You may find one of the greatest joys of having wealth is the opportunity to provide similar peace to your loved ones. If so, you should consider and design a comprehensive financial plan to do so.
Wealth affords you opportunities, enhances freedom and diminishes many of the usual constraints of life. But, most fundamentally, it provides you peace of mind and financial security.
If you’re like others in your situation, you may find one of the greatest joys of having wealth is the opportunity to provide similar peace to your loved ones – whether it be parents, siblings, children, grandchildren or future heirs. If so, you should consider and design a comprehensive financial plan to do so in an efficient, orderly and thoughtful manner.
How would you react?
Imagine you have two children. Sarah studied technical chemistry and works for a pharmaceutical company in Basle, Switzerland. Her younger brother, Michael, is more of an artist. After completing his degree in musicology, he moved to London to start his career as a professional composer. His big dream is to crack the international charts with one of his hits, but unfortunately this hasn’t yet materialised (yet). Michael, in his opinion, has to live in an international metropolis because he needs to be close to the producers. While working towards his dream profession, he keeps his head above the water with numerous small jobs. Would you offer Michael financial support?
Michael’s parents, in real life, finance his apartment and expenses in London. Some parents would probably do the same. But what about treating both siblings equally? Should Sarah receive the same monthly allowance, even though she has a well-paying job? And what if Michael is not your son but your brother, son-in-law or best friend from primary school?
How to set up a financial support plan
Here is a potential approach to set up a financial support plan:
Step 1: Calculate core & excess capital
Work with your financial advisor to calculate your (and your spouse’s) lifetime spending needs and determine the wealth required to support those needs. We call this amount your ‘core’ capital. By segregating your wealth into ’core’ and ‘excess’ capital, you ensure any support provided to your loved ones does not put your lifestyle at risk. Through this process you determine your total net wealth is USD 10 million, comprised of USD 5 million of ‘core’ capital and USD 5 million of ‘excess’ capital.
Step 2: Determine Michael’s income needs
You calculate Michael’s income needs based on your current support pattern with an inflation adjustment. You determine Michael needs USD 50,000 of annual supplementary income to support his lifestyle. Of course you hope he that he will realise his dream one day, but at this stage you want to plan for Michael having this income need indefinitely.
Step 3: Identify product solutions
With the help of your banker, you determine a financial product that can be acquired for a single deposit of USD 1 million that will guarantee USD 50,000 of gross income to Michael for his entire lifetime – including both before and after your death. You purchase this product for Michael and no longer have to supplement his income. This solution leaves you with USD 9 million of net wealth – comprised of USD 5 million of ‘core’ and USD 4 million of ‘excess’ capital. If all goes as planned, you will pass on USD 9 million one day. In the case of unexpected events occuring, you still have full access to your USD 4 million of ‘excess’ capital.
Step 4: Equalise total gifts through inheritance
You work with your financial and legal advisor to ensure that on the latter of your and your spouse’s death, the first USD 1 million of your estate will be paid to Sarah to offset the contract purchased for Michael to supplement his income. The balance of your estate (USD 9 million - USD 1 million = USD 8 million) is then divided equally between Sarah and Michael, resulting in Sarah receiving a total inheritance of USD 5 million (USD 1 million + USD 4 million) and Michael receiving a total inheritance of USD 4 million.
While the above provides just one example of a financial support plan, there are several threshold questions that will help shape any financial support plan, including:
- Who should be provided with financial support?
- Should all children be treated the same? What if different children have contributed differently to the financial and cultural values of the family? Should the income earning and wealth generation capabilities of family members impact their support? Is there a difference between fair and equal support for family members?
- Should your biological and step-children be treated the same?
- What support should be provided for future heirs?
- Are there specific educational, life goal or character requirements that a supported loved one should meet before support is provided?
- How should certain life events, such as marriage, the birth of children or grandchildren, separation or divorce, health issues or retirement impact support, if at all?
- How long do you want the support to last? Should the support be self-sustaining? Should it taper over time?
- Should support be adjusted for inflation?
With a proper planning strategy, you can realise one of the most gratifying rewards of your hard-earned wealth: providing financial security to your loved ones.
What matters to you?
Life, business, investments, aspirations - what matters to you matters to us. This article is part of our ’What matters to you?’ series, in which we have a close look at what lies close to your heart and how wealth planning may help you to achieve your objectives.
About the author
David Pare is a Senior Vice President (Market and Product Solution) at International Planning Group (IPG). IPG is a trusted partner of Julius Baer’s open product and service platform. It offers wealth structuring and transfer planning solutions for high net worth individuals and families.