Succession Planning for UHNWs and Family Offices

The following is an extract from the Jersey Private Wealth Report 2018

Key Findings: Succession planning 

• Wealth erosion is a major concern for Jersey wealth creators, as is providing a secure environment for future generations 
• Transfer or sale of a business is extremely important and a variety of Jersey structures are used for the efficient and effective transfer of wealth 
• Preparing and educating the next generation about family wealth is a big responsibility and parents are divided about how much to tell children and when 
• Entrepreneurs, who are still creating the wealth, find it difficult to hand over control, while a number of patriarchs want to maintain control ‘from the grave’ as part of their legacy 
• Divorce, remarriages and blended families are making families increasingly complex, leading to conflicts arising from fair distribution of wealth, while transfer of a family home can be emotionally challenging 
• Philanthropy plays a critical role in succession planning and is a way of engaging children in investment and governance issues. 

Chief concerns of UHNW families

The report’s findings support the theory that tax, particularly inheritance tax and capital gains tax, is one of the biggest concerns for private clients and is one of the reasons for them to relocate to Jersey. Tax efficient transfer of wealth using a variety of structures, including wills, trusts and foundations is of paramount importance. 

The impact of wealth on the next generation is also a major consideration for Jersey private clients. 54% of the respondents confirmed that they do not want their wealth to have a detrimental effect on their children’s career, either as a lack of motivation in school or by forcing them to take over the family business if their true interests lie elsewhere, 

“You really don’t want your children to be ruined by money.” 

“I think there are too many trust babies around who have no motivation to get out of bed in the morning, and I don’t want my children to fall into that trap, so they absolutely have no idea what our wealth is.“ 

UHNW parents are also keen to ensure that their children’s wealth should be protected in the event of future marriage so anecdotal evidence from the interviews shows that prenuptial arrangements are often required. 

It was also found that wealth erosion, whereby a family can go from ‘rags to riches’ and back to rags again within three generations, along with the impact of divorce settlements and poor investment returns, is of pressing concern to Jersey private clients and family offices. 

The study found that a third of Jersey UHNW families interviewed have not yet fully addressed the impact of succession planning, whether this is handing down family wealth or passing on the family business. The results from the investigation confirmed that for private clients, succession planning involves one or more of the following; the transfer of wealth in terms of money and assets; the transfer of the family business; setting up philanthropic structures; education on wealth. 

Interestingly, it was also revealed that entrepreneurs, who have created the wealth themselves, feel less pressure to maintain the wealth for future generations in comparison with those who have inherited the wealth as a first generation. These respondents expressed feeling a great deal of pressure to hand over wealth to the next generation and are deeply concerned at the thought of being the one to lose the family wealth. There was also a common consensus among respondents to make life ‘as simple as possible’ for the next generation. 

“There will be those that will want to look after their little ones and hand them everything on a plate, there will be others who will say that I made it from the start, you’re getting nothing, and maybe something in between.” 

A family affair 

The results from the study confirm that the primary purpose of succession planning is to provide a secure financial environment for the next generation, or even the next two or three generations and that this kind of planning is an emotional rollercoaster. Different family members have very different views about it and creating a shared vision is hard, while the findings confirm that “everyone is different, there is no one size fits all.” 

Added to this, the findings support the fact that UHNW families are increasingly more complex and extended than ever before. Divorces, re-marriages, children, step- children, step-grandchildren, half-brothers and sisters, often far flung geographically, create a complicated and sophisticated scenario. Respondents confirmed that they struggle to ensure all children or step-children, male or female, regardless of position in the family, are treated equally. 

“I don’t want to have warring factions between my family, and the way it’s structured....it’s a fifth for everyone...it’s only fair that they all get the same.” 

Communication is key 

The research discovered that communication with younger generations is important when it comes to the successful transfer of wealth in succession planning. However, respondents confirmed that they are split as to when the succession plan should be shared. Some respondents have chosen to communicate everything about the family’s wealth in its entirety to the next generation at an early age, while others choose to let their children lead their own lives and not let them know the true extent of the family wealth. Some interviews revealed that sharing the vision and values of the family was felt to be sufficient, without sharing the amount of wealth. Others communicate on a strict need to know basis with some deliberately withholding information. 

An even split? 

Succession planning for wealthy families can be very challenging. The old tradition of primogeniture, where the oldest male heir is set to inherit, has now changed. The study found that age and gender does not affect parental decisions when passing on their wealth to the next generation. However, discussions do involve whether different children want to be involved in the family business or not and this does affect the decisions on succession planning. 

“There’s an old concept that succession planning is a business handed down from father to son and so forth. 

Today, I think it very much depends on the abilities of the children and what they want to do.” 

The research discovered that when not all beneficiaries are directly involved in the family business, planning becomes more complicated. One child might be working to grow the business, while another might not be involved at all. One interviewee explained, “I think it very much depends on the abilities of the children and what they want to do.....If they don’t have that interest and they don’t have that ability, if they had the interest but not the ability, I wouldn’t want them to run the business.” 

Some respondents said they had decided to turn to company shareholding to manage distribution, while others plan to sell the business in order to split the wealth. Where a family has a lot of sentimental value bound up in a particular property, the study confirmed that this can be a real issue. 

Getting the timing right 

The investigation found that wealth creators really struggle with when to pass on their wealth, with a concern that it may be either too soon or too late, as one respondent put it, “I just don’t think you know whether you’ve planned properly until it’s too late.” The findings also reveal that with people living longer, parents pass on their wealth much later in life which means that inheritors themselves are likely to have children, making the need for effective succession planning even more pressing. 

Education, education, education 

The report found that financial education was of huge significance for future generations and this was voiced by 40% of the private clients interviewed. It is not uncommon for UHNW individuals to encourage one to one training sessions or longer courses when the younger generation are teenagers to make sure they are armed “with some of the universal facts about preservation of wealth and growing wealth.” The investigation found that philanthropic ventures provide parents with the opportunity to educate their children on wealth in a positive way with investment decisions. 

“It’s to try and get them to understand the difference between capital and income and if they live off a reasonable two or three per cent return from your capital then you can carry on doing that forever. Whereas, if you start taking out eight per cent a year you will have no capital left very quickly.” 

Educating everyone 

The report finds respondents to be united in their belief that it is vitally important to educate the family as a whole about money to avoid the erosion of wealth and safeguard the financial future of the next one, two or even three generations. 

“They might see a Trust Fund that has got five hundred million pounds in and think, brilliant I don’t have to worry about money again and they each go and buy themselves a private jet and then the money is gone. It requires good stewardship alongside education of those family members.” 

The findings reveal a widespread belief among private wealth professionals that it is essential to get the next generation to understand what the business is all about and it also helps the advisors build trust with them, which is important for the future. “People are keen to be more responsible in terms of getting the next generation to understand what is coming their way.” 

“On our death, there are small sizeable gifts to the children and then the rest goes into the trust, it’s then split into separate trusts depending on the tax situation of the children and there are controls on what they can get, but they’re now sufficiently old enough that they can get whatever the trustees want to give them.” 

Encouraging young investors 

The research discovered a positive response, among those interviewed, to academy or young investor days for children of clients, who are encouraged to take up longer term placements and internships if they want to learn more about family wealth. One Jersey private wealth professional says, “We would often encourage the education of the next generation at an earlier stage and that might be through a more structured course, through a one to one training session or coaching session”, while some take it even further, “Sometimes we allow teenage sons and daughters, while they are at school or university, to spend a week or fortnight here, for their CV, but also, it’s part of their own education because of the family money. So we take that very, very seriously.” 

“When Trusts don’t work very well, it is usually when not enough attention has been paid either by the patriarch, matriarch or by the sort of group of advisors as a whole to educating their younger generation and I don’t mean having been to University. I mean educating them about the family wealth, about the Trusts and about how they operate and from my point of view I think bringing in the younger generation at an earlier age to teach them about what the wealth is in the family, how it operates, how it’s looked after, I think is really important.” 

Encouraging the next generation – a wealth professional’s view 

“Recently, a principal brought his son to meet us and he said to his son, “I need you to understand the extent of this wealth and the complexity around managing this. I don’t expect you to understand it immediately, but I want you to start becoming involved. Over time it will start to feel more natural.” 

Horses for courses 

The study found that UHNW families are becoming much more systematic in how they approach financial education and appreciate that different methods are required for everyone. One interviewee explains, “My children are split down the middle, so my eldest and my youngest are useless, can’t hold on to money and my second and third can’t spend money... we talk to them about the importance of budgeting, we talk to them about the importance of managing their means.” 

Family charters 

According to the report’s findings, wealthy Jersey families are increasingly setting out a family constitution or charter, stating that their aim of increasing the family wealth is to ensure that sons and daughters and their children have a good start in life. These family charters operate much like a trust structure but keep it within the confines of the family. 

“It’s crucial that the next generations and the generations after that understand the wealth of the family, understand what the family stands for, what it’s trying to achieve long- term and that there is some kind of family plan. More and more people see family charters as the way forward, and that makes a lot of sense because with great wealth comes great responsibility and you need to manage that properly and you need to have people’s buy-in.” 

The report finds that a large proportion of respondents and their advisers agree that many children of western first world economies do not necessarily recognise the extent of what their wealth can achieve, so educating them about philanthropy can be a good place to start. Children can become involved in a philanthropic foundation by managing the assets, preserving the wealth, growing it, distributing it and disbursing it. 

Read the full Jersey Private Wealth Report 2018S

https://gibsonstrategy.com/content/docs/Gibson_Strategy_Jersey_Private_Wealth_Report_2018.pdf

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