Much has been written about "The Great Wealth Transfer" that is expected to happen over the coming years as Baby Boomers pass their wealth to next generations. Both the estimates of what value is to pass, by inheritance or gift, and the timeline over which this is to happen vary widely.
However, with one such estimate placing the value to be transferred between $30 and $70 trillion over the next 25 years, the sums are, by any measure, staggering. Compress the timescale, and the enormity of this demographic shift in wealth ownership becomes truly compelling. And compressed it has been, possibly quite dramatically.
As the months have unfurled since the first, at that point unprecedented, wave of pandemic restrictions back in March 2020, it has become increasingly clear that a process of creative destruction has been unleashed on a scale previously thought impossible. The adoption of innovative and disruptive technologies, as well as new consumer and business behaviours have since powered economies over the recovery curve, causing entrepreneurial wealth to reach new heights of $10.2 trillion at the end of July 2020. This, coupled with families' being confronted by the thought, and not infrequently reality, of family members’ mortality, has provided a new impetus for succession plans to be put in place or revisited, and in many cases accelerated, in order to ensure the effective transmission of wealth to the rising generations.
Structuring solutions with a robust governance backbone
While structuring options, such as trusts, foundations and indeed family investment companies or family partnerships, can provide a suitable framework for the orderly transfer of a family’s wealth and protect against its erosion, it is only part of the jigsaw. This is especially so where wealth holding structures are created to address the concerns and reflect the wishes of the wealth creator generation, without much, if any, involvement from the next and future generations. There are, of course, often very good reasons for this being the case—in terms of protecting young and vulnerable beneficiaries and guarding against a dependency culture emerging.
However, unless rising generations, as beneficiaries of the senior generations’ largesse, understand clearly the purpose of the family’s wealth, its wealth holding structures and their own roles and responsibilities with these, and have been inculcated with the same sense of purpose driven by the family’s shared values, chances are that even the best designed structures will not protect against disharmony settling in when the senior generations are no longer there. Transparent and age-appropriate dialogue at an early stage between family members, the family office and fiduciary service providers is therefore an essential component of a successful multigenerational strategy for the transmission of a family’s wealth.
The commercial and the emotional
Further sensitivities often arise where family trusts and foundations act as the receptacle for family businesses, as they sit at the cross-section between rational, commercial considerations and what can be highly emotional, parent-child and sibling relational processes. Balancing the concerns of those who remain actively involved in the family business(es) against the differing contributions of their siblings and future generations is no mean feat, as each generation and individuals within the same generation come with their own set of hopes and fears.
Having a seat around the decision-making table and embedding checks and balances that ensure that no family branch becomes disenfranchised should go a long way towards preserving the family’s unity, including in the face of difficult issues such as the future direction and continuity of a family business.
Accordingly, an accelerated process for the transfer of a family’s wealth will typically be best supported by simultaneously bringing forward the governance timeline. This is not merely to address what can be the highly emotive issue of succession to roles, such as on the boards of family businesses, private trust companies or membership of advisory, protector and/or investment committees. an early transfer of governance would ideally usher in a period of inclusive co-governance between the senior and rising generations, through which cooperation and a shared family vision can be cultivated, ultimately leading to a seamless changing of the guard.
Operational longevity through renewal
Turning to the other side of the same coin. While technology, healthcare and industry stocks—and families operating in these sectors—have benefitted from the Covid-related demand for goods and services to be delivered remotely, economic recovery over the last 17 months has been uneven. This has meant that family businesses in more traditional and less technology-enabled industries have had to reassess their strategic and investment priorities, reinvent their businesses and often re-imagine their governance.
Next generation family members, particularly tech-native millennials, have been instrumental to this renewal process, by bringing in their skills and unique perspectives on how family businesses can re-build better for impact and in a way that resonates with a new, socially-minded customer base. This has opened up avenues for the next generation to demonstrate their value to family enterprises and capacity to lead in a way that would have been unthinkable in a pre-Covid world.
This frictionless, imperceptible at first, organic process of transference of governance will typically precede and ultimately clear the way for senior generations to hand over the rains, safe in the knowledge that their heirs have got the resilience, drive and business acumen to succeed. Ultimately, is this not what every successful family aspires to?