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Building A Lasting Legacy: Why Heritage Wealth Planning Is Imperative For The Middle East Each family needs to establish common values and consult wealth advisors together with heirs to prevent future misunderstandings, and thereby realize a smoother generational wealth transfer.

By Abdulmohsin Al Omran

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Al Omran

There is a common saying that "a fortune never lasts beyond the third generation." Indeed, estimates state that 70% of families lose their wealth in the second generation, and 90% in the third. This is particularly important in a rapidly growing region like the Middle East, which is building a reputation for resilience amidst global volatility.

The Middle East is emerging as a hub for high-net-worth individuals (HNWIs) due to its relatively tax-friendly environment, strategic location, connectivity and developing infrastructure. According to a recent report by Knight Frank, despite an overall fall in ultra-high-net-worth individuals (UHNWIs) population in 2022, the region saw an increase of 16.9%, with the UAE and Saudi Arabia having the fastest growing UHNWI populations.The Middle East is also set to see $604 billion worth of wealth transferred intergenerationally by 2030.

Planning for one's family wealth to be transferred smoothly to the next generation is essential to prevent family disputes, as well as to preserve its value. Without a proper heritage wealth strategy, families can face devastating effects on their wealth in the long run. Therefore, effective heritage wealth planning in the region is paramount to realize a lasting legacy for following generations. However, preserving it has some notable challenges. Here are a few reasons why- as well as a few practical tips to overcome them.

Why family wealth is hard to preserve

Five factors commonly influence the loss of a family fortune. These include:

1. FRAGMENTATION AND LACK OF PLANNING Each generation that inherits wealth tends to spread it amongst a larger group of individuals. Similarly, the revenues of a family business may plateau if its profits are distributed to a wider group of heirs rather than re-invested, slowing the growth of wealth.

Moreover, the lack of a common plan or governance system will make it harder to manage wealth wisely. With family businesses making up approximately 60% of the GCC's gross domestic product (GDP), they house a significant portion of the region's wealth. Unfortunately, too few families take action to protect their wealth.

A recent global survey showed that while 83% of investors are concerned about the smooth transfer of assets, fewer than half raise the topic with their heirs. Discussing the topic with family members is the first step in lifting the curse of intergenerational wealth loss, and addressing the issue requires a systematic process and expert support.

Regarding governance, the same reports shows that only around 66% of older HNWI business owners in the Middle East mention that they have a formal and rigid system of governance in place, compared with 50% of younger respondents. Younger HNWIs also display more receptiveness to change, with 45% stating they have a formal and flexible system of governance, which has transformed over time to reflect their family values compared to 28% of older respondents.

Therefore, this mismatch in governance system values between generations must be resolved either by having a common governance system agreed to by all parties, or by establishing clear conflict resolution systems well in advance to prevent disputes, the jeopardization of decision-making, and the ultimate loss of wealth.

Related: For Family Businesses In The Middle East, Formalized Governance Can Help Create Lasting Legacies

2. LIVING STANDARDS The global cost of luxury goods and "living well" has been rising faster than general inflation since 1982. Likewise luxury spending in the Middle East is gaining popularity due to relatively young populations and high disposable income.

According to Barclays, the Middle East is set to account for 8% of luxury goods sales globally by 2030, up from 5% currently. Nevertheless, unless income rises commensurately, living the good life will deplete wealth gradually as it gets more expensive.

Therefore, HNWIs need to keep a check on the cost of their living standards, despite the recent expected slowdown of inflation in the Middle East. Seeking different income streams to maintain their spending power can also help HNWIs maintain their overall wealth position.

3. INVESTMENT DECISIONS Wealth takes a lifetime to build, but it can be lost in mere weeks following unwise investment decisions that fail to connect risk with return. According to Ernst & Young (EY), global investment is increasingly becoming complex especially with UHNWIs and individuals investing through discretionary or execution-only mandates. A similar study by them displayed a record 65% of Middle Eastern clients seeking support in financial planning.

Consequently, family businesses and HNWIs must prioritize education for them and their heirs in wealth planning/preservation to ensure its proper management. Engaging with simplified digital wealth platforms can also assist this, while providing frequent and flexible interactions with wealth advisors to prevent costly, uninformed, and rash investments.

Related: Let the Family Build (And Then Let The Professionals Run)

4. CONCENTRATION Family wealth is commonly concentrated geographically in too few assets or asset classes, such as local real estate and the family business. This increases risk and reduces risk-adjusted returns.

Approximately 90% of HNWIs from a recent survey hold their wealth in the Middle East, and they continue to expect to do so over the next few years. Similarly, almost 25% of HNWIs are reevaluating the geographical set-up of their family businesses to safeguard against unpredictable global economic performance, which is being magnified by increasing inflation and the Russia-Ukraine crisis. Hence, HNWIs in the Middle East must diversify their investments to prevent the risks of losing wealth over poor performance in one or a few asset classes.

5. TAXATION AND INHERITANCE LAWS Inheritance tax in certain jurisdictions may force the liquidation of assets unless tax liabilities have been planned for in advance. Although the GCC countries don't have any inheritance tax, some of its neighboring countries do.

Moreover, if a Muslim individual passes away and has not left any will, different nations will have different ways of dealing with the leftover assets. For example, some might apply Sharia law to the succession of assets, which might not be at the deceased's best interests. Expat HNWIs may be exposed to other laws and taxation based on the domicile of the investment. Therefore, it is vital to consider and plan for tax liabilities and local inheritance laws early on to prevent losses to wealth.

Heritage wealth planning has helped many affluent families secure a robust financial legacy for future generations. HNWIs in the Middle East know the importance of heritage wealth transfers; however, more effort is needed to plan early, consider rising living costs, educate heirs, and diversify wealth.

Engaging with reputed wealth advisors can help achieve more organized heritage wealth planning by crafting personalized financial plans based on experience, unique family circumstances, and leveraging extensive networks. Nevertheless, each family need to establish common values and consult wealth advisors together with heirs to prevent future misunderstandings, and thereby realize a smoother generational wealth transfer.

Related: What Family Businesses Need To Know About The New Legal Framework Governing Their Operations In The UAE

Abdulmohsin Al Omran is the founder and CEO of The Family Office. Since it was founded in 2004, The Family Office has managed more than US$2 billion of assets for over 200 ultra-high-net-worth individuals and families across the world through offices in Manama and Riyadh. Their Dubai office opened in May 2023, consolidating their leading presence in the GCC.

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