For families to succeed with the transition of their wealth, they need to work out a way of preserving it. The best way of doing this is to plan the wealth transition well in advance, taking into account, as much as possible, any internal and external factors that may impact upon the wealth and planning for these eventualities.
Each family plan is unique in that it is founded on the internal and external factors that may impact upon the family in question. For example the size of the family is of major importance, substantially more so to a large family with a numerous heirs, as opposed to a small family with only one or two. Similarly the international spread of a family, particularly relevant in today’s society, is an important factor to consider as the different jurisdictions in which family members reside will need to be taken into consideration. One type of wealth that is least likely to survive to the third generation is wealth generated solely from a single business asset, so it is particularly important the family plan incorporates preventative measures to stop this from happening.
Other factors to be taken into account when tackling the transition of wealth within
a family include their values and beliefs, religion and human and intellectual capital.
Any family plan must also understand family governance; how the family is willing to involve and organize relations between all the existing generations and those to come, share its wealth among them and how it will mitigate individual expectations in a bid to build common objectives across the generations.
A perfect illustration of this concept was highlighted by Mark Haynes Daniell in
his book Strategy for the Wealthy Family; “Wealth preservation is all about managing risk, and structuring asset ownership and control in the current generation, across generations, and through the turbulence of history and the cataclysmic events that can be visited upon any family, wealthy or otherwise.”
Examples of the benefi ts of family planning in preserving wealth during its transition are the Rockefeller and Mellon families in the US. Their secret to preserving family fortune is by planning across generations. Rather than following the traditional approach and leaving their estate to their children, these entrepreneurs passed a signifi cant portion of their wealth directly to the third generation, eliminating a general layer of estate/inheritance taxes. This was an impressive example of multi-generational planning, a sophisticated wealth management philosophy, which is as valid nowadays as it was 100 years ago. Families have to learn from the past.
The benefits of multi- generational planning
Multi-generational planning, as used by families such as Rockefeller and Mellon, is benefi cial in many ways.
For example, it can significantly mitigate financial risk. Divorce, financial mismanagement by family members and other unexpected circumstances can be combated by the asset protection strategies multi-generational planning can utilise. They can dissuade creditors from fi ling claims, thus reducing much of the fi nancial risk that these events can pose.
Another way in which multi-generational planning preserves wealth is by building beliefs and values. For example, a family plan can provide a forum for teaching fi nancial management skills to younger generations, as well as sharing philanthropic values that the older generations used to create the wealth in the fi rst place.
The family plan can be fl exible too. In some cases it may be a family chooses to invest together; in others they may choose to set up a private family foundation and put younger family members or trusted advisers on the board. Either way, younger members of the family will have the opportunity to develop the skills required to become effective stewards for family wealth.
However, before implementing any of these methods it is important participating family members come to understand and agree on the desired outcomes as well as the rules that will govern the process.
Exploring different needs and goals, while respecting the sensitivities of individual family members, is crucial to the success of any multi-generational planning strategy. Each generation is able to have its own specifi c needs and goals but for the plan to be successful these will need to work across all the generations and compromises reached where necessary, in order to achieve the overall objective of wealth preservation.
A successful plan will be able to incorporate common goals and create common structures to meet them, as well as adapting the planning process to incorporate the needs of personal goals too.
Family office a response to wealth preservation within a family?
American businessman James Cargill once said: “A family offi ce is for someone who has too much money and too much family.”
Although the idea of a large and happy family with an abundance of wealth is a nice one, in practice this is not often the case.
A family has to take into account the needs and wants of each individual member as well as their fi nancial objectives. Unfortunately this can lead to confl icts concerning the rights to and control of family wealth.
To prevent this, a family needs to defi ne its governance structure, specifi cally the procedures used to resolve any disputes that might arise over its wealth. There is still some uncertainty as to what a Family Offi ce is, how it is structured, what its objectives and responsibilities are and who should be part of it. This is because Family Offi ces may take a number of different forms, meeting different objectives depending on the family.
Depending on the needs of the family and the services required by its members, the Family Offi ce structure is able to adapt itself to the family’s needs. It does not exist as a set model, in terms of family offi ce or family governance structure, it is instead fl exible. It can adapt to fi t each family and its unique set of factors, both internal and external, that impact upon the family’s wealth and help to create a family plan that will preserve the wealth in spite of these factors.
What families from around the world do have in common in terms of their needs and concerns, is a requirement to access resources and expertise to assist them in wealth preservation. It is here that the Family Offi ce comes in by helping the family establish a family plan.
Experts have different views on who should be involved in a Family Offi ce structure, although there is a common consensus that families should have access to a collective body of advisers that together provide “Family Offi ce Services” (namely banks, independent asset managers, multi-family offi ces, lawyers, life style services companies, etc.). By turning to the Family Offi ce, families are able to draw-up a multi-generational plan, under the guidance of these expert advisers. Taken into account the internal and external factors that impact upon wealth, as well as managing both the needs of individual members and the family as a whole, a Family Offi ce can preserve the wealth of the family across generations to come.
