Posted on: March 1st, 2018
Leaving money to heirs can be a tough road to navigate even under the best conditions, when family members are few and they all get along well. But when it comes to transferring ownership and control of sizable wealth to multiple family members, the task can become significantly tougher—and fraught with interpersonal land mines capable of effectively blowing up that wealth.
Single-family offices are well-versed in the risks of sustaining family wealth across multiple heirs and generations. Their best practices for wealth transfer—which focus as much on nonfinancial matters as on the assets themselves—offer a peek into the world of the Super Rich, and offer valuable lessons for those of us who hope to pass along wealth to our kids down the road.
Multigenerational, sustainable wealth management requires a shrewd combination of smart planning and savvy implementation. That goes double when there are significant assets to consider, including a family-owned business.
The great majority of ultrawealthy families with single-family offices tend to work with truly best-in-class legal and wealth management professionals to transition the ownership of the single-family office to heirs in tax-efficient ways. Having exceptional financial and legal experts steer the ship into port is one obviously smart move to make.
But there’s another issue that too many wealthy families ignore or underappreciate: the nonfinancial factors involved in passing on family wealth, particularly when there are many heirs involved.
Based on our experience, we’ve seen how focusing predominantly, if not exclusively, on transferring financial assets can result in aggravating existing family dysfunction (or even create new problems). That, in turn, can lead to brutal intrafamily conflicts, accompanied in the worst cases by lawsuits and bad judgment that ultimately destroys the family’s wealth. When resentments among the inheritors boil over into open warfare, nothing good is going to result.
Of course, these outcomes don’t have to happen—and they generally don’t among families that take the time to address both the financial and nonfinancial considerations of multiheir wealth transfer.
The key is to focus on ensuring there is high-quality family governance in place. Here’s what that entails.
Effective family governance often starts with delineating your family history and values. Sharing the story of the family and the way the wealth was created proves to be educational for many family members, especially heirs who may not know important details such as:
Discussions of family history have proven to be very powerful ways of binding families together and creating harmony. When all the generations know the family history, they can often move ahead with greater certainty about themselves—knowing where they came from, who they are today and what they stand for. Ultimately, this can greatly reduce or eliminate wealth-destroying family conflict.
Option: Older generations wanting to have their values and wishes for the family continue are increasingly creating so-called ethical wills. Although they’re not legal documents, ethical wills help patriarchs and matriarchs communicate their hopes and dreams, their wishes, and important life lessons to their heirs. Hopefully, the ethical will reinforces these ideas among heirs and guides their decisions.
For a family to work together, its members’ values, goals and expectations must be in alignment. This alignment helps them act as a true family rather than as a number of people simply connected by blood and a common portfolio, without much else in common.
Important: There is nothing wrong with family members not being on the same page—not “being a family.” But if this is the case, it’s much better to recognize that fact early on, appropriately divide the family wealth and let each go his or her own way. Trying to force such a family into alignment rarely works—and usually leads to severe problems.
Finding alignment in terms of family values and mission requires a few questions to be answered:
To facilitate coherence within the family that can result in better decision-making, many wealthy families construct vision and mission statements for their single-family office.
Vision and mission statements provide the big picture when it comes to the family office. The structures and protocols of family governance help ensure things are managed on a more granular level.
For example, family members have roles when it comes to the wealth they share and manage through their single-family office. They might be owners, managers, beneficiaries and so on. The family members will have different rights and responsibilities that can be determined formally or informally.
The purpose of family governance is to create an organizational structure that includes the family history, the vision and mission statements, the roles and responsibilities of family members, and processes and systems to manage the family office (and possibly other shared family resources) most effectively.
A key benefit of well-structured family governance is superior decision-making. When that occurs, there are relatively few missed opportunities, little if any family hostility and greater overall emotional calm. Moreover, the family or the single-family office runs smoother and delivers better outcomes for family members.
The objectives of creating structures and protocols for single-family governance include:
Example: One type of document that is often used to ensure good governance is called the family constitution. A well-crafted family constitution will:
All that said, issues of family wealth transfer and family harmony are not exclusive concerns of the richest among us. The actions taken by single-family offices to ensure good family governance can be extremely valuable to families with far less wealth—including those who own businesses and expect their heirs to one day take charge.
The fact is, any family with money to give to heirs can benefit by finding agreement between its members on issues like family values, family mission and family goals—and then documenting the processes and rules they’ll use to make decisions about family wealth based on those issues.
To that end, it can be helpful to hold regular family meetings or family retreats to discuss these topics and seek to come to agreement on them. Although these conversations can also occur informally, many families find that setting aside dedicated time can bring family governance issues into sharper focus—and ultimately lead to less conflict and smarter family financial decision-making.
Often a family wealth facilitator is used to keep ideas flowing, keep the conversations moving forward and dampen any problems that could cause the discussion to devolve into fighting and hurt feelings. This facilitator may be a trusted family financial advisor or other professional, or a team of people that includes financial and psychological experts.
Action step: Contact your financial or legal professional to explore more about family wealth transfer and family harmony.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
© Copyright 2021 by AES Nation, LLC. All rights reserved.
No part of this publication may be reproduced or retransmitted in any form or by any means, includ- ing, but not limited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys’ fees.
This publication should not be utilized as a substitute for professional advice in specific situations. If legal, medical, accounting, financial, consulting, coaching or other professional advice is required, the services of the appropriate professional should be sought. Neither the authors nor the publisher may be held liable in any way for any interpretation or use of the information in this publication.
The authors will make recommendations for solutions for you to explore that are not our own. Any recommendation is always based on the authors’ research and experience.
The information contained herein is accurate to the best of the publisher’s and authors’ knowledge; however, the publisher and authors can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof.
Unless otherwise noted, the source for all data cited regarding financial advisors in this report is CEG Worldwide, LLC. The source for all data cited regarding business owners and other professionals is AES Nation, LLC.
