Passing the Torch: Engaging the Next Generation in Family Wealth

Subsequently, we are observing that effective dynastic planning models often involve engaging the Next Gen in the governance of family wealth structures. This strategic involvement not only prepares the Next Gen in relation to the effective management of a family’s wealth but can also strengthen the family’s legacy, adaptability and cohesion.

In addition to a seamless transition of generational wealth, other benefits observed are continuity and stability during the generational transition, alignment of interests with the long term goals of the family wealth, fostering a sense of responsibility. The Next Gen also bring new ideas and fresh perspectives which can lead to innovative strategies and approaches in wealth management.

A common concern, however, for the older generation who may have earned the wealth, as settlors or founders of these family wealth structures, is whether the Next Gen have the ability to manage, respect and sustain these wealth planning frameworks?

It can be said that a legacy is not merely a collection of assets, it embodies the principles, ethics, and aspirations of the founders. In this article we will explore a simple mechanism that enables the older generation to pass down these core values and engage the Next Gen in the management of family wealth structures, without granting them significant power.

Family Advisory Committee

A favoured solution would be to establish a family advisory committee, that sits alongside a family trust.

A family advisory committee is a body made up of family members and or trusted advisors (the “Committee”). Although the Committee is formally drafted into the trust instrument, as its title suggests, its function is purely “advisory”.  The Committee does not have decision making powers nor does it hold any fiduciary responsibilities. This is important for a number of reasons including the Committee not being deemed controller, which may be risky for tax reasons and also possibly reportable under the Common Reporting Standards (CRS) and/or the Foreign Account Tax Compliance Act (FATCA).

Ideally, the Committee would be subject to its own set of regulations which does not form part of the trust instrument (the “Regulations”). The Regulations set out the terms and conditions of the Committee including voting rights and how Committee members are to be appointed and removed.

The role of the Committee is to discuss and decide on pertinent issues for the family such as philanthropy, ESG, and impact investing or it may even include the preservation of family harmony. By way of its Regulations, the Committee will vote on matters and make recommendations to the independent trustee. The trustee has a duty to consider those recommendations and, in accordance with its powers under the trust instrument, will exercise its discretion as to whether to further those recommendations.

It is essential to highlight here that the recommendations are not legally binding upon the trustee or any other party. This works well because the settlor can rest assured that, so long as a robust and diligent trustee has been appointed, no absurd recommendations will be considered and implemented. So long as specific powers are not carved out, the trustee will hold absolute and sole discretion, so in the event that the Committee makes unreasonable recommendations, the trustee is at liberty to simply reject those requests. 

The key is to ensure a balanced representation of both the older and younger generation when establishing the Committee. Once the older generation members have confidence in the younger generation’s competence to handle tasks independently, they can gradually step back or formally resign from the Committee.

We are seeing today that the Next Gen are progressively expressing a desire to leverage their family wealth resources for global betterment. Being a member of the Committee is an effective way to achieve this, so long as it is aligned with the rest of the family’s wishes.

This Committee allows for open dialogue and debate between the members with the aim of furthering these objectives.

For more complex and layered family structures, different committees may be formed to laser focus on topics of interests such as an ‘education committee’ or ‘ESG committee’.

The Family Advisory Committee provides an effective means for the older generation to impart their ethos and values, concerning the management of family wealth.

Conclusion

By involving the Next Gen in governance, the matriarch and patriarch of the family can promote a culture of open communication, shared decision-making and collective responsibility. This approach helps align the interests and expectations of all family members, reducing potential conflicts and fostering a sense of shared purpose. It ensures that the family’s wealth is seen as a common resource to be managed collaboratively as a lasting legacy, rather than a sense of division.

A version of this article was first published in the TL4 Private Client_Issue 16 ‘Next Gen Wealth’, pp.22.