Establishing a Purpose
In order to plan, a family needs to consider what they are planning for. What is their long term goal or purpose? For some it is wealth preservation, for others it is maintaining a certain standard of living and for others it is the family’s legacy. Answering the question of purpose is fundamental to the process of succession planning and it is often the hardest part.
Challenges which typically arise are a lack of common purpose (ie the family, as a whole, does not agreed on their ultimate goal) and a failure to consider whether the common goal is actually achievable given where the power/control lies within the family unit. If, for example, the wealth and power is held by one or two individuals who are unwilling to engage in the process, succession planning needs to be looked at through a different lens; either those wielding power need to be convinced of the merits or those around them need to consider planning for themselves based on that unwillingness to engage.
It is therefore important at the outset to understand who ‘calls the shots’, what their vision is for the future and what drives them. Are they looking to pass on wealth and control during their lifetime or on death? Who do they consider to be part of the family for the purposes of planning – is it immediate blood family or a wider class? What do they view as a successful plan? Is planning purely financially motivated or is there something more fundamental driving the approach?
A family business brings a further layer of complexity when planning, not least because arguably every wealth family operates a business (even if that business is generically categorised as ‘wealth creation’).
Again, purpose is a key factor – is the business purely intended as a wealth generator or is it there to provide the family with a long term vocation? Is the intention that family members should be brought in to the fold regardless of qualification/suitability? Are family members even interested in involving themselves in the business and sustaining a legacy?
The purpose of the family business and its long term future are fundamental to discussions in this area and should be the bedrock on which any planning is based.
Articulating a purpose is, in itself, an important part of planning as it enables families to consider what drives them and to establish weaknesses which need addressing. The purpose should ideally reflect a vision which is universally agreed by those affected, at least at a high level. A purpose has limited value if it will ultimately fall away in the absence of the prominent individuals who have simply imposed it on the family. Even a well planned wealth preservation structure is at risk if there is a significant lack of consensus in the future or if it is too prescriptive.
It is sometimes proposed that the family’s purpose be formalised through a written family constitution (mission statement). This is not a formal, binding document and does not have an agreed precedent. It is generally a set of motives or principles agreed between family members which sets out the family’s purpose and the key philosophies they aspire to. It is often said that the value of the constitution is in its creation – namely the hours spent by a family understanding each other’s motivation and vision for the future, but also establishing where the fault lines lie.
Detractors will argue that a family constitution offers limited value, on the basis that the discussions will create tension and the constitution itself will ultimately reflect the patriarch/matriarch’s vision for the future (on the assumption they maintain control) and will simply delay the problem until his/her death. This line of argument should not be dismissed, not least because a constitution is not binding and it is unquestionable that dynamics shift following a death. However, steps can be taken to turn what has been agreed into a binding format, as described below.
These are the ultimate succession planning tool, but they are sometimes dismissed as a side show to the bigger picture, presumably because they are viewed as a simplistic solution to a more far-reaching conundrum. Wills are in fact complex documents which need as much consideration as any other structure which a family decides to put in place.
In the UK Wills are based on trust law and often have trusts embedded which develop into significant asset holding vehicles for future generations. They also send a strong emotional message at a difficult time for any family. Why are certain family members trusted to act as executor/trustee whilst others are not? Why was it appropriate to leave certain assets outright to individuals whilst others are ‘mere’ beneficiaries of a trust?
Whilst Wills self-evidently deal with planning on death, the concept of lifetime giving is altogether broader – encompassing direct transfers of wealth and the establishment of structures intended to benefit families over generations. Typically, UK and US centric families will look to companies and trusts to plan for the future, but there are other entities and ownership regimes that may be appropriate when planning for international families.
A trust is a legal relationship in which an individual (the settlor) transfers assets to a trusted individual/company (the trustee) to manage in the best interest of named individuals (beneficiaries) or for prescribed purposes.
Trusts have a reputation as being tax avoidance vehicles but this is a blinkered view. They are in fact a way of preserving wealth and control with long terms succession and family governance in mind; not least because they offer a solution to keep businesses and family assets under one umbrella to avoid the risk of a schism which the family may be seeking to avoid.
A company is a more universally recognised holding entity than a trust and has the benefit of certainty; although this can be accompanied by a corresponding lack of flexibility.
The use of companies in the family context can require a creative approach, and increasingly families are looking to establish ‘family investment companies’ (FICs) as a way to plan for the future. FICs are companies with different shares classes, with varying rights and entitlements so as to spilt control and economic benefit. They do not benefit from any special tax regime but they do enable families to distribute shares amongst family members based on particular needs and circumstances.
Planning for the future can mean protecting assets for direct descendants. Each jurisdiction deals with the division of assets on divorce in a different way, but as divorce rates increase and marriage becomes seen by some as a more contractual commitment, it is not uncommon for nuptial agreements to be entered into to provide certainty. This is particularly the case where valuable family businesses are at stake and an obligation to pay out or distribute shares to a divorcing spouse can adversely impact the family as a whole. In some families a nuptial agreement is not just a ‘nice to have’ but a requirement for them to participate in the family wealth. Whilst this may sound draconian, it does detach the process from the emotional concerns of raising the topic.
Philanthropy can be a polarising topic. Some see value in charitable giving, others criticise a system which enables the wealthy to reduce their tax bill and to redirect their wealth as they see fit. Regardless, it is often a discussion for wealthy families when planning for the future – particularly when considering their ‘legacy’.
The focus so far has been on achieving a family’s purpose through structuring. However, as we live longer and the risk of losing capacity increases, ‘capacity planning’ becomes of greater importance. It is not just a case of what happens to a patriarch or matriarch’s personally held wealth in the event of a loss of capacity but also what happens to their directorships, trusteeships and other roles within the family and their structures. A loss of capacity, and consequent inability to make decisions on core aspects of the family affairs, could lead to a significant, and unexpected, shift in power and family dynamic as others seek to fill the vacuum.
One size does not fit all, and the considerations above are not mutually exclusive – in fact typically families will look to a range of structures when planning for the future. A decision as to which entities or succession tools are most appropriate will depend on a range of factors including the location of the family’s assets, the location of family members, the applicable tax regimes and any cultural sensitivities.
In practice succession planning is a dynamic, evolving process with the concept of ‘change’ at its heart. Change in characters, business, circumstances and even purpose drives planning for wealthy families. A failure to adapt to these changes and to involve those impacted in the process can be the catalyst for ‘unsuccessful’ planning and family fall out. In this context, perhaps the most significant ‘change’ is death. The death of a patriarch/matriarch can fundamentally shift a family’s attitude and can bring to the surface all manner of issues which were lying dormant. Planning for wealthy families involves trying to mitigate that fall out and trying to manage the succession between generations in a seamless and inclusive manner. This does not necessarily mean implementing extensive, complicated structures – but it does mean understanding family dynamics and ensuring that anything which is put in place will stand the test of time.