This week we hosted a panel discussion with Sophia Money-Coutts, a columnist at Telegraph in conversation with Sandra Davis, Partner and Head of Family Law at Mishcon de Reya. The event discussed a pressing concern for upper high net-worth (UHNW) families of preserving family wealth through generations to come.
Many UHNW families face several challenges and risks to their wealth which are often external risks as well as internal. While external risks cover third-party creditors, political instability, economic uncertainty, reputation and increasing global focus on transparency of assets, there are also many internal risks which are not addressed as directly as external problems. These internal risks can be even more harmful to the preservation of the family’s wealth for future generations. It’s common for UHNW families to lose their fortunes by the third generation, therefore making it essential to address the internal challenges to ensure this problem does not arise.
One of the most important steps when preparing for succession of wealth preservation is to ensure you have an appropriate will. Reviewing the will regularly is imperative, especially at significant life events for example marriage, divorce, the birth of children and grandchildren. Many people believe that their will is the start and end of the estate planning process. And while this may be the case for some individuals with simple affairs, for the very wealthy, it is just the start of the succession planning process.
Most of the family wealth for the upper echelons of society has been made through family businesses. Protecting the business is integral and central to the preservation of their wealth. Passing the family business down generations is an intense and challenging task. It has been said that only 30% of family businesses are successfully passed down from generation one to generation two. The chances of the family businesses being successfully passed down to generation three is only 10%.
When looking at family wealth, a clear distinction should be made between ownership and management of the business as family members do not always fall into both categories. Ownership and shares in a family business are commonly held through trusts, in order to reduce the affect caused by assets passing from generation to generation. This allows the shares to be kept as a whole instead of being split at the time of death. Management of the family business is another difficult process for both the generation taking over and generation letting go. A thorough evaluation must be undertaken to decide who the next best capable successor to the management of the business will be. Some family members are just not ready, which could lead to bad decisions; jeopardising the success of the company.
In order to make these critical decisions and avoid risking the preservation of the family wealth, family governance is important. A strong family dynamic will lead to easier decision making and a thriving family business. A family internally divided will cause many problems when deciding how to take the business forward. There will be shareholder disputers, trust issues and eventually the protection, growth, and sustainability of the wealth will be impacted.