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Financial Planning > UHNW Client Services > Family Office News

Incorporate Family Dynamics Into Succession Planning

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Short sleeves to short sleeves within 3 generations. This is a common saying that captures the fact that most wealth does not survive beyond the second generation. In fact, 70% of all family business successions fail to transfer wealth successfully to the next generation, and 90% will fail within 3 generations.

A 2003 study by the Williams Group found that “less than 3% of failures are due to professional errors in accounting, legal or financial advisory planning or to estate taxes.” This means that advisors have the skills to help with the technical transition of wealth from one generation to another. What undermines business succession are the softer issues of communication within the family unit, unprepared heirs and a lack of family mission.

The technical aspects of wealth transfer are important and should not be discounted, but legal and tax-planning skills don’t guarantee a successful business succession. Advisors must not only focus on creating documents that have the right wording but also address how a family can manage the assets in the future.

The first step for advisors is to think of the transition as a family succession plan rather than a business succession plan. The estate planner should consider the family’s overall well-being and then determine the most efficient means of transferring the wealth to the next generation. To do so, advisors should expand their definition of a client, revise their definition of capital, and concentrate less on the transaction and more on the relationship with the client.

The main element of successful succession planning is respect for the individual while, at the same time, recognizing the importance of how that individual works with others as part of a cohesive unit. Although more difficult and time-consuming, a consultative approach that incorporates the voices and viewpoints of individuals in the succession plan is more likely to result in success.

Succession planning must move beyond concepts such as the “dead hand control” approach, in which the parent tries to control the next generation’s actions. Once the parents are gone, one or more of the children may feel empowered to disrupt the succession plan. A disgruntled family member can easily destroy the hard work of a generation, despite an expertly prepared succession plan.

Advisors should consider enlisting the help of a professional who deals with the psychological issues of family wealth.

Taking a page from the business world, the family should consensually develop a mission statement. This and other important decisions should be documented in the succession plan. Lastly, the next generation should develop, implement and practice the skills that put the abstract of knowing what needs to done into practice.

Advisors often consider assets in terms of what can be placed on a balance sheet, but to better ensure a successful transition, they need to revise this view to include human assets. Successful succession planning will incorporate other assets such as the emotional and social character, stability and strengths of family members.

In succession planning, the advisor’s role ranges between that of a pure problem solver and a consultant. He or she has information that the client doesn’t have and addresses a client’s problems. Additionally, the advisor can be seen as a counselor, directing the client’s issues to a workable solution.

Clients would be best served by advisors who adopt both approaches and ask the question, “What do you want as your legacy?” The client may reveal important information, such as the desire to leave a legacy (in addition to wealth) that supports the positive character of children or the client’s charitable involvement.

Advisors are accustomed to developing and reviewing business plans, but they aren’t as familiar with family governance plans. Just as businesses and other entities develop plans, families need a plan for governing themselves. They should meet regularly to discuss the business of the family. They should also consider supplementing the mission statement with a family vision and family values. Together, these 3 elements would be used to determine and test proposed courses of action.

The family can make decisions by vote or by consensus. Reaching consensus is preferable because, although voting can be easier, it often leads to future conflicts if family members feel they haven’t been heard.

The path to family business leadership must be clearly marked with educational and experiential requirements. To reduce conflicts, the family governance plan must account for members who enter the family business later. This can eliminate the subjectivity of the parent choosing the “fair-haired” child to assume the business leadership role, even if he or she is unsuitable for the position. In addition, the creation of objective hiring guidelines, in conjunction with education, experience and skills, further ensures the continuation of the family business.

One definition of a successful transfer of wealth is that it remains in the control of the designated beneficiaries. This definition may include the sale of the business to individuals outside of the family. Although this may be satisfactory for many assets, it is inconsistent with the goal of maintaining the family business. When developing a succession plan where the objective is to retain the family business and family harmony, the advisor should consider that some family members will want to retain the business and others will want wealth in another form, and they must be satisfied with other assets.

Advisors can improve the likelihood of successfully transferring family wealth beyond the second generation by considering the family’s dynamics, expanding the definitions of client and capital, and taking a balanced problem-solver/counselor role with their clients.


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