Involving family in wealth transfer

Wealth and asset transfer used to be a “off limits” topic within the family, usually never discussed with the next generation. However, times are changing and with them the perspective and importance of family governance.

Involving the family in the wealth transfer process

Over the next few decades the largest wealth transfer in history will take place. Half of the world’s UHNW (ultra-high net worth) individuals with assets of at least US$ 30 million are expected to pass on their wealth in the next three decades. Over the next 10 years alone, US$ 1.010 billion will change hands in Europe, according to research.

Wealth and asset transfer used to be a “off limits” topic within the family, usually never discussed with the next generation. However, times are changing and with them the perspective and importance of family governance.

Studies show that inadequate communication and confidence in decision-making within the family, together with a lack of financial education and governance, pose the greatest risk to the handing down of family wealth and legacy. Family wealth built up by prior generations is at risk of eroding with every subsequent generation, whose members tend to have their own conflicting agendas. The scenarios vary from contrasting expectations, life goals and wishes, to differing attitudes to investment and wealth creation.

The good news is that with careful planning and family guidance you can help to avoid family wealth diminishing over time.

What is family guidance?

Family guidance seeks to steer how a family communicates and balances complex needs when there is substantial amount of wealth, and supports decision-making as a team. As a concept it might sound quite simple, however, the system behind it has certain complexities and requires teamwork on the part of all family members.

Family dynamics are multi-layered and definitely very hard to change. Recent developments have significantly changed the way we live and our prospects for the future; therefore now, more than ever, it is essential to think and plan, taking a long-term view, in order to preserve and enhance the family’s wealth over generations.

The first step to preserving unity and successfully transferring wealth down through the generations is to discuss, align and document family objectives, common values and roles and responsibilities with the members of the next generation. The document should also set out who has the power to make which type of decision. It is about having a clear understanding of the family structure, including the roles and obligations of its members. This might, nevertheless, require a family to regularly review them and if necessary, redefine the priorities - in accordance with a prior agreed change process - to ensure that they stay consistent with the goals and objectives of the generation to come. Family members that do not feel that their voices are being heard are less likely to engage and commit to preserving the family’s wealth and legacy.

Simultaneously, educating the successors on the responsibilities that come with inheriting wealth is an important next step in preserving wealth within the family. In order to achieve a common understanding of family affairs, it will be necessary to introduce the successors into the world of investments and money management early on. The first step is to determine which skills are needed and which need to be enhanced in order to uphold the family’s values and objectives. One way might be to work with your financial advisor to help develop your successors’ familiarity with basic financial, investment and risk management topics. The other possibilities include regular programs and briefings to build on that knowledge and be familiar with current developments.  Empowering the next generation will enable them to maintain the family legacy and add to it themselves.

Regular family meetings should include learning about the family affairs, discussing the directions the business is taking and reviewing financial statements. These meetings can be an efficient platform for updating priorities and enabling family members to input their ideas. Moreover, open discussions encourage the next generation to actively engage, bring in fresh points of view and participate in shaping the family legacy. In addition, these meetings can, to a certain extent, prevent or at least limit possible future conflicts or litigation.

Transferring wealth to the next generation is an ongoing process – and it is extremely important to keep talking as a family, even after a structured intergenerational wealth transfer plan is in place.