Richard Bull, Crowe

There is a well-known maxim that by failing to plan you are planning to fail. Words along these lines are attributed to both Benjamin Franklin and Winston Churchill, two world leaders with proven track records.

How does this relate to succession planning? I would wager that all advisers create very detailed plans with their clients when it comes to estate planning and managing capital taxes.

While these plans are designed to minimise capital taxes and build in asset protection, so the wealth is protected from ‘outside attack’, what is often overlooked is the impact on the beneficiaries.

We are very good at planning to protect the money from the beneficiaries, trusts, and family investment companies (FICs) being very popular structures, but how often have we thought about how we protect the beneficiary from the money and the impact the wealth has on their life?

For a plan to be truly successful, I believe that it must empower and be driven by the next generation, not simply treat them as passengers.

The old adage of shirtsleeves-to-shirtsleeves; being the curse that familial wealth is usually gone by the time you reach the fourth generation is in many ways a self-fulfilling prophecy. After all, if the only involvement in the family wealth is receiving a generous annual allowance, what incentive do children have to push the boundaries?

Education, communication, and involvement are key to building and retaining a shared vision for family wealth in order to successfully navigate the inherent difficulties of succession. Whether that be in relation to wealth or a family business (the latter having so many nuances I’ll leave it for another time).

The rate of change over the last 20 years with the advent of technology and the increasing focus and importance of sustainability means that the outlook of the next generation can be very different from their parents. Children view the world very differently and have very different attitudes about what they want from their lives.

Instead of preserving all of the decision-making powers with the top generation which often demotivates and leads to the very behaviours they are seeking to avoid in future generations, giving family members responsibilities and involving them in decision-making makes them a part of the wealth and also imparts on them the behaviours needed for long term success. 

Allowing the next generation to help set the agenda, with care, can keep parties interests aligned instead of alienated.

In the world of trusts, it may not be appropriate to appoint younger beneficiaries as trustees initially, instead trustees might form investment committees and empower beneficiaries to become responsible for managing certain funds themselves – while the funds remain within the protection of the trust. A similar outcome is possible within FICs.

This process allows the beneficiary greater control to express themselves in the choice of investments, yet still be under the guidance of the trustees. This allows for alternate strategies to be pursued and for individuality to be nurtured and developed. 

One family member may want to get into property development, another might favour more charitable causes while a third may be motivated to pursue ESG investments. Whatever the outcome, the next generation is encouraged and empowered to invest and ultimately maintain/grow the family wealth, as opposed to it being off-limits to them.

While the hope is that all investment decisions pay off, the reality is that many will not. Permitting beneficiaries to make mistakes in a controlled manner will feed their entrepreneurial spirit, how many entrepreneurs succeed first time round? 

Understanding that in life there are ups and downs is a healthy lesson to learn at a young age and it also shows the next generation the fragility of family wealth and why it’s important to not take it for granted.

As beneficiaries grow and become more responsible, it’s only right that their involvement with the family wealth changes to. When the time is right, bringing the next generation into the decision-making process on bigger issues and ultimately how the trustees exercise their powers is the start of transferring the power down the family line.

Rather than looking at this as a loss of control, we should encourage our clients to strive for this, after all this is what creating a legacy looks like.

Finding a balance between involving generation two and making it impossible to reach decisions requires a balancing act. Instead of appointing every member as a trustee which makes exercising powers difficult, family trust companies have a key role to play.

A family trust company can allow for the appointment of multiple directors and it’s possible to organise the operation of the company to allow for different levels of authority for different numbers of directors. In this way, younger family members can take over the administrative functions but certain key powers are reserved for full family meetings of the directors.

I said before that education, communication, and involvement are key to engaging the next generation. The exact process and mechanisms will vary family to family, but the one constant is learning to evolve with changing times.

I am frequently amused to read articles about the importance of avoiding family conflicts. While no adviser wants to court arguments within the family, for long-term success any governance structure should be able to handle disagreements and even encourage different perspectives. Where this is not the case, the death of the head of the family is usually a catalyst for change and not always positive change.

If instead a family has a structure that involves the different branches, permits individuality and different opinions as well as facilitating debate on strategy; the family stands the best possible chance of breaking the ‘three generational curse’.

So next time you are devising a succession plan, or working with your clients to devise a plan, spare a thought for the beneficiaries feelings and what they may make of things.