Whilst succession planning has long been on the HNW agenda, never before has so much value been at risk from poor planning. The pandemic, and the disruptions associated with it, makes preparation particularly important when so much can go wrong.
The greatest wealth transfer in history is taking place, with £5 trillion ($6.61 trillion) expected to pass from Baby Boomers to younger generations over the next few years, according to different studies. Now, with the global pandemic bringing succession planning into an even sharper focus for many, how can high net worth families bridge the generational gap to convert potential crisis into opportunity?
The following article comes from Maitland, the global advisory and administration firm. Its international reach gives the firm a good vantage point for the the issue. The author is Iris Harvey, executive director, Private Client Services at Maitland. This is clearly a major topic and the editors are pleased to share these views. The usual disclaimers apply to views of outside contributors. Jump into the debate! Email the editors at firstname.lastname@example.org and email@example.com
It is difficult for anyone to have missed the headlines anticipating a huge transfer of weatlh in recent years. The numbers are staggering. Last year, research by Brooks Macdonald found that more than £300 billion is due to be passed on from Baby Boomers to around 300,000 heirs over the next decade alone.
Whilst succession planning has long been on the HNW agenda, never before has so much value been at risk from poor planning. This, together with the harsh reality of a global pandemic, is spurring matriarchs and patriarchs of high net worth families into action to get their affairs in order.
Whether it be reinforcing existing structures or putting new ones in place, effective succession planning typically involves engaging with younger generations to prepare them for the wealth transition. Fifteen years ago, private banks and family offices tended to do business solely with the head of the family, and when the torch was passed, it was usually to a single family member. Fast forward to the present day and family wealth is becoming increasingly intertwined with the lives of all of its members.
Knowing when to bring younger generations into conversations about family wealth is tricky and specific to each family. Some may choose to give their children an account or assets to look after when they come of age to help them decide if they want to be in the driving seat of that wealth in years to come. For others, having business conversations around the dinner table from a much earlier age is the preferred method.
From cultural influences to varying outlooks on life, generational differences can also be a concern when it comes to the transferral of wealth. According to recent research from Barclays Private Bank, two thirds of older high net worth individuals are concerned about the transition of wealth to younger generations.
The best solution to mitigating these concerns is recognising that there is no best way to prepare the next generation, but rather focusing on what works for each family within a broad framework that deals with the key succession planning parameters. For those matriarchs and patriarchs who are ready to bring younger generations into the fold, with the right tools in place, they have a unique opportunity to bring family members together in what is an uncertain time for us all.
So how can families successfully transition wealth to the next generation in today’s environment?
The family constitution - why every HNW family should have one
Establishing strong family governance is key. But this doesn’t have to be solely via legal entities. In fact, the family constitution can be as formal or informal as each family would like it to be.
Imagine a senior family member suddenly passes or is no longer able to gather family members around the proverbial table. What happens to the inheritance? Does the family keep it centrally or divide and conquer? If a younger family member wants to set up their own business, what portion of the pot can be invested into such endeavours versus held back for future generations?
More than a guidebook on how to protect family wealth, family constitutions are the glue that hold HNW families together, acting to preserve family values and aid future generations with key decisions, based on a shared vision. Creating a family constitution can act as a unifying process as family members have clear, honest and transparent conversations with one another about their ambitions and frustrations.
Communication is king
Parents and children tend not to communicate very well at the best of times. When it comes to educating younger generations about wealth, finding a way to tell the family story cannot be overstated; it can influence the messages given to younger generations from an early stage and help to motivate the next.
With a rising generation of tech-savvy Millennials due to inherit a portion of the great wealth transfer and more likely to engage via more modern methods of communication, families are considering alternative strategies when it comes to communication within the family. This could take shape as a video exploring how the family’s wealth has been built, its history and its ancestors, to put a human touch behind the numbers and instil a sense of family legacy in its younger members through a medium that can persist well into the future.
Having the right people around you is crucial, especially in a crisis
Every family is different, and each will be facing their own set of concerns in respect of the next generational wealth transfer. What is most important is that there is a plan to preserve what is most important to the family, and that this is communicated appropriately. For families without a plan, there has never been a better time than now to start getting one in place.