Charlotte Murtagh, head of private office at ZEDRA, provides tips to ensure wealth stays within the family and issues to consider around the business, taxes, profits as well as estate and inheritance fees to avoid unwelcome surprises.

Around 70% of wealthy families will lose their wealth by the second generation, and 90% will lose it by the third. A shocking statistic indeed. But not a new one. It was revealed by Roy Williams of The Williams Group, which carried out a 25-year-long study into the transfer of intergenerational wealth.

Williams defined failure as ‘an involuntary loss of control of the assets’. If we go further back, to 1776, the economist Adam Smith noted that wealth accumulated by a family within the confines of a business ‘seldom stays in that family for long’.

But it need not be this way. Most of the reasons Williams found for the erosion of family wealth were ones that were entirely preventable; in fact, he found that 96% of intergenerational wealth seepage was entirely down to the family itself.

The reasons included:

•            lack or breakdown of communication;

•            lack of trust;

•            inadequately prepared heirs;

•            lack of a strategy - or family mission; and

•            poor legal/tax/investment advice.

These are all things that, with some planning, can be avoided.

Communication is key

People still struggle to talk about money, even in societies where salaries and the accumulation of material goods is revered - so most of the globe in fact. We do all count our worth in cash, and perhaps more so in family business where there is an emotional, as well as financial, investment.

Sometimes even talking about planning finances can feel like an admission of failure.

But it’s not. Why? Because the families that are most successful in holding on to their wealth are those that can have open, honest, and rational, conversations about their wealth, whether it’s addressing family issues around the business, taxes, profits or even estate or inheritance fees.

Families should always keep an open line of communication, just keep talking. This means even if conversations become heated or difficult. You have built up an element of trust and a foundation which can get you through the more challenging debates.

You also need to teach your children how to make decisions. This means involving your children when you make those decisions. Quite simply they will not learn unless they are involved.

By involving them at a young age you can ensure they have the skills to drive the business. Even if it means employing them as interns. And while they may be in higher and further education, it may be worth having a mentorship programme.

The impartial support of a trustee

It’s also important not to dismiss having a trustee. If you have a third party involved in the business, they can help when it comes to navigating and communicating difficult decisions.

You will need to have a goal because without a proper plan you will end up with a business that is totally unprepared for the future.

Succession planning

A study written by the Wise Council looked at family enterprises spanning over 100 years. It found how the most successful businesses embraced the priorities of future generations.

The current generation of family business leaders need to bear in mind that their successors will have different values and goals - whether it’s climate change or embracing further equality.

This then brings me onto the crux of the matter. Because if you are able to plan and talk then practical financial planning should be easier to instigate and will feel like a natural progression.

It is also important to have a Will, and a written succession plan - perhaps even a family constitution.

Don’t forget to consider a financial planning professional who can help with investment and wealth management plans to show how wealth will be managed and invested into the future.

How to discuss family wealth planning

There is no magic formula for involving the next generation in wealth transfer conversations. After all every family is different.

We recommend that the best time to talk about family wealth planning can often be during or after certain events such as:

•            the birth of a child or grandchild;

•            starting school or higher education arrangements;

•            early adulthood firsts such as a first home, vehicle or offering career development support;

•            marriage and protecting wealth;

•            retirement planning to protect you whilst also allowing family members to access family wealth; and

•            later life arrangements to protect your affairs should you lose capability, but also ensure your wishes and later life care preferences are followed.

All the above can be useful prompts when discussing the future of your family business.

How to start a conversation around succession planning

Start by thinking about what your aims are for your wealth – establish what’s important to you and how you want your wealth to impact your family. You can then create a long-term plan for your family, and involve them in the conversation at this stage.

Involving a professional adviser can provide a deeper understanding of all the options available and put those plans into action. You then need to continuously review the actions taken to ensure you are making the most of any new allowances or options available, and your actions are aligned with your changing family structure.

Consider a private trust company

You might also want to consider a private trust company that acts as a trustee of a trust or group of trusts.

It has a board of directors which can include family members and appointed professional advisers or business associates but unlike a traditional trust, family members can come up with their own governance rules.

This means you and your family can make sure the roles and responsibilities of your family’s private trust company are clearly defined.

A private trust company gives family members direct involvement in the management of the trusts and the assets. A private trust company can act as a trustee for a master trust which itself holds other trusts, often called feeder trusts which can hold family offices and investments.

Private trust companies can be set up to manage your family’s tax liabilities which makes them useful for both tax and succession planning.