Complex planning challenges require sophisticated wealth transfer strategies.
Despite a recent economic slowdown, Brazil remains firmly entrenched as an economic superpower thanks in large part to its vast natural resource wealth. The country’s enviable growth during the last decade led to the creation of great fortunes as entrepreneurs seized on the China-led global commodity boom to mint, according to Credit Suisse, nearly 230,000 millionaires. With a GDP of $2.2 trillion, Brazil’s economy is larger than India’s and is nearly twice the size of Mexico. Brazil is positioned to remain a critical market for wealth managers and other service providers focusing on the high net worth segment.
According to Wealth-X, Brazil is home to more than 4,000 ultra-high net worth individuals, holding $770 billion of wealth – the highest in Latin America. Unlike many other markets, especially those of developed economies, Brazil’s high net worth population has some unique characteristics that create interesting dynamics, challenges and opportunities. According to Forbes, only 6% of Brazil’s ultra-high net worth individuals have inherited their wealth, which indicates the overwhelming majority amassed their own fortunes or have shrewdly invested their nominal inheritances.
Being a continent-sized country, Brazil’s high net worth population has distinct regional differences that demand customized approaches. On the one hand, a significant amount of Brazil’s millionaires remain concentrated in the country’s two main cities – São Paulo and Rio de Janeiro. High net worth individuals in these cosmopolitan urban centers often operate globally-connected conglomerates that require highly-sophisticated financial and legal strategies to manage both domestic and international operations.
However, because the country’s natural resource driven wealth creation has largely occurred in the more rural areas, the industrious entrepreneurs emerging from these parts tend to be more nationalistic in their business, travel and outlook. These individuals typically operate businesses only in Brazil, and by and large maintain a strictly local business structure. In fact, many of these individuals fuel Brazil’s luxury market, as they are less inclined to travel overseas to make purchases and prefer to shop within Brazil’s notoriously high-priced borders, making the country a top performer for fashion powerhouses like Gucci and Louis Vuitton.
Regardless of where in the country they reside, wealthy Brazil residents are exposed to the legal and regulatory limitations of a country that only three decades ago was emerging from a military dictatorship. Brazil has generally not had the time to create sophisticated frameworks capable of properly addressing the complexities involved in managing and transferring large fortunes. Having succeeded in building their wealth, many of these individuals now face their greatest challenge – preserving that wealth, and ensuring its smooth and efficient transfer to the next generation.
The challenges of wealth transfer in Brazil
While the proper transfer of significant wealth in Brazil certainly requires the execution of well prepared legal documents, this also requires a patriarch or matriarch develop a clear vision for their financial legacy, which entails the careful management of emotions, personalities and complex family dynamics.
As most wealthy Brazilians attribute the majority of their wealth to the value of a closely held business, business-related planning challenges abound. Wealthy Brazilians have to determine if and how their business will suffer upon their death, perhaps because they hold key customer, vendor or governmental relationships. They also must determine how business equity should be transferred to heirs, especially in cases where some heirs are actively involved in management and others are not. Further, they must determine if their heirs have the necessary skills and desire to partner with existing shareholders, and whether doing so would add new challenges to the business. Finally, business owners need to evaluate whether the value of their business relative to their overall portfolio creates a significant diversification risk.
Further, as the miracle of wealth creation dictates many members of the next generation will not have the same level of success as their ascendants, patriarchs and matriarchs should consider how to preserve their wealth over time. This means they need to determine if wealth should earmarked not just for their spouse and children, but also their grandchildren and great-grandchildren. Decisions need to be made about whether wealth should be transferred to both bloodline and non-bloodline family members, and if estate funds should be used to repay outstanding debt obligations, meet philanthropic giving desires and/or fund education or retirement plans for their heirs. It also requires the patriarch or matriarch assess the various currency, sovereign and liquidity risks associated with their asset profile.
These are not often easy issues to tackle when the discussion of wealth transfer commonly surrounds the uncomfortable subject of death and the accompanying concerns about privacy and confidentiality. According to Barclays Wealth Insights, 34% of global high net worth individuals do not trust their children to protect their inheritance, 20% believe assets should be allocated differently between children and 40% have experienced wealth as a source of conflict within the family.
These challenges create an unprecedented need for high net worth Brazil residents to plan for their wealth transfer. Solutions that create liquidity, provide flexibility and offer peace of mind should be sought.
Fostering a planning culture
As Brazil’s current wealth is a recent phenomenon, the process of recognizing and addressing these challenges have not been practiced by multiple generations and a culture of planning has only recently begun to develop.
Wealth management advisors to high net worth Brazil residents typically focus on helping clients grow their assets. However, aiding them to preserve, structure and transfer their wealth is important to providing complete wealth management services.
Advisors who fail to address these issues not only impact their clients, but also jeopardize their own businesses in the long term. The Institute for Preparing Heirs suggests 90% of inheritors will change advisors upon receiving their inheritance, generally because the heirs have limited relationships with their parent’s advisors and have not been engaged in the wealth transfer planning process.
Alternatively, properly initiated and managed wealth transfer discussions help advisors solidify relationships with heirs and build new relationships with business partners and extended family members, while aiding them in identifying new assets and complementary business opportunities.
Life insurance as a solution
While Brazil residents have a variety of solutions available to aid them in meeting their wealth transfer needs, there is one highly attractive solution that can inject liquidity to an estate when needed most: life insurance.
Life insurance is often an ideal planning solution due to its ability to offer a death benefit that is a multiple of the premium, cash value in the event an early surrender is required, flexible premium schedules, attractive policy provisions and guarantees from highly rated entities.
As the domestic Brazil life insurance market is not highly developed and offers coverage amounts that are often insufficient to meet the needs of the growing high net worth population, more sophisticated strategies need to be considered in order to bridge the liquidity gap faced by affluent Brazilian families.
The taxation of life insurance in Brazil
Due to the social and economic benefits of life insurance, the tax laws of many countries have evolved to exempt life insurance death benefits proceeds from income taxation.
Eduardo Avila de Castro, partner of Machado, Meyer, Sendacz e Opice Advogados in São Paulo says, “Brazil tax law generally exempts death benefits proceeds of life insurance from income tax. Any life insurance based planning solutions should be evaluated and implemented with careful consideration for the relevant laws and planning objectives. Due to the changing international tax landscape, I suspect an increasingly growing number of advisors will consider the use of life insurance based solutions to meet the changing needs of their clients.”
The widespread planning and liquidity needs of Brazil residents, combined with the attractiveness of available life insurance offerings, creates the most attractive opportunity in Latin America to serve high net worth clients. Practitioners who become educated on how to address and solve these complex needs, will surely reap the brand, monetary and associated benefits of highly satisfied clients.
By Diego Polenghi, Managing Director, International Planning Group