Investment, Wealth Planning | 15 June, 2018

How do I protect my family against contingencies?

Ricardo Ramírez Wealth Planning

Potential family and business risks can be detected with good wealth planning, in order to protect our family against contingencies. However, without planning, structuring and organizing, we will not achieve such protection.

If we want to do a complete planning of our wealth situation, we need to take measures related with the structure of our family business or the design of a specific person’s succession. Additionally, it is very important to anticipate if the heirs will have enough financial liquidity to cope with all personal expenses, taxes, contributions and outstanding debts in case of an unexpected event, such as death, serious illness or permanent disability.

We all probably know someone who did not plan properly to prevent these risks, forcing their families to sell part of their wealth, hindering the viability of business projects, or even in some cases, forcing them to renounce their rights to the inheritance.

Therefore, it is key to consider some examples of risks that, if not correctly analyzed, could generate very complicated situations:

  1. Absence of the person that provides the most important income for the family: due to many reasons, the person that provides the family’s main income may stop generating such income. In this situation, the family could have problems to maintain its living standards

 

  1. Use of personal guarantees to support business activities: the founder of an important company passes away, and the heirs do not have enough liquidity to cover all debts derived from personal guarantees that were given to support business activities. This forces them to sell part of the family wealth or even some of their assets being seized by third parties

 

  1. One single person managing a family business owned by several siblings: due to an accident, the person managing the business passes away. The deceased’s children become part of the group of equity owners in control of the company, being able to influence business activities without actually having knowledge of the business, which in turn hurts or even blocks important initiatives for the development of the company

 

  1. Persons with several family relationships: a person accumulates important business assets with his children from a second marriage. Additionally, he has a great relationship with his children from the previous marriage. This person will have to plan very well to make sure that, in his absence, all children are left with balanced situations. In this case, the children from the second marriage would inherit complete control of the business, while the children from the first marriages would inherit additional goods or assets.

 

  1. Asset concentration: traditionally, families have counted on their savings and investments to cover the needs of the following generations. During the last few years, and due to the low returns offered by the safest assets, families have increased their exposure to real estate and riskier alternative assets, in search of better returns in the long term. In case of adversity, those assets may need to be sold quickly. If that situation coincides with an unfavorable market environment, the assets may have to be sold at a loss, and in extreme situations, may not be able to be sold at all.

Given all the examples shown above (and may others), it is very important to do a complete analysis to understand all the needs that have to be covered, as well as make sure that we have all necessary tools to cover them.


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