Recently The Archers highlighted the important issue of succession planning, which can be a sensitive subject for families to tackle. Often generations within the family unit have different objectives and aspirations which without regular communication and trust between family members have the potential to cause family disharmony.
As the saying goes, there is nothing more certain in life than death and taxes, but families are often far better at preparing for the latter. A study by Preparing Heirs authors Roy Williams and Vic Preisser of wealth transferred over 20 years by more than 3,250 families found that 70 per cent of inter-generational wealth transfers resulted in a loss of assets and family discord.
Perhaps more surprisingly only 3 per cent of failed successions were due to poor financial planning, tax and investments, with the vast majority – 60 per cent – due to a lack of communication and trust; a further 25 per cent of failed successions were due to the heirs being unprepared for the responsibilities and expectations that come with wealth.
Effective passing on of assets therefore relies on good family governance: establishing shared values, aims and priorities, managing individuals’ expectations, defining their obligations, acknowledging their strengths and weaknesses, and preparing them for wealth. Underpinning this are agreed priorities governing the family’s wealth, whether that be conserving, consuming or contributing.
Ultimately it’s about defining what you are about as a family. The starting point is to form a vision of the future based on family history, personal experiences and shared values. This is achieved by having honest discussions in a safe family setting. Open communication is essential, as is making sure that all family members are aware of possible problems and receptive to finding solutions.
This responsibility extends to being clear sighted about family members, acknowledging any limitations of character or ability. While it may sound harsh, if wealth is passed on to someone unable to cope with it, everyone loses.
Once there is trust and communication among the family and the necessary information has been gathered together, a family constitution is the natural progression. This is a document that states, in simple terms, the family’s objectives and beliefs. It sets out on what terms wealth is to be inherited, any expectations of family members, how beneficiaries will be treated and what they can expect to receive.
Although a family constitution is not a legally binding document, all family members should sign up to it and if written properly it can pre-empt claims of broken promises later. And it’s worth revisiting the document annually and continuing to have open conversations as circumstances and family dynamics change.