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Four strategies to help ensure a smooth wealth transfer

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Four strategies to help ensure a smooth wealth transfer

Nick Cawley, Global Private Clients Service Line Leader, highlights four ways in which wealth services providers and their clients can minimise the challenges involved in inter-generational wealth transfer.

The saying ‘from rags to rags in three generations’ is often rolled out when discussing troubles that can be encountered when passing family wealth from one generation to the next. And there is clearly some truth in it when you consider the number of families who have seen their wealth or business diminished when a new generation takes the helm.

The inter-generational transfer of wealth is often complex and can be problematic – with the potential for conflict arising both while the older patriarch or matriarch is still alive or after their death. Having appropriate and effective wealth and succession planning in place is critical if such conflict is to be avoided (or minimised) and wealth is to be preserved down the generations.

As a provider of wealth structuring services to private clients, it still comes as a surprise when a client either doesn’t have a comprehensive succession plan in place, or has one that hasn’t been updated in some time. Yet to a degree this can be understandable – not least because such planning tends to require an acknowledgement of one’s own mortality.

Having worked closely with private clients for many years, here are some of the steps that can be taken or ‘tools’ that can be used that have typically proved successful in helping make sure the transfer of wealth is as smooth as possible.

1. Make sure everyone is part of the conversation

One of the biggest stumbling blocks comes as a result of the older generation – let’s call them ‘generation one’ – not having a clear, open and honest conversation with the younger generations about their objectives, plans and wishes for the family wealth and business, if there is one. Yet this is an absolutely vital starting point.

Do they want the wealth to flow directly to beneficiaries, or will they expect some to be used for charitable purposes, for instance? Are the next generations expected to join the family business or will there be an opportunity for them to start their own endeavours? Exactly how is the family wealth going to be shared upon death of the patriarch or matriarch?

And has all of this, and more, been communicated clearly?

Conversation should also be a two-way street – generation one needs to listen to what the younger generations expect from their family wealth and what is important to them. After all, they will be the ones taking the family forward.

Some of these conversations may be difficult, especially if the family is large and the views and priorities vary significantly across the generations. But it is better to have them up front, and deal with any differences, rather than be faced with conflict or in extreme situations, potential litigation further down the line.

2. Build in flexibility

While it may seem to make sense for a founder, patriarch or matriarch to be as specific as possible in their instructions – detailing everything to the nth degree – this can actually be counterproductive and damaging.

As generation one, you have to accept that generation three (your grandchildren) and four (your great-grandchildren) may well be very different – viewing the world differently and having their own beliefs and objectives. So, if you try and put something that’s rigid and prescriptive in place, you may only be baking in problems that will emerge later on, or worse still, potentially denying access to the wealth that you want to be made available to these later generations.

Likewise, however, you don’t want to be too vague in your wishes or intentions to the point where they could be misinterpreted or, indeed, lead to conflict. It’s a question of making sure that you build in appropriate flexibility.

Take a letter of wishes for a trust, for example. This is a very traditional, and many would say essential, tool when it comes to wealth and succession planning, as it gives clear guidance to trustees to follow your intentions. However, we’ve seen some letters of wishes that run to pages and pages and are very prescriptive. A fine balance needs to be struck and this is something that professional advisers and trustees can assist with.

3. Make the most of structures

The private wealth industry has developed significantly in recent decades and one of the areas in which this is most evident is in the structures that are now available for wealth and succession planning. From trusts (including private trust companies), foundations and partnerships, families have a number of tried and tested structures to choose from across a range of jurisdictions.

Having those options, however, means making smart choices and it’s here again that a professional can provide invaluable advice in helping choose and establish the structure or structures that are going to most effectively meet objectives.

We have a client, for example, who set up five separate structures for five beneficiaries as well as a trust for charitable purposes – ringfencing the money but building in flexibility within each structure. This proved to be far more efficient than trying to cover everything under one trust.

The great thing about the structures that are available nowadays mean that clients' specific preferences can be met. Clients in Asia or the Middle East, for instance, are less familiar with the trust concept of giving assets away to someone to look after. So, private trust companies and foundations are particularly popular here as they can give more control to generation one and future generations.

Likewise, clients may prefer certain jurisdictions. Some may want to keep their money closer to home, whereas others may be looking for a jurisdiction that has strength, political stability and flexibility around a specific structure.

4. Educate the next generation

No matter how well educated the next generation may be university-wise or from life experience, understanding how a family business is run and how wealth ‘works’ is often outside of their knowledge base. This is where generation one and professional advisers have a significant joint role to play.

By having conversations with the next generations, knowledge gaps can be identified and a plan of action can be put in place to provide the necessary education. This may well be around specifics such as how a trust is established and run, or more general around identifying philanthropic projects and running a foundation.

And as with any job, knowledge comes from both training and experience and therefore needs to be ongoing. So, for instance, we may invite family members to sit in, as observers, on investment management meetings every quarter until they become more comfortable with the process and the underlying investments themselves.

It’s likely that any wealth transfer will still run into challenges over time, and while the strategies outlined here won’t get rid of conflict altogether, hopefully they will make life easier for everyone involved.  

Give yourself greater flexibility

At Ocorian, our extensive experience in establishing and managing complex, high-value structures helps protect, preserve and plan for the future of our clients’ personal and family wealth. 

Find out how we can support your private wealth plans by contacting our team below or viewing our full range of private client services here.

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