The question of risk management always comes up when planning a family’s future asset management plans, hence spending a little bit of time looking at the topic makes sense. We mentioned previously that risk can be managed by defining family visions, values and priorities in the first place, but beyond these steps what tools ought to be kept in mind?
In our opinion, several instruments can be used to mitigate the risks to which your family will be subjected over the next years and decades. Trusts are an obvious case here, but other ideas such as gold, real estate and insurance products are also worth keeping in mind. Especially if your objective is to prepare a secure future or to build a legacy.
From a very technical perspective, a trust is a legal structure which is set by an asset owner with a very specific purpose in mind. In practice, a trust is not a mere legal structure, however. A trust acts like a form of vault in which assets can be safeguarded until a certain set of conditions are met.
As legal structures, trusts are built upon very precise documentation which describes the specific conditions which can unlock the funds entrusted to the Fund. The documentation is always prepared by our specialized lawyer, obviously, but in reality various parameters must be taken into account beyond purely legal terms.
Ultimately, what makes the difference is not the legal wording on which the trust is based. No. What makes the difference is the vision that the owning family wants to attach to that trust. Said differently? Well, once again the core issue is not how to protect, but what the family has in mind for the future.
Oftentimes, the family members who decide to build a trust do so because they want to preserve certain assets over time, so that they can be transmitted to very specific beneficiaries at a later stage. Typically, the trust will thus be responsible for keeping the assets from interference. Some trustees are nominated to manage the fund and to guarantee that the assets will not be tempered with for alternative reasons or withdrawn outside of the specifications set by the family members during the constitution process.
Let us take a couple of examples here.
If the beneficiary of the said trust is a child, for instance, then the trust funds could be protected until that child reaches majority. This is particularly relevant if your purpose is to build a school trust to be made available at a later stage, but a similar legal structure could also be considered in a retirement context.
Beyond children, family trusts can also be crucial for the whole family itself. Imagine a typical client story for a minute… At a young age, you meet the man of your life, go to school abroad, build a family and come back home, several years later. Your life is perfect, things go perfectly well. But then, one day, your phone rings. Your beloved other half had an accident and your life stops, right here, right now. In the absence of a trust fund, nobody can tell how the family money should be used, and the family explodes because, well, inheritance talks are rarely friendly. If a family trust was there, however, things would take place as “planned”. Better safe than sorry, as they say…
In a different context, the funds allocated to a fund may also generate interests, which can then be redistributed to specified beneficiaries in specific and clearly defined circumstances. In a number of circumstances, in fact, this ability to preserve the funds from the rest of the world also means that trusts can be used to protect assets from external creditors – which thus provides the family with another type of protection.
A trust can also be set for insurance management purposes. In such a case, death benefits could fall under the jurisdiction of the trust and therefore avoid various tax which would normally be applicable.
Alternatively, if the beneficiary is a charity, then the funds could be released when specific criteria are met, thus fulfilling a family legacy of your choosing. In each and every case, the point is therefore to clarify what you have in mind, and then to make sure that the legal aspects follow. Please feel free to get in touch, we can help.
When it comes to safeguarding a family’s assets, gold is also worth considering. The reason for that is simple: gold has historically been perceived as a value-preserving commodity. Over the years, the value of gold has not only progressed, it has helped with preserving the assets of those who have invested into it from depreciation.
The point is important, because it suggests that gold is not just relevant to those who intend to speculate. Yes, the price of gold evolves and can generate significant profits on the commodities market. Still, what really matters is the stability which derives from it – which means that the material is clearly relevant to those who want to transfer value from one generation to another – but also from one country or city to another – whilst preserving anonymity and confidentiality.
In times where global currencies fluctuate immensely and present a risk in terms of value preservation, as a matter of fact, gold also has the merit of diversifying a portfolio. Again, the main criteria when it comes to deciding whether or not you should invest in gold product is therefore your ‘why’.
Should you decide to invest in gold, keep in mind that the questions of liquidity and storage are very important. Investing in gold product makes sense, but you want to make sure that the said gold will be kept safely, and that you will be able to trade it should you need to. Options exist, we are happy to help.
Real estate is the third risk management tool relevant to those who want to diversify their portfolio beyond financial products. Real estate is interesting because it presents several advantages, ranging from value preservation and… liquidity.
First, real estate is often perceived as a way to build value over time rather than capital – probably one of the reasons why real estate investment is so popular among Asian investors, as a matter of fact. Over time, indeed, a well-designed real estate strategy can yield a significant return on investment, but it also has the merit of creating a patrimony for the family through financial leverage.
Second, real estate presents an opportunity in terms of speculative investments, which will be relevant for the families with the least risk adverse profiles. In some cases, the strategy consists in investing in real estate to avoid the reporting constraints attached to purely financial products and investment. In other cases, the strategy can consist in investing in renovated assets with ideal locations and to expect a value increase within a five-year range. Alternatively, the strategy can consist in investing in assets which have a strong potential but need to be renovated first. In the former case, the objective is speculative, while in the latter the dynamic is rather a matter of value creation.
In both cases, the question of assets liquidity should be kept in mind. Real estate is often seen as being the opposite of liquid, yet in reality smart real estate investments can be extremely flexible. Whether you have speculation or value creation in mind, investing in prime assets can often guarantee transaction rapidity when you need flexibility.
Last but not least, insurance products can also provide significant value when it comes to managing risks for your family.
First, insurance products are a way to invest against bad financial surprises, In a world where high-wealth families are increasingly spread over the surface of the globe, each family member can be covered by a policy which can cover him/her in case trouble occurs. Especially when significant differences exist between the medical care systems, investing in the right insurance is a matter of peace of mind as well as a way to mitigate financial – and human – risk. In Hong Kong, for instance, the medical system is often seen as being more westernized than that of Singapore, yet the proximity to China tends to be re-insuring for many patient-to-be clients.
Second, insurance products can be a source of cash. Founders, entrepreneurs, investors and high-level executives know it very well, investing in a policy can be a way to guarantee that a significant sum will be provided to the family should anything happen. In some countries, regulations may also force the next generation to pay inheritance taxes, in which case the family assets may be severely affected. By contrast, a lump sum may provide a significant advantage.
Make sure to get in touch with your insurance broker or with you family concierge here, as those topics are delicate and highly specialized. There is no point buying “any” type of policy, what matters is not the quantity but the relevance. All in all, however, insurance schemes are a form of investment which produces a return on investment and which benefits can match a variety of needs, depending on your priorities.
Saving and investment schemes are for instance relevant if your purpose is to increase your capital over a certain period of time, or to plan for emergencies and health matters. The point there, again, is to define the goals you want to achieve.
In line with the trust structures mentioned previously, insurance premiums can also be invested for education purposes. In this case as in the previous one, the premiums paid by the policyholder accumulate over time and constitute a capital which produces interests. In the medium and long term and depending on the risk profile attached to the account, the policyholder therefore obtains more than invested and thus creates room for further investment or enjoyment.
Talking about enjoyment leads us to the possibility of using insurance schemes to build retirement plans. These schemes help with building a retirement package, obviously, but they also provide interested life protection guarantees which can become very important to protect your family should anything happen to you.
The bottom line is this one: risk management takes vision and a lot of strategic thinking. Whilst there are various tools at your disposal to mitigate risks when it comes to building your family’s future, the key element is to determine what you want to achieve, and to develop a strategy and an ecosystem around that strategy to ensure that things will work optimally for you.
Trusts are important legal structures which can help stabilize assets over long periods of time. Real estate can help with building a patrimony while gold can have a role to play in terms of value stability and transfer. Last but not least, insurance products are essential for family protection as well as for family planning hence they can help paving the way while building for later. Sometimes the strategy may be very conservative in the sense that it may be built to protect, but would you be sorry rather than safe? Probably not… In any case, your family office is probably the one investment you shouldn’t avoid. Don’t you think?
At Jia, we sincerely believe that your family should be at the heart of everything we do. Day after day and year after year, we strive to treat family members as unique clients, and we excel at preserving their interests, beyond money and asset management.
Our experts and partners support your family as team members support each other, but beyond this we become the unique support you always dreamed about. Having a family spirit is not just important, it is at the core of our DNA. It's as simple as that. So, how can we help you today?
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