Introduction
Passing on wealth to others is a key objective of many families and investors. Whether this is to heirs, charities or others depends on each individual’s objectives and how they define what they want their legacy to be.
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Legacy goals
Women tend to perceive and value wealth mainly as a source of security and tend to focus on being financially secure and able to afford a certain lifestyle for themselves and their loved ones over the long term. Additionally, for women, legacy often means more than passing wealth down to the next generation; it also means being capable of positively impacting the lives of others.1 There is a tendency for women to invest with purpose, where purpose represents both their goals as well as their values and impact on society.1 For example, they may want to help finance the next generation’s business ventures, or provide for a first family home. They may also have a passion for a certain cause and would like to use their wealth to make a difference but may not know whether such goals conflict with their objective of passing on wealth to the next generation. A personalized plan would help better understand and meet these objectives.
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Investing for your legacy goals
Preserving, or better growing wealth through investing is necessary, otherwise there will be wealth erosion through inflation, taxation, and consumption over the generations. Inflation rates can be a helpful starting point for forecasting future spending, but it is important to consider that each investor’s personal spending composition will be different to the mix of goods and services used by an inflation index. Furthermore, as a family grows, the real return on its investments will need to meet the needs of more people. Future generations may also expect the same lifestyle as previous generations. However, they may not be able to depend on the same resources—unless the family can increase the real return on its assets. Therefore, there is a need to invest in assets that generate positive and growing returns. The aim of the Legacy strategy is to pass on assets that go beyond their lifetime needs for the next generation, or to use them for other favored causes. A Legacy strategy therefore focuses on maximizing the value of transfers to future generations and to make a positive impact on society.
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Succession
In the context of the Legacy strategy, it is also important to look at succession planning and the smooth transfer of assets. The aim should be to minimize family conflict, especially during challenging times such as divorce, sickness, or the movement of people or money across borders due to, for example, the migration to jurisdictions with a higher tax burden. Succession is a key topic for most families and one that deserves attention. Wealth succession is paramount for the preservation and stability of the family dynamics and fortune. Having such succession discussions early on is important. The involvement of heirs in investment decisions might also be beneficial in including—and educating— the next generation. On average, given women live longer than men they also tend to have larger inheritances—given they typically also inherit wealth from their partner. It is therefore even more important for them to carefully plan the succession to their wealth.
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To identify the appropriate size and investment approach for the Legacy strategy, it is important to look at the entire wealth plan and how assets can be allocated to meet investors’ needs. The UBS Wealth Way framework helps investors develop an investment strategy optimized for their goals and objectives. It can also help investors understand clearly where their money is—and why. Once investors have defined and funded strategies for short- and medium-term cash flow needs (the Liquidity strategy) and lifetime goals (the Longevity strategy), investors can invest the remaining wealth in their Legacy strategy.
The Legacy strategy does not focus on immediate cash flows. Instead, it focuses on maximizing and preserving wealth for future generations. Without the need to sustain withdrawals, regardless of market conditions, the Legacy strategy has an inherently higher capacity for risk than the Liquidity strategy or Longevity strategy resources. For a Legacy strategy, short-term volatility is less relevant to the overall health of the portfolio and the shortfall risk (likelihood of dropping below the initial wealth level) will be lower. The multigenerational time horizon also allows more flexibility for using illiquidity as a source of potential returns. A higher proportion of illiquid assets (where permissible by local jurisdiction) like illiquid hedge funds, private equity, infrastructure, and real estate can therefore be incorporated in such a portfolio, offering the potential for a higher risk-adjusted return potential.
Philanthropy
Donations to charitable causes and contributions to foundations can also be incorporated in the Legacy strategy. Once women have a plan to meet their lifetime and intergenerational goals they can confidently decide how much they can allocate for charitable causes. It is also important to take note of how best to give to philanthropy as there are several tax considerations around how to make the most with the allocated wealth.
Investing for impact
In addition to generating financial returns with their Legacy strategy assets, women may also be interested in deploying their capital to create a positive impact on society and the environment. Research shows that women tend to have greater confidence in investing their money when their values are aligned with their investments and when they see a social benefit. Incorporating sustainable investing solutions can also be a great way to engage with, and bring in, the next generation.
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Female investors appear 13% more inclined than men to invest based on their values.
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of women agree that money is a tool that can be used to help fulfill their purpose.
So, what steps should women take to ensure a smooth succession process? At a minimum, women need to have in place a will, together with an assigned person to execute it. Any beneficiaries of said will should be made aware of who this assigned person is. Furthermore, it would be wise to have a power of attorney and advance directive in case of illness so that heirs are able to manage any assets and ensure that your wishes are carried out in case your health deteriorates.
In addition, depending on the specific needs, trust and life insurance solutions may be key components of a successful transfer of wealth. Setting up a structure like a trust or foundation may be appropriate, for example if a beneficiary is particularly young, or ‘not ready’ to inherit a significant amount of assets all at once; or it may be expedient to clearly separate private from business assets under distinct structures.
A combination with a life insurance policy can provide additional liquidity, which may prove to be an efficient way either to ensure a more balanced inheritance among the heirs, or for dealing with certain financial needs linked with the inheritance. However, according to a 2021 study by Life Insurance and Market Research Association, only 47% of women have life insurance, compared to 58% of men, with only 22% of women feeling very knowledgeable about life insurance vs. 39% of men.9 And when women are covered by life insurance, the average level of coverage is significantly lower.10 On average, men carry life insurance policies worth nearly twice as much as their female counterparts, according to a Haven Life survey.10 Reasons for this gender gap may be women’s perception that life insurance is not worth their level of income or that it is too expensive. It is important that wealth planners discuss the potential needs and benefits of the offering in the context of wealth succession.
In certain circumstances, it can make sense that specific assets be passed on to the beneficiaries in the course of a lifetime gift(s), rather than in the event of death. Based on our investor survey, about the same amount of people choose to pass on wealth after they pass away vs. during their lifetime, with a higher percentage choosing to pass along some wealth while alive and some upon their death. Interestingly, we see no gender discrepancies in the choice of timing of the wealth succession. We do see, however, some gender differences on the reasons behind the choice of timing.
Conclusion
For women investors, establishing goals for the Legacy strategy is important. As women take control of a larger and growing share of wealth, they will want and need to take control of their Legacy strategy portfolios both in terms of investing them to protect and grow their wealth over generations as well as taking steps for a smooth transfer to the next generation. Women value expert advice more highly than men, both in terms of investment advice, but also in terms of facilitating discussions and executing succession plans. Women need to plan, invest smartly and orchestrate the transfer of their wealth. Through their investments, charitable donations, and financially educating their heirs, women have the potential to make a significant impact on both society and future generations.
UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment. Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability.
