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Why succession planning in a pandemic is a once-in-a-generation opportunity to transfer wealth

The coronavirus pandemic has prompted families of wealth to accelerate their succession planning and check if existing plans are still fit for purpose.

The coronavirus pandemic has prompted families of wealth to accelerate their succession planning and check if existing plans are still fit for purpose.

The seismic disruption has created shockwaves last seen during the Global Financial Crisis with low interest rates ushering in tax-efficient transfers of multigenerational wealth and advantageous investment opportunities in assets at marked down prices.

Paul (right) and Wesley (below) Karger, managing partners and co-founders of the US multifamily office TwinFocus Capital, told CampdenFB they are seeing families take a new hard look at their need for robust succession planning in the era of the coronavirus.

Paul Karger, TwinFocus Capital

More than a quarter (28%) of the next generation cohort of family leaders surveyed by Campden Wealth with RBC for the new study The Next Generation of Global Enterprising Families Shaping Tomorrow, Today 2020 believed their families were either somewhat or very unprepared for succession.

Next gens told Campden Research the biggest obstacles they faced during succession planning related to the unease families felt when discussing topic (33%), the main wealth holder being unwilling to give up control (22%), families not knowing how to create a successful succession plan (17%) and the family not having a next gen member who is either willing or able enough to take the reins (17%).

How is the coronavirus influencing the succession planning being sought by ultra-high net worth (UHNW) families and individuals?

The Covid-19 pandemic is accentuating the need for UHNW families to have a holistic, fully-integrated family office solution in place. This includes all aspects of both investment management and wealth structuring, particularly in situations where multiple jurisdictions are involved to coordinate and proactively prepare for developments as they occur in real time.

Wesley Karger, TwinFocus Capital

In the event that a matriarch and/or patriarch does fall ill and is incapacitated, there needs to be a clear roadmap for seamless succession and transition with solid family governance programs that are managed by trusted advisers who have an understanding of the family balance sheet and are equipped to take decisive action. This is especially crucial in times of uncertainty when capital market volatility spikes and managing assets becomes more challenging and time consuming in order to avoid permanent loss of capital.

While these types of global macro and capital market events are at times impossible to predict with any level of certainty, our family office solution is intentionally designed to handle such situations, where we can essentially “flip a switch” under such circumstances and our contingency plans seamlessly and immediately come into play. And of course, these plans and family strategies are constantly revisited and re-assessed to adopt and discount any change in family circumstances. Stated alternatively, our solutions aggressively plan and anticipate these types of remote events and install detailed strategies necessary to have in place for if and when they do happen. Without this, families with substantial balance sheets can find themselves in a confusing and difficult position, on top of dealing with the prevailing loss of a loved one or other challenges.

What are the new factors relating to the pandemic that families planning their successions need to consider now?

Families are being impacted by the pandemic in different ways based on the primary industries in which their wealth was created and subsequently the manner in which cash has been invested. However, regardless of these types of factors, we believe that we are experiencing a once-in-a-generation opportunity to transfer wealth.

For a variety of reasons well beyond the scope of this narrative, this pandemic, as did the Global Financial Crisis of 2008/09, has created a global macroeconomic environment that fostered unprecedented low interest rates. These low rates have in turn also facilitated unprecedented shifts and transfer of multigenerational wealth very tax-efficiently.

Additionally, the recent market volatility and drawdowns have accentuated the ability to identify and invest in assets at distressed prices, making these wealth-transfer strategy opportunities even more compelling and advantageous for ultra-high net worth families.

For example, our global research team has been identifying and diligencing distressed asset managers in global structured credit and real estate, particularly given the structural trends underway in commercial, manufacturing, multiresidential and office real estate. Real estate has also been deeply impacted by the recent enactment of a once-in-a-generation tax savings legislation in Qualified Opportunity Zones.

However, there are many pitfalls to be mindful of, not just around investment due diligence, but also optimal tax, legal and most importantly—family multigenerational wealth structuring—when making these types of investment decisions. While the pandemic has created an ideal environment for transferring wealth, families must be strategic and leverage the counsel of experts and their trusted advisers to ensure they navigate the complexities and do so effectively to not actually do more harm than good.

Can you describe a case where an existing family succession plan fell short during the pandemic?

We have seen the pandemic accelerate families’ interests in updating their estate/succession planning, inclusive of business operating agreements.

For instance, one family that we started working with late last year came to us with plans that were over a decade old. The documents were grossly out of line with their current intentions and objectives, and named fiduciaries that they were no longer even in contact with. They are now thankful that we have updated their entire suite of estate planning documents, especially considering their children are now adults who have become capable of making important decisions during trying times such as this pandemic.

We have been extremely proactive in working with our clients to update their plans so that transitions will be seamless in difficult times. Even though some families are more hesitant to talk about succession planning, we place a high degree of importance on ensuring plans are well drafted and reviewed regularly. We make sure we are thinking of all potential scenarios and preparing for every contingency.

Are family principals adding new conditions before they transfer wealth and control?

Generally, we typically advise that multigenerational vehicles provide fiduciaries sole and absolute discretion for a variety of tax and non-tax reasons, although we also build in allowance for family/beneficiary participation. During times of extreme volatility where asset prices can artificially take huge hits to the downside, having experienced fiduciaries oversee assets becomes all the more mission critical and prudent.

For example, whenever we go through a period of extreme market volatility, the average investor becomes extremely nervous no matter how big their balance sheet. Their tendency is to move everything to cash and government securities, usually at market bottoms that result in permanent loss of capital. It is times like these where prudent investment management and detailed investment policies for all family office portfolios provide the necessary protection—but only if strategic plans are adhered to. This usually involves the oversight of professional fiduciaries.

Do principals believe their next-generation is ready for that transfer or responsibility or are they opting for non-family succession, perhaps for a set timeframe?

This is highly client dependent. We encourage our clients to prepare their children from a young age to understand the privileges and responsibilities of wealth by introducing them to family governance programs anchored to core values and building on these programs gradually as they age and mature.

But decisions about how and when to transfer responsibility—for either family wealth, including family-owned businesses—are dependent on a number of factors, including the core beliefs of the principals and the capabilities of the next generation.

Most of our families prefer to structure assets in trusts for their beneficiaries so that there are more detailed guidelines and protections in place to serve as guardrails for inheritance, wealth ownership and oversight by professional fiduciaries as we stated above. This might even include instructions for managing assets, including family businesses, so that matriarchs/patriarchs can feel at ease that critical decisions are made with prudence, while not governing “from the grave” to allow for flexibility and good timely business judgment.

What is your biggest takeaway about UHNW family succession planning during the pandemic?

This pandemic has accentuated the need to implement holistic, multigenerational wealth structuring plans that are highly integrated with the investment management functions.

It proves that you must expect the unexpected and have a well-designed plan in place to act effectively and efficiently if the unexpected does occur. Even families that already have what we call the “Phase One” foundational documents in place, those documents are not as effective if an overall plan was not previously contemplated and implemented, especially if a matriarch or patriarch is lying in bed incapacitated and unable to make financial decisions. Their assets can lay in ruin during market turbulence, with little that can be accomplished by their heirs.

When a family owns more complex assets and as the value and complexity of the balance sheet grows, this holistic approach becomes even more critical. For example, different types of real estate or closely held businesses have their own complex issues. Whether you’re leasing, financing or selling during this pandemic and these transactions fall through, you must have a plan for dealing with all the different scenarios/contingencies and fiduciaries that can handle these situations at all times.

Dealing with expensive artwork is another random example of something that could be impacted. If selling that artwork was part of a succession plan and it was on consignment at a local art gallery, for example, what happens to that asset when a hundred-year pandemic forces the gallery to close its doors and ultimately declare bankruptcy? You better have read the fine print and planned for this or esoteric assets such as fine art can disappear quite quickly.

While situations like these might seem remote, no one ever thought we’d be in the situation we’re currently in where the entire world has literally shut down for a prolonged period of time. And again, this is why ultra-high net worth families need an integrated approach that can address all the variables and contingencies associated with all their different assets and the complex interactions between them. Within this context, a fully integrated family office solution is exactly “what the doctor ordered.”

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