The nation’s wealthiest are reaching retirement age, and while they probably have been planning their finances for retirement for years, they should also be planning for the inheritance of their fortunes. The average age of an ultra-high net worth (UHNW) individual is 59 for men and 57 for women. Within the next 10 years, nearly 16,000 ultra-high net worth individuals with a combined net worth of over $4.1 trillion will pass on their wealth to the next generation.

As many of these individuals approach retirement and think about their legacies and wealth succession plans, a huge amount of wealth is set to change hands in the coming decades. This era of familial wealth transfers and giving is unprecedented. Over the next 30 years, $16 trillion of UHNW wealth is expected to be transferred to the next generation, and the United States accounts for 40% of wealth transfers, according to findings from a recent NFP-sponsored Wealth-X study, Family Wealth Transfers Report, creating a new generation of UHNW individuals. The latest Wealth-X report examines data and trends associated with wealth succession globally, providing an in-depth analysis on the worlds liquid and illiquid wealth transfer to reveal its relevance for succession planning, and further efficient protection of assets through insurance.

“It is important that the insurance portfolio be structured properly to not only fit the client’s needs and goals, but to also be in accordance with all the applicable jurisdictional guidelines. Therefore, the insurance advisor should be well versed in the global marketplace and understand how to properly structure each client’s unique insurance portfolio,” says Celeste Moya, vice president of international insurance and product management for National Financial Partners Corp., an insurance advisory and brokerage services provider to high-net worth individuals, and also a provider of benefits, P&C and life insurance.

“One more key aspect the client should keep in mind is that their insurance portfolio does not just provide efficient wealth transfer solutions, but can also preserve the families legacy by protecting family values, business ideals and philanthropic goals, which can all be lost without proper planning,” she continues.

As many come into new money, the next generation could lose up to half of the fortune of an UHNW individual, the report says. The importance of planning for the transfer, and furthermore, the obtaining insurance (especially life insurance products) helps provide control and stability back to the UHNW individual regarding their inheritance.

Considering the United States is the largest country by UHNW population, accounting for nearly 40% of wealth transfers over the next several years, the report explores the impact of UHNW populations, delving into the impact of transfers on taxes, philanthropy, private banking and family offices.

Click through the following pages to find out more about the Family Wealth Transfers Report and its impact on the insurance industry.

By the numbers: The growth of the UHNW population

According to NFP and Wealth-X’s survey, the global UHNW population is made up of individuals with a net worth of $40 million or more, and this number increased to 211,235 individuals in 2014, with a combined wealth of nearly $30 trillion. These are record high numbers of both UHNW population and wealth, having risen 6% and 7% from last year, respectively.

Furthermore, amidst growth in terms of UHNW population size and total wealth, there has also been a rise of self-made UHNW individuals in the last 20 years. Today, self-made individuals make up to 64% of the UHNW population. These individuals also account for 60%–or $18 trillion—of the global total of UHNW wealth.

The influence of this growth in population and wealth impacts several industries, from wealth management to luxury and philanthropy. As UHNW individuals come to retirement age, and wealth successions plans are put into actions, these priorities shift toward securing ending legacies. Sometimes, this takes the form of philanthropic donations and bequests, which allows the success of the wealth to be shared across wealth tiers. Influences such as globalization, technology, and deregulation among other actors enable for billions of dollars in wealth to be created in a matter of years, rather than a matter of decades, fostering a positive growth environment for the wealth of UHNW individuals, particularly those who are self-made.

“Since the majority of these UHNW individuals are now what we refer to as ‘global citizens’ because they generally have a presence in many different jurisdictions–both in personal and business assets, it is very important that their team of advisors really understand the global marketplace and have the right resources to address the various jurisdictional hurdles that may arise,” Moya says.

With the rise of ultra-wealthy entrepreneurs, combined with the importance of wealth transfers, it is likely that many of the next generation will be starting off with some inherited wealth, but also will be building their own fortunes.

With two-thirds of the world’s wealthiest being first-generation wealth creators, they will, for the first time, have a hand in their own succession planning. Those in the second or third generation of wealth will have had a greater experience with wealth transfers, but the evolution of the UHNW sector over the last several years indicates that this will be a new experience for many. Successful wealth transfers are critical for UHNW individuals of all wealth sources to solidify their legacies, and notably, towards the end of their lives, this becomes one of their biggest priorities.



The age of inheritance

Although early planning can ease the process, it is never too late to start conversations about wealth transfers. The current UHNW population is, on average, twice as old as the rest of the world with an average age of 59, compared to the global average age (30 years old). Billionaires are even older—with an average age of 63.

But UHNW individuals in their 70s and 80s also hold a disproportionate share of UHNW wealth, indicating that wealth increases with age. Those individuals who are 80 years and older are three times wealthier than the youngest group of UHNW individuals. For those 80 years old and over, the average liquid holdings alone reaches nearly $100 million, more than three times the minimum threshold to become a UHNW individual. Additionally, 58% of all UHNW wealth is held by those who are 60 years old or older, and 82% of wealth is held by those who are aged 50 and above.

With this trend of wealth rising with age, the next few years will presumably be an intensive period of family wealth transfers, as a tremendous amount of wealth is expected to change hands from the aging UHNW population. This is especially important in the U.S., as UHNW individuals will account for nearly 40% of the wealth transfers within the next several years. 

Wealth transfers can consist of many different types of assets, particularly liquid assets. As the study indicates, just as net worth increases with age, so does liquidity (in absolute terms as well as proportion of wealth). As wealthy populations age, individuals tend to sell shares of their businesses to finance their children’s education. They make luxury acquisitions or diversify their assets.

But UHNW individuals also must consider the potential cost of transferring their wealth to the next generations. Estate taxes, for one, can be a huge expense. In some countries, they can be as high as 40% to 50% of an UHNW individual’s net worth. In some cases, other assets may need to be sold in order to meet the high cost of inheritance taxes.

In the United States, estate taxes are at 40% for those with more than $5.34 million in assets in 2014

“It is important that they understand the value that an insurance portfolio can add to their wealth transfer plan due to the various key benefits it can provide, including: asset preservation, creditor protection, tax advantages, liquidity, diversification, stability, estate equalization, protection against sovereign and currency risk and legacy preservation. Insurance is a financial instrument that goes beyond just providing a death benefit and that can be customized to fit many different wealth transfer needs, both for the clients personal and business assets; therefore, it should be a key part of their overall wealth transfer plan,” Moya says.


Family Wealth Transfers Overview

By leveraging Wealth-X’s proprietary database of dossiers on more than 100,000 individuals, the study has forecasted how much wealth is due to be transferred, as well as how many UHNW individuals are likely to pass on their wealth to the next generation within the next 10, 20 and 30 years. Forecasting the wealth transfer takes into account data, including age, geography, family relationships and life expectancy.

“Insurance advisors should begin to engage future generations as early as possible in the planning process so that when the time comes for those future generations to take the lead in the estate or business, they are well versed on how to best preserve their assets and continue to plan for future generations,” Moya says.

As previously stated, a massive amount of wealth is expected to change hands within the next decade, at $4.1 trillion. Within the next 30 years, this number increases four times—to $16 trillion. The likelihood of a wealth transfer taking place will increase with each decade, according to the study. Many UHNW individuals are not ready to pass on their wealth within the next 10 years.

When taking into account the profile of the average UHNW individual today, there are fewer women passing on their wealth as a proportion of the UHNW population, but this is also largely due to the fact that the average age of female UHNW individuals is 57 years, compared to age 59 for men. Women make up 13% of the world’s UHNW population, but they will only account for 8% of those who transfer their wealth over the next three decades. Self-made individuals make up 68% of the UHNW population that will pass on their fortunes within the coming years.

Private holdings, in particular, form the largest component of the UHNW individuals set to transfer their wealth, presenting a $6 trillion opportunity for banks, as not all children of wealth individuals will want to continue the legacy of the family business. Many children seek an exit from these businesses, which are often strongly associated with the first generation wealth.

 “The preservation of assets across generations needs to be a priority. As wealth transfers to different generations who may have different goals and priorities, both from a personal and business perspective, it will be important that the wealth transfer plan be structured in way that protects against the degradation of assets and that is also flexible enough to overcome various issues that could arise,” says Moya. 


Cash holdings

When examining the value of UHNW assets, Wealth-X says that we can expect nearly $5 trillion in liquid assets to be passed onto the next generation within the next 30 years, creating more freedom and independence for the second generation of UHNW individuals to invest and spend their inherited liquid assets according to their own discretion, without impacting their primary business holdings.

But cash holdings should be optimized for their efficiency during a transfer to the next generation, the study claims. The use of insurance and other specialty products for these unique situations can help ensure the cash is held in optimal assets.

Wealth-X puts this massive amount of cash into perspective by indicating that the amount of money UHNW individuals are due to pass on is large enough to purchase Apple Inc., the most valuable company in the world, seven times over. Furthermore, all of this could be done without having to sell any non-cash holdings.

“UHNW clients should be prepared to discuss with their insurance advisors any insurance coverage currently in place, any particular goals they need to achieve specific to their insurance portfolio–including business continuation, buy-sell agreements or estate planning, insurance with exit strategies–potential financial hurdles or concerns and an overview of the rest of the their wealth transfer plan,” Moya says.


The geography of transfers

North America is expected to be the location of the largest transfer of UHNW wealth within the next 30 years, according to the Wealth-X report, in both absolute and relative terms. Sixty-two percent of North America’s UHNW wealth, equal to $6.35 billion, will change hands in the next 30 years, representing 40% of the global total.

Similarly, European wealth transfer is expected to be smaller than North America in both absolute and relative terms, but Europe already has a higher proportion of inherited wealth, according to the report. Forty-five percent of Europe’s UHNW individuals are either fully or partially inheriting their wealth, compared to only 25% in North America. While this number reflects the fact that a large portion of the wealth in Europe has already changed hands to a new generation, this phenomenon is expected to occur in many other regions around the globe within the next several years, including America.


Philanthropic bequests

While many family wealth transfers are expected to occur over the next 30 years, there is also an expected rise in large philanthropic bequests. Philanthropy is one way that UHNW individuals can continue their legacies, while also giving to a cause that is meaningful to them.

Philanthropic donations by the global UHNW population are expected to total approximately $300 billion, and North American UHNW individuals will constitute 57% of these pledges, the report states.

Modern forms of philanthropy also involve more than merely pledging funds and making a donation. Instead, more hands-on and holistic approaches are becoming much more common. This reduces the significance of bequests, as a large portion of donations are made over the course of a lifetime, and it helps to ensure that the gifts made are in line with what the original UHNW individual desired.


The future of UHNW individuals

Wealth-X says that we can expect to see constant fluctuations in both the population and total wealth of the world’s UHNW individuals, considering the dynamic demographics and estimates regarding wealth transfers to the next generation.

The study forecasts the future landscape of the UHNW population until 2040, asserting that the population and their total wealth will have approximately trebled. Wealth-X anticipates approximately a population of over a half a million UHNW individuals with a total wealth of $88 trillion.

Within this population, the fastest growing wealth tiers are expected to be those at the very top and also the bottom. The billionaires, as well as those worth between $30 and $50 million. For billionaires, the study says, the financial gains from early succession planning can amount to billions themselves, highlighting the importance of planning a wealth transfer early.

Furthermore, Wealth-X predicts that the population of female UHNW individuals will grow faster than their male counterparts, and the self-made female UHNW population will grow even more rapidly. Ultimately, we can expect this to change the current wealth source dynamics, as self-made UHNW women are a minority. While only 34% of female UHNW individuals are self-made, this number is expected to rise by 55% by 2050, Wealth-X predicts, as a result of increased entrepreneurship from women around the world. More women are also expected to inherit some of their wealth, and thus have an opportunity to create even more for themselves, creating the prospect of a positive future for the wealth of UHNW women.