A few weeks ago, I wrote about the C-suite Dilemma.
The article focused on the major personal finance challenges that C-suite executives face when they are ready to step down from the upper echelons of the corporate world.
The article led to a few executives in my network reaching out to me to discuss their particular situations in closer detail. One such high-flying executive, Sahil, had a few layers that he needed to address.
In today’s piece, I want to focus on the structures and solutions we recommend for Sahil and other High Net Worth C-Suite executives that may be facing similar challenges.
Challenge #1: Debt-Free Non-Liquid Assets
This one applies to entrepreneurs, too, but we often see this with our very select C-Suite clientele. They have fully paid, debt-free fixed assets here in the UAE, such as property.
The concern here is a potential issue with succession planning and the transference of those assets.
Sahil had a property worth AED 2 million that was fully paid for. The entire value of the property basically sits in the property. Sahil has rental income coming in from this property, but he was concerned that in the event of death, under Sharia Law, there could be a delay in the settlement of this asset, and the transfer to his next of kin might not go as he would like.
The Solution: Free Up Locked Equity
Sahil’s best bet is to de-risk the situation as much as possible. I recommend he take out a loan against the property while it’s fully paid for and while the rental income is still flowing in.
For a property worth AED 2 million, if he takes a loan against 60% of that value, he’d be borrowing about AED 1.2 million from the bank. That leaves AED 800,000 of his equity still locked in the property. He can now take the AED 1.2 million and park it in offshore assets and investments outside the purview of Sharia Law.
The offshore assets are more liquid, easier to transfer to his next of kin, and as a result, Sahil would have created a whole new bucket of assets with money that was otherwise tied in another asset.
The rental income from the property would help to pay down loan installments. And the rental income Sahil received would now come to him in the form of returns from his offshore investment portfolio.
Now, of course, we have incurred debt in the process. And to ensure that debt is comfortably cleared in the event something happens to Sahil, he can purchase a term Life Insurance policy for the tenure of the loan worth AED 1.2 million. The bank would then receive this amount, and Sahil’s property would once again be debt-free and transferrable to his next of kin.
The offshore investment portfolio will also likely grow over time. Effectively, Sahil would increase his net worth and diversify his estate without taking on any significant out-of-pocket expenses.
Sahil’s got four such properties across the UAE. Considering that he is completely debt-free, he can apply this model across all his property.
The structure creates new assets and eases his wealth transfer and inheritance planning concerns.
But you might ask: What if I have a will in place? Wouldn’t that take care of something like this?
Remember that a will is always contestable. Even if your next of kin ultimately win any proceedings, it might be a long, tedious process if the will does get contested. What we’re doing here greatly reduces what is at stake if that happens.
Challenge #2: The End of the Group Life Insurance Benefit
Most C-suite executives have hefty Life Insurance policies as part of a Group Life Insurance plan. The challenge here, however, is that they lose that benefit at the end of their tenure with said organization.
Sahil is likely to retire from his current role in the next two years or so. Given his seniority, he probably has somewhere between US$ 2-5 million worth of Life Cover as a part of the company’s Group Life Insurance plan.
When he retires, he loses that cover completely. He would then have to go out and procure a privately-purchased Life Insurance policy. For many executives, this decision comes after a long, two to three-decade run in the corporate world. Age and the state of their health when they step out of the luxury of a corporate benefits package might mean that they are either uninsurable or paying extremely high premiums for their Life Insurance policies.
The Solution: This is fairly straightforward. My recommendation to Sahil here is to keep the company policy in place and, additionally, get a privately purchased Life Insurance policy as soon as possible.
This proves easier while he is still in good health and has a healthy income. Ideally, this policy would equal the value of the Life Cover he has in place through the Group Life Insurance policy.
Sahil could potentially ask his company to redirect his Group Life Insurance policy allowance towards a privately-owned policy, and he could cover the difference himself.
First, this ensures that he has Life Insurance in place even after he steps down from his corporate life. And equally importantly, a personally purchased Life Insurance policy might be the only lifeboat the next of kin have while the rest of the estate is getting settled.
Challenge #3: The End of the Medical Insurance Benefit
Another typical C-suite benefit is the premium-level Medical Insurance coverage extended to the executive and their family.
If Sahil were to step down from his position, that’s another benefit he would lose immediately.
The Solution: I recommended that Sahil source a good Medical Insurance plan equivalent to the care he is used to with his current plan. Suppose he goes ahead and purchases private medical cover from them and starts to build a good relationship with the insurer. In that case, Sahil will benefit from continued Medical Insurance even after his corporate run, at the best possible rates.
All in all, we’re trying to shift the dependence on that comfortable corporate package to a more sustained safety net.
Sahil’s challenges are not unique to him. These issues of limited liquidity, too many fixed assets that are fully paid for, and the potential discontinuation of benefits and policies are common to many successful C-suite executives.
The goal is to create a robust safety net so that all is good when they are ready to step down from their corporate careers for whatever reason. The executive and their family’s futures are secure, and their assets and investments are well-planned and positioned for easy wealth transference.