More than money and assets: what makes an effective succession plan

With what many are calling the ‘Great Wealth Transfer’, experts anticipate the transfer of a staggering value of wealth over the next two to three decades. Although different research predicts differing figures, the conclusion remains the same; now, more than ever before, it is essential that families consider the effective succession of wealth.

However, it is not only about money and assets. Effective succession recognises that great wealth affects the life and psychology of the first generation in a different way than it does the next generations. Wealth has a different meaning for those who have built an empire from the ground up to those born into the empire. A successful transition of wealth and power bridges the gap between acquirer and inheritor, parent and child, ‘old-school’ and ‘new-school’.

With a recent encounter with two ultra-high net-worth families with two very different approaches to their wealth and succession planning, both going through a very similar family event, this article contemplates the factors that helped or hindered these families on their wealth succession journeys.

• Unity begins with communication

All families desire a harmonious transition of wealth between generations, and for the wealth to tie them together rather than tear them apart. However, it is also widely known that, in reality, wealth often divides a family.  With this in mind, it is easily understandable why a patriarch or matriarch may insist on involving the younger generations in the wealth, or why they may choose to shield them from it.

Seeing both scenarios play out at the same time in similar circumstances is insightful. Where the extent of the family’s wealth comes as a surprise to the next generation, they are “unprepared for the future, neither warned nor guided into their situations.”²   This is especially true when a family business is involved. In this case, one of the families had minimal integration between the family and the business, with the result that, some painful and inconvenient decisions had to be taken by family members to facilitate the transfer of wealth.

In contrast, the family that had involved the next generation in the business over the years was aligned on the transition of power and ownership – the roles each person would play and how the transfer would take place. Various family members had been working in the business, gaining intimate and valuable knowledge of both the business and the patriarch’s vision. As a result, there was much less anxiety involved for the whole family, the trustee was able to make a more straight-forward decision, and the costs involved were considerably lower.

• Practicalities matter

Creating a succession plan is important, however, even the most well-intentioned succession plan will fail if it is not practical to implement. One example from many years ago that comes to mind is a settlor who determined that, on his passing, the two children from his first marriage (his wife had passed away) and his second wife must agree on any distributions to be made from the family trust. As the children and second wife did not get along, no one would approve a distribution to the other.

Involving the next generation in the discussion when setting a succession plan can be of great value in ensuring that it is practical. Factors such as family dynamics, implications of different jurisdictions’ taxation and legal regimes, and the differing needs, skillsets, abilities, aspirations, and desires of different family members, are essential to consider. An inclusive and interactive approach may also highlight any further steps and formalities that may be necessary, such as a shareholders’ agreement, post-nuptial agreement, an investment policy statement, or a life insurance policy.

For instance, a member of one of the families in the recent encounter had concluded a post-nuptial agreement which allowed the family to have more effective options available to them. In contrast, where these practical implications are not planned for, it can unfortunately also be the case that there are very limited options available for the effective transfer of wealth, forcing the family to choose between options with less-than-ideal consequences. In this instance, it created distance between family members at a time when proximity and closeness were desired.

• Don’t do it alone

Each family is unique, and each family’s systems, dynamics, and history are unique. Having the support of professionals who understand this, but also have the insight gained from working with multiple families, is paramount. This extends to all areas of private client services – there is immense value in having the right tax advisor, lawyer, accountant, fiduciary services professional, and family business advisor at one’s side – and there are many more professionals with expertise and specialisms that can help wealthy families with their particular circumstances.

Obtaining detailed tax advice and having it regularly updated is important to help direct the succession discussion. Although tax should not be the driver when making succession decisions, no succession plan would be effective without proper consideration of the potential tax implications and considering what that would mean for individual family members.

In addition, having trusted advisors who are acquainted with the family and their matters, can be invaluable when sudden life events occur or if time-sensitive transactions need to take place. In the example mentioned above, over 500 legal documents had to be prepared, among a myriad of other actions, checks, and formalities that had to take place. Both families had long-standing relationships with a variety of professionals, which meant that they could immediately start working and collaborating to assist the family with the numerous decisions, complexities, and transactions.

• It is a worthy endeavour

The saying ‘shirtsleeves to shirtsleeves in three generations’ rings true for too many wealthy families. In many cases, this is the reality even when the first generation was convinced that it would not be true for them. In today’s world of ever-increasing complexity, geographically dispersed families, and diverse assets, it is more important than ever to ensure that an effective, comprehensive succession plan is in place - one which truly considers the family, and not only the wealth.

A version of this article was first published in the Family Office Magazine Summer Issue 2023.

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