“You can choose your friends but you sho’ can’t choose your family,
an’ they’re still kin to you no matter whether you acknowledge ’em or not,
and it makes you look right silly when you don’t.”

― Harper Lee, To Kill a Mockingbird

It’s common for wealthy families to have focused on the eldest generation controlling everything.

Often, only the accident of death or incapacity triggers the passing of control and assets to future generations.

By then, it’s usually too late. With emotions running high and with the feelings of inequality and perceived unfairness driving behaviours, we have all too often seen public fallout on the front pages of the tabloid press, and destructive battles for control of fractured assets between ever-wider and less cohesive family groups.

In certain cultures with prescriptive rules that limit freedom of disposition, this fracture is hardwired in to the laws of succession, making these problems virtually mandatory.

Yet little in the way of positive outcomes flow from family disputes. Far from preserving wealth for future generations, these spats have the ability to destroy wealth and relationships for ever.

That’s not to say that the alternative – putting practical succession plans in place – is necessarily an easy thing to do. To quote the author Anne Morrow Lindbergh, “Good communication is just as stimulating as black coffee, and just as hard to sleep after.” These conversations can be delicate and uncomfortable for many families.

The tendency, therefore, had been to sweep such matters under the carpet and view it as tomorrow’s problem. The difficulty with that is tomorrow’s problems have a tendency not to go away and just get worse.

Treading on eggshells

The UBS 2019 Family Office Report made for interesting reading.

According to the family offices who responded, barriers to the documentation of a succession plan were:

  • discomfort in discussing the topic;
  • an inability to relinquish control; and
  • a perception the next generation weren’t ready.

All three featured in over 30% of responses.

Conversely, few respondents cited that a lack of knowledge, or not having access to appropriate advice to construct a plan, were significant barriers.

Interestingly, of those family offices that had been consulted, 32% had a formal written plan. The rest either had an informal or verbal agreement in place or no plan at all.

The same UBS report said that governance priorities for the family office, in the next 12 to 24 months, were:

  • improving communication between the family office and family members; and
  • education of family members regarding family office activities.

Featuring in two thirds of responses, these responses were clearly of paramount importance and there is clearly plenty of work still to undertake, and avoiding conflict entirely is unlikely to be possible.

In many ways, controlled levels of conflict can be healthy, especially where there is a safe environment for family members to objectively put their views across. Bringing in a neutral third-party can be an excellent way to get these conversations moving – and to test out potential new partnerships which may aid the management of your family office long-term.

Structures to support succession planning

As communication increases and ideas are generated, there will naturally be a need to structure some element of a family’s balance sheet.

There are a range of solutions that can be deployed by families that can help as part of the tool kit to deal with deal with succession in a planned and controlled way. It is a question of which tools to deploy and when to appropriately meet the family goals.

So, what are some of the tools?

One way may be to set up a trust. A trust is a legal relationship created when the ownership of certain assets are transferred, usually to a professional trustee and documented through a trust deed. This arrangement allows for the separation of control from economic benefit.

The central dilemma then rests over the retention of control, and how to keep as much of it as possible, which is a natural challenge. Article 9A of the Trusts (Jersey) Law 1984 provides for the retention of certain power and whilst there are certain trade-offs to consider, benefits can be made available across the family, without giving up the overall control of the underlying assets.

The trust’s beauty is also its flexibility. Over time those aspects of control which were retained, can also be passed over to subsequent generations either irrevocably, or subject to revocation in prescribed circumstances. It is thus possible to involve subsequent generations in the management of family wealth in a gradual and proportional way that matches the behaviours that they demonstrate, and the skills they wish to deploy.

Whilst only a partial succession tool in its own right, a limited partnership allows for control to be centralised in the general partner (GP), which is usually a limited company, whilst allowing the whole family to benefit from the wealth generated by the partnership.

Mechanisms can be built in to allow for selection of which family members participate in the board of the GP, to allow for those skilled and interested in managing the family assets to do so without cutting off other family members from benefit.

The impact of taxation has to be factored in to any solution proposed to deliver family goals. In certain circumstances the taxation cost of implementing a comprehensive solution may be prohibitive, or may be prohibitive in relation to a certain part of the family’s assets.

There are other situations where the law of the country where the individual lives, or where the asset is situated, does not allow an asset to be held in a trust. In these cases, advisers often look to employ a company as a next-best partial solution. Here, using different rights attaching to different share classes, some if not all of the benefits of a trust or foundation can be arrived at.

Let stability be your legacy

The hardest conversations are the ones that admit our own mortality, and empower others within the family unit to take on the roles and responsibilities that we consider part and parcel of what made us who we are.

But, for most successful people, those roles and responsibilities that ensured the growth of and maintenance of their businesses, and of their wealth, included a great deal of collaboration, trust, and preparedness for the unexpected.

It seems only sensible, then, to bring that same thinking to the family office.

The importance that has been rightfully placed in the planning and construction phases of a family office must also be given to its maintenance.

It should not be lost on families that they should view succession as an evolving process which should be documented at every stage, and subsequently revisited and tested by all stakeholders.

With such significant amounts of wealth set to pass from one generation to the next over the next 20 years, there is plenty of scope to get it wrong, but also plenty of scope to get it right.

Prepare your family office for future success

LGL is a trusted name in family office services. As a uniquely independent, director-led organisation, we produce a consistently high standard of service founded in long-term relationships, agility across asset classes and solutions, and multijurisdictional expertise.

Should you wish to discuss how LGL could help with the management of your assets, please contact the author, Paul Tomlinson.