This article is also available in: Swedish

In the coming three decades a record global Ultra High Net Worth wealth of approximately USD 16 trillion is expected to be transferred to the next generation [1]. Furthermore the global UHNWI population is forecast to rise by 22% over the next five years, meaning an extra 43,000 people will be worth more than US$30 million by 2023 [2].

For Sweden, the trend is similar to the global one. In the past years, the Swedish high, ultra-high and billionaire's population has constantly grown, and is projected to continue to increase by respectively 22%, 25% and 16% by 2023 in comparison to 2018 [3].
It is a well-known fact that finding the best and most efficient way to transfer wealth to the next generation is of great importance and can be challenging depending on family situation and complex wealth structures. For many, the topic of succession planning is sensitive to discuss within family members and it is not unusual that the planning takes place only at a later stage in life, if ever.
Moreover, for families spread out in different jurisdictions there may also be complex issues to address such as for example forced heirship rules and how to make sure that the wealth is preserved within the family.
In the future, with more accumulated wealth to be transferred, succession planning related challenges will also increase.

Succession and inheritance in Sweden

Generally speaking, if no active succession planning has been done, the assets of a deceased individual are divided between the heirs in accordance with Swedish inheritance rules. If the deceased individual was married, the spouse would inherit the assets with a right of free disposal. Children of the spouses would normally inherit after the last surviving spouse. This would however not apply if the deceased would have children from for example a previous marriage (Sw. särkullbarn). In such situation the children would have the right to receive their statutory portion of the inheritance directly after the deceased parent unless certain exceptions would apply.
For High Net Worth Individuals there may be good reasons to plan ahead for their legacy not to be divided in accordance with regular inheritance rules.
There may for example be a family business that should be passed on to the next generation, where the ultimate wish is to pass on the business without splitting it between the heirs. Or there may be a wish for a property to be passed on to one legal heir while the others should receive adequate compensation. In both examples it is crucial that the planning for the future succession is done well in advance and that it is carefully drawn up to be in line with the individual’s wishes.

The inevitable tax element in succession

Even though there are no inheritance or gift tax in Sweden, taxation should also be taken in to account for succession planning purposes. For example, how should the family business be passed on to the next generation in a tax efficient way?
Receiving assets through inheritance would, in some cases imply, that the heir would take over the deceased individual’s acquisition costs under the principle of continuity for taxation purposes. For example, inheriting a property or a portfolio of assets would in general imply that any unrealized gains will be taxed in the hand of the heir at time of sale. The principle of continuity applies regardless if the inheritance would have been passed on in accordance with Swedish regular inheritance rules or if it would have been passed on through a will.
To set up a will with instructions on how the wealth should be divided between heirs is a common way to actively handle succession in Sweden. Forced heirship rules would however have an impact on how the assets can be divided. In order for a will to be valid it should be drawn up in accordance with formal requirements as set up in the Swedish Inheritance Code. It is necessary with two independent witnesses and the will must be signed by the testator (or acknowledged by the testator) while the appointed witnesses are present.
Another efficient way for succession planning, which may not be as commonly known, is to pass wealth on through a life assurance policy by appointing beneficiaries through a beneficiary nomination to the life assurance policy.

Why use a life assurance for succession planning?

Besides being an efficient investment tool a life assurance policy can also be an efficient tool for succession planning since it, many times, can be structured to suit the policyholder’s wishes. It can sometimes be more efficient than a regular will and has, to some extent, even a stronger legal status than a will.

Succession planning through a life assurance policy can be accomplished by having the policyholder designate beneficiaries through a beneficiary nomination or by structuring the policy, for example, to cover several lives assured, often in combination with a beneficiary nomination. By designating beneficiaries, the policyholder can choose and control who should be the recipient of the wealth, independently of certain heirship rules. The only formal requirements that should be fulfilled for a beneficiary nomination to be valid is that it should be done in writing, it should be signed by the policyholder and the insurance company should have received the document with the original signature. Another option is to include the beneficiary nomination directly in the life assurance contract upon conclusion.

A beneficiary nomination drawn up in accordance with above simply means that the life assurance policy is not part of the policyholder’s estate once the policy holder pass away. This implies that the policyholder can be sure that the nominated beneficiary will receive the payment from the life assurance policy directly.

Appointed beneficiaries will receive the proceeds of the policy plus 1 % of the policy value free from tax when the contract comes to an end. Depending on the structure of the life assurance policy the, contract may continue to be in force after the policyholder has passed away. This would imply that the appointed beneficiaries would take the place of the deceased policyholder and that they, as new policyholders, would have full control of the policy with the possibility to appoint new beneficiaries, make withdrawals from the policy or even surrender the policy.

Appointing beneficiaries through a beneficiary nomination is a flexible way of planning for future succession. Should the family situation of the policyholder change, the beneficiary nominations can easily be updated accordingly, as long as not made irrevocable by the policyholder.

Benefits of life assurance for Swedish residents

  • investment flexibility – access to international assets not registered in Sweden, such as alternative funds and private equity;
  • maximum policyholder protection through Luxembourg’s “Triangle of Security”;
  • no capital gains or income tax on proceeds from the life assurance policy. Specifically, gains derived from withdrawals and/or surrender are not subject to local income tax;  [4]
  • the life assurance policy is only taxed with a low annual yield tax [5]
  • possibility to assign, pledge or use the life assurance policy as collateral;
  • the proceeds from the life assurance policy fall outside the Swedish taxpayer’s estate on the death of the life assured if there is beneficiary nomination;
  • direct investor influence possible – policyholder free to manage the portfolio of a fund linked to the life assurance policy;
  • easy to declare in the annual Swedish tax declaration

Protection against market volatility via the Wealth Preservation Life Cover 

Lombard International Assurance can offer the optional feature of Wealth Preservation Life Cover (WPLC) which can be added to the life assurance policy. The WPLC is designed to compensate beneficiaries in the event of negative market performance if the policy value would be below the net premium paid at the time of claim. This option gives clients peace of mind that their beneficiaries will receive at least the amount that was invested in the policy, regardless of investment performance.

For more information, please see Wealth Preservation Life Cover ("WPLC").

[1] Wealth Family Transfer Reports 2015
[2] The Wealth Report 2019
[4] Dividends paid within the life assurance may be subject to withholding tax. Taxes paid in the insurance, can in principle, be used to set off the Swedish yield tax.
[5] The effective tax rate for 2019 on foreign life assurances held by Swedish resident individuals amounts to 0,453% on the value of the life assurance in the beginning of the year + full or half value of premiums paid to the life assurance during the year depending on when the premium was paid.