Wealth Management: A comprehensive way to transfer Family Wealth

The successful transfer of family wealth to the next generation is an objective of every human being. Unfortunately, many a time the aims of the current owners are not achieved due to various reasons. Many a time such transfers would lead to deep and extended family breakdowns and conflict. This article will be considering ways on how to practically minimise failures in wealth transmission, through the establishment of “family governance” where the involved family members have clear roles and responsibilities so as to ensure that wealth is successfully passed on without the renowned family wars that tend to arise during such phases.

In most family enterprises, businesses are typically the primary engine of the wealth creation. The vast majority of enterprises start out as an idea from the owner who would offer limited services and/or products that are provided. Many a time these structures are not liquid, meaning that these businesses are asset rich but cash poor and are subject to various factors sometimes opposing, that at the same time could either create wealth or destroy it. If the business manages to develop to maturity, the family will face new challenges. Most mature family businesses control enterprises that generate on-going cash flow. Families in this position will have to face totally different scenarios related to family governance – how the family maintains its entrepreneurial spirit as wealth grows, who and how many family members should be actively involved in the business, how to diversify and grow, if the business is not to stagnate, how will the cash flow requirements of the business, its financial assets and the family relate to each other?

The Planning Process of Wealth Management within Family Governance

The process of managing and passing on wealth across generations needs to be executed through the implementation of a family governance and strategic wealth management plan that provides a holistic approach to the transfer of the family’s legacy. Here the focus is on the family members who are directly and/or indirectly involved or those that will be involved at some point in the future. At the core, the family enterprise revolves around the management of the human capital that exist and not solely on the financial assets involved. The complete process of wealth planning should integrate the family shared purpose, with the business objectives, financial assets, career expectations, on-going estate planning and other aspects that affect all those involved.

The classic approach to wealth and estate succession planning is to treat family issues and business issues as totally separate and distinct from each other. That is, those who take over the business would have little to do with the trusts, foundations to hold the family’s wealth, and no consideration for structures for family governance such as family assembly and/or family council. This approach has major flaws and is being increasingly challenged as being incomplete and uncoordinated since this process completely leaves out from the picture the most important aspect of the jigsaw: The Family.   

Importance of Balance between Family and Business – Family Governance

For the past decade, new insights and understandings have emerged through the application of basic systems theory to families and the businesses and the wealth they own. It is now becoming more accepted that there is not only the business consideration to be planned for, but also another two, the Family and Ownership dimensions. It is of crucial importance to find the right balance between these three systems since they continuously overlap and interact in unique ways only found within family enterprises and wealthy families. Unfortunately, professional services offered tend to focus and be delivered from purely the specialists’ area of specialisation. Through this approach whether consciously or not or because of convenience, providers, are avoiding to tackle the delicate family issues. Family expectations, dynamics and understanding how functional or dysfunctional a family is should actually be tackled before any other wealth and/or asset planning and investment processes due to the different risk profiles that the different family members would be ready to accept or before decisions are taken and which will be binding the family members together whether they are prepared for it or not. Finding the right balance among these systems requirements (family governance) is crucial and typically always requires a multi-disciplinary approach, using advisers who consider this type of work to be a calling.

Shared Family Values and Purpose

Human capital is relatively straightforward – a family must keep its kids safe and healthy. Intellectual capital is more dynamic in any given family, but generally involves traditional education, knowledge about the family business’ unique industry, and a sharing of knowledge among family members. To drive and maintain these three types of capital, a family governance must develop its own set of values that drive each category and a shared purpose. For example, are education and charity important to the family? If so, successful families should write this down and internalise these core values and the shared purpose in all that they do.

The process of identifying the shared values and shared purpose, proactively managing the family’s capital and successfully navigating the interlocking systems in a family business requires families to do some hard family governance work. This process can be invigorating and rewarding, but it is also challenging for many families to take the time and energy to ensure that it is done. Successful families find a way.

Points to Consider in Planning Wealth Transfers

To successfully plan for the transfer of one’s wealth to the next generation is a deep-seated human desire. A “successful” transfer of a company, property, or estate, however, can be defined in many different ways:

  • The transfer should be peaceful and create inter-generational harmony.
  • The transfer should incur as low a tax as possible.
  • The transfer requires a solid legal structure.
  • The transfer should be carried out according to the ground rules and wants of the owner of the estate, who often has strong ideas about who should get what, when and how.

 

As is apparent, such aims may well be incompatible with each other, and can be a recipe for future conflict. This article considers how best to minimise the possibility of failure through a process of on-going “family governance”, where all family members have a role, to ensure that wealth is successfully and harmoniously passed to the next generation.

In particular, this article considers:

  • The basic fears that can motivate an estate owner.
  • The problems that can be caused by a “top-down” approach.
  • Participating in a process of family governance to avoid and resolve difficulties, including:
    • best ways of ensuring proper communication in the family governance structure;
    • preparing the next generation on how to handle wealth;
    • the family charter: specific rules and guidance to be agreed by family members;
    • the continuing nature of family governance.

 

A Successful Approach

 

Private client lawyers, accountants and tax advisers owe their clients much more than high-quality legal, tax and estate planning advice. They owe them an open mind that tries to understand what really matters to them. They owe them professional coaching and facilitation of complex psychological processes, understanding of the family dynamics continuously at play and the other plethora of human relationship issues that are faced by families in business to prepare them for what counts, that is, harmony and peace in the family and between generations, all in a solid legal structure with optimised tax benefits.

Private client lawyers, accountants and tax advisers must therefore be advisers with a broad view, and in collaboration with family business advisers,  to guide their clients on their journey towards successful transfers of their wealth to the next generation and beyond through the provision of  holistic solutions rather than specialist centred solutions.

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