A lack of planning can be very expensive. Families are becoming more complex as blended families are more commonplace, and more generations are now involved. A wider circle of family members are being brought into the wealth succession plan, with the next and following generations often having an entirely different view on how to manage their wealth.
If the next generation is not involved in the planning process, or if the eventual wealth allocation does not prove to be what they expected, then very costly and drawn-out conflicts can arise, as numerous real-life cases have shown time and again.
The wealth succession dialogue is not a single event, but an ongoing process and we have gathered some common traits of successful wealth transfers based on our experience with families from around the world.
It is vital to establish a vision and define the purpose of the wealth succession right from the start. Both for receivers or distributers of the wealth, this should be the first step to consider.
The wealth giver should have a clear view of who they want to pass wealth to, when and how this should be done, and in what proportions.
The party receiving the wealth needs to be clear on what they would like to get out of the wealth they would be receiving, both for the short and the long term, and how they can prepare for it.
The vision and the purpose will be the basis of the discussions between the receiver and the giver.
Wealth givers tend to put off succession planning because of any combination of these factors:
- They still feel young and healthy
- They are busy expanding the family business and increasing the family wealth
- They believe the next generation is still too young and inexperienced; or
- They feel the family and the next generation should already know how the wealth is meant to be shared and carried on
The harsh reality of life is that no one can say with any degree of certainty when things will change and leave a permanent mark.
While knowing when to start succession planning can itself be a challenge, the earlier the conversation and the planning takes place, the easier it is to build a step-by-step consensus approach.
The wealth giver can approach this discussion by reflecting on the family story and considering shared values and aspirations. Open discussions should be conducted with mutual respect and family members all need to be aligned with what the family stands for and how its heritage and values should be passed on to future generations.
Both the wealth givers and receivers need to understand and agree on what they want to achieve from the discussions about succession planning. All those involved need to feel they have their say, be prepared to provide information and keep communication lines open during the process. This will allow for both the givers and the receivers of the wealth an opportunity to frame their respective expectations in the context of the facts and find common ground.
Inheriting wealth should never be taken for granted. The transfer of a family business and/or wealth from one generation to the next works best by mutual agreement. The next generation will need to build a track record and demonstrate that the family assets will be in good hands in the future.
Some successful next generation family members have created commercial initiatives that may be related to or separate from the core family business. Others may practice by managing a single asset to build trust and financial literacy.
Managing different talents and different levels of interest can affect the succession plan.
Reconciling these with the goals of the family to build trust and ensure unity is key.
The wealth transfer should be effected in a gradual and controlled manner. Prior to a full transfer, the first generation may give the next generation opportunities to understand the responsibilities and create an impact in the early years, while allowing room for error and to learn and grow in alignment with the family’s values.
The wealth giver should also acknowledge the efforts made by the next generation and build this into their succession plan. It is vital to be mindful of generational differences, to be open to change, and to acknowledge that things can be approached differently.
As traditional business models are being disrupted and dismantled by the rapid technological change, families should review new opportunities to expand their assets through venture capital and private equity.
While change is to be expected, it must be delivered sensitively and with due respect for previous generations.
An evolving blueprint for transition, one that should be documented at every stage, is worth considering. Revisiting the succession plan with an eye towards the future can offer fresh ways to look at the family’s legacy.
It is important the next generation have a proper sense of ownership – either to maintain a winning status quo, or to find fresh ways of reinvigorating the family’s wealth creation.
As we have established, the aspirations and responsibilities of the next generation may differ vastly from the last. Successful families not only have the succession discussion early on but also equip the next generation with the tools and independent counsel necessary to help them take on their future roles.
Securing the right advice is crucial. An advisory team can help develop and assess various strategies, weigh up scenarios and provide advice and support while taking into consideration different perspectives.
It is important to have a network of trusted advisors who intimately understand the intricacies of family wealth succession and can offer holistic advice from governance to insurance and even down to dispute settlements. Although wills and trust funds used to dominate succession planning in Asia, increased global regulations make it a complex affair requiring a broad range of expertise.
Avoid the pitfalls
Succession planning can be complex and the process can be filled with issues and ‘traps’. Some pitfalls to avoid include:
1. Lack of clarity and vision
Succession can be a very emotionally-charged and sensitive journey. It is thus quite common during the transition process to say one thing and then do something completely different, if there is no family vision to hold it together.
A lack of transparency and undefined timeframe may also make the terms ambiguous and open to controversy and misinterpretation.
Clarity, especially for business families, includes the need to separate the family’s private wealth from its business assets.
2. Lack of formal collaboration
Differing views and opinions can cause problems – including what is considered fair in terms of distribution and who should be included as beneficiaries.
A less formal approach – “because we are family” – may lead to complacency, affect the succession and wealth transfer process, and eventually create conflict.
3. Prior family conflicts and entitlement issues
There may be issues when the next generation lead a privileged life and are not aware that creating and maintaining wealth requires work and dedication.
There may also be ripple effects from other family conflicts such as fractured relationships or complications that arise from divorce, remarriage and multiple marriages, and children born out of wedlock.