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The Importance of Currency Hedging in UHNW Estate Planning

It's all about the money

Recent events in Russia and Greece provide devastating examples of capital flight. It’s estimated that $151.5 billion in capital left Russia in 2014, up from $61 billion the previous year, based on information provided by the Central Bank of Russia. For Greece, €25 billion have left Greek banks since December. Investors are moving their money, seeking safe havens from the uncertainties of currency devaluation, sanctions and protectionism.

In general, ultra-high net worth (UHNW) investors have businesses, assets and currencies spread across the globe. Those that aren’t necessarily diversified end up becoming so when forced into capital flight, as recently seen in Russia and Greece. While it’s difficult to anticipate specific crises, smart investors think long-term and diversify their holdings well in advance of such problems.

The U.S. dollar (USD) is still widely considered the most stable currency in the world and is projected to continue to be the top, or at least very close to the top, for the foreseeable future. The dollar holds 44 percent of international debt markets (European Commission), is the most actively traded currency in foreign exchange markets (Triennial Central Bank Survey) and is the most widely used reserve currency for monetary emergencies (European Commission). Also, many countries pin their own currency to the dollar. The dollar is not the currency to be traded on speculation—it’s the safe portion used to hedge against other currencies.

From an estate planning perspective, this distinction is extremely important. UHNW individuals want to have their wealth, the portion they want protected, in a very stable currency with financial instruments that enhance those protections. Life insurance and annuities, often used in conjunction with trusts and personal investment companies, are at the forefront of options used for such purposes. The reasons are, actually, very simple, these vehicles may:

  • be denominated in very stable currencies, such as the USD, Pound or Euro;
  • offer additional creditor protections;
  • provide specific values of cash to offset estate and inheritance taxes; and
  • provide a chassis for significant tax-neutral or deferred cash accumulation.

According to the recent Wealth-X and NFP Family Wealth Transfers Report $16 trillion of UHNW wealth is to be transferred to the next generation over the next 30 years. Currency issues are bound to rank high for many of these families. Latin America is expected to transfer the highest proportion of its wealth at 17 percent, equal to $380 billion, over the next ten years. In the next 20 years, Asia’s UHNW population and wealth are expected to grow to become the largest in the world. It makes sense for these investors to hedge by diversifying into stable currencies, such as the U.S. dollar. Insurance solutions, likewise, are one of the most efficient ways to transfer wealth to the next generation.

Kris Stegall, AVP Research and Development at NFP, is an expert in research, analysis and case design for the U.S. and international marketplace. His knowledge and experience enables him to pinpoint potential jurisdictional issues before they arise, and allows him to develop comprehensive solutions that address unique or complex goals related to wealth planning, business planning and specialized risk management.

NFP is a leading insurance broker and consultant that provides employee benefits, property & casualty, retirement, and individual insurance and wealth management solutions.  NFP and its subsidiaries do not provide tax or legal advice.  Clients should consult their own tax and legal professionals.

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