e.g. his businesses in China, properties in China and Singapore. The asset investment portfolio with the financial advisory firm and other banks comprises an insignificant part of his total net worth.

3. Furthermore, Mr A’s investment portfolios with the banks are leveraged, hence, a need to include a financial instrument with certainty in value. A life insurance policy is an appropriate asset class to add to Mr A’s asset mix because the sum assured is determined at time of purchase. It allows for risk diversification and creates another asset class which has liquidity in his total portfolio.

4. Life insurance policy is an efficient way for HNWIs to create additional liquidity based on their gender, age, health and net worth.

With the disruption caused by the COVID-19 pandemic, Mr A’s businesses was inevitably affected. Experiencing an unprecedented credit crunch in his businesses, he started to seriously evaluate Ms X’s advice of “creating liquidity to protect his family”.

Mr A agreed to Ms X’s recommendation to consider exploring buying a life insurance policy to be held by Trust for smooth transition of wealth. He then proceeded for a medical check-up, arranged by Ms X. After many discussions with Ms X on the suite of life insurance products available to him, Mr A concluded that a life insurance policy with death benefit coverage of USD20 million was appropriate. This translated to an estimated distribution of USD6 million to each of Mr A’s 2 children and his wife.

At the recommendation of Ms X, Mr A sets up a Trust administered by Precepts Trustee Limited (PTL), as trustees, to hold the life insurance policy with Mr A as the insured. PTL will liaise with Ms X and Mr A to fulfill the premium payment obligations for the insurance policy purchased. As the insurance policy owner, PTL will claim the insurance proceeds from the relevant insurer upon Mr A’s demise. Upon receipt of the insurance proceeds and in accordance with the Letter of Wishes, PTL will distribute the proceeds to Mr A’s beneficiaries including his children at a certain age or triggering event as stipulated by Mr A during his lifetime. This is an important protective measure especially if the beneficiaries are minors or lack the experience and competence to manage a large sum of money to avoid risk of depleting their inheritance within a short period of time. For Mrs A, Mr A’s wish is for her to receive her share of the trust fund in a lump sum.

Creating the right wealth structure based on each HNWI’s circumstances is of crucial importance. Regardless of events such as the COVID-19 pandemic, HNWIs should recognize the need to create liquidity to combat unforeseen adverse situations. For advisors focusing in this segment of the market, we highly recommend regular dialogue and review of the HNW clients’ needs and recommend appropriate structures to cater for evolving circumstances.

This article was first published in our newsletter, The Custodian Issue 17 on April, 2021. Click here to access our latest newsletter.