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Considerations for Successful Family Wealth Transfers

Preserving generational wealth depends on managing critical internal family dynamics.

By Daniel G. Berick

Family offices are increasingly preferred vehicles for centralizing the stewardship of family assets across multiple generations. However, even with the growing importance of family offices among ultra-high-net-worth families, issues relating to formal governance are often overlooked.

When coupled with family wealth transfer techniques ranging from the cutting edge to the long-established, a family office can provide the benefits of centralized wealth management, efficiency and privacy while safeguarding a family’s financial legacy. While family offices and centralized family wealth transfer plans are created with the intention of preserving wealth and family cohesion for future generations, poor planning and a wide array of potential pitfalls can derail those plans.

The challenges to governance and unity are more pronounced as family members are increasingly more geographically dispersed and generational differences in investment and philanthropic philosophies can fracture a coherent family vision. Even beyond a family’s investment strategy, the preservation of generational wealth depends on critical internal family dynamics. In this series of articles, we will discuss three main themes: considerations for success in developing effective family governance; common pitfalls from the field; and potential functions of the family office beyond investment management.

Considerations for Success

Effective wealth management requires attention to a family’s culture and a plan for cohesion in successive generations through relationship building, information sharing and attention to family governance. These align disparate family members’ values and investment priorities, while mitigating the potential for conflicts. Formal governance structures involving family members and external advisors, such as advisory committees or boards of directors, can help facilitate discussions among family members concerning emotional business and financial decisions.

Culture, Cohesion and Information

While the dynamics between parents and children are well beyond the scope of this piece, successful multi-generational wealth transfers depend on family culture and cohesion more than any other factors. Families that are able to articulate, communicate and foster a sense of mission build transparency and connections between generations, helping to keep families from splintering—and their assets dissipating—when faced with economic or family stresses.

However, to build this cohesion it takes effort; requires trust, information and cooperation, and the ability to recognize and accept the different strengths and weaknesses of family members.

Successful family offices and family groups use a variety of tools to build family culture to develop that critical element of cohesion.

Communication. Open and regular communication is crucial. Whether it’s regarding financial or business information or quotidian family news, regular dialogue supports unity or the transmission of culture, it is critically important, as a family’s wealth moves through successive generations, that family members feel a sense of connection, both to each other, and more broadly, to the family as an “institution.” These connections, when formed early and cultivated over time, prove invaluable when a “junior” generation succeeds to family leadership. Members must have trust in each other, as well as familiarity with each other’s strengths, weaknesses and foibles, in order to assume the stewardship of their family’s wealth and safeguard a successful generational transition. It’s much more difficult to try to build those connections in what can be an emotionally charged circumstance on the point of succession.

Family Retreats. Family retreats can provide a platform to create alignment to existing goals, report on progress, educate and make important decisions. Successful retreats often involve an educational component, frequently on financial or philanthropic matters, and can equip succeeding generations with a greater sense of familiarization with the family’s businesses, its investments, and with their fellow family members. Some families use an “annual report” approach to provide “State of the Family” information, serving as a mechanism for the senior family members to communicate the status of the family and the family business, in addition to their aspirations for the foreseeable future.

Programming at family retreats can include presentations from family office professionals and outside investment managers, regarding portfolio updates and performance information, and from philanthropic leaders, as well as recreational activities and team-building exercises. Expanding the scope of a family retreat to include younger generations can provide an opportunity to lay the foundation for strengthening relationships inside the family. Annual family retreats often resemble a cross between a family vacation and a shareholder meeting, while monthly or quarterly update meetings tend to be short and focused on financial results. While there is no single “ideal” location, family homes or family business offices are typically discouraged, as those locations are rarely “neutral ground.” A destination hotel resort with a business conference room can provide a more desirable combination of privacy, recreation, neutrality and formality.

Participation. One of the most vexing questions families face when planning for generational wealth transfers centers on participation: “When should members of junior generations become involved in decision-making processes regarding the family’s assets?” This question is deeply rooted in issues of control, transparency and communication, and every family has a different philosophy on how to address it. In looking at families that have successfully managed generational wealth transfers, one effective approach is the establishment of “subfunds,” where senior family members make a separate asset allocation that will be managed by members of a junior generation. They are tasked with determining asset allocations, investment return parameters and targeted investment classes, and producing formal reports as part of the family’s overall investment documentation. These subfunds can be set aside specifically for venture investments, social impact investing or any of a number of other investment approaches, or established for philanthropic purposes. Along with building investment experience among the junior generation, the exercise of these subfunds also familiarizes them with each other and with their family’s broader investment philosophy and goals. It accustoms them to working collaboratively with each other (and with the professionals in their family office), before taking over the reins of the family’s wealth more comprehensively.

As the spread of generations increases the number of family members who might seek a role in management, families find themselves in the awkward position of having to choose among themselves to allocate roles and responsibilities in operating companies, and to deal with the associated issues of promotion, compensation and the like. Some families make the decision early in the generational lifecycle of a business to turn to external management, with the family retaining ownership and, perhaps, board roles. Conversely, other families have taken the “independent trustee” approach and have included non-family members on their businesses’ boards of directors.

The leadership identification process can be undertaken with varying levels of formality, ranging from consensus-style decision-making by senior members (i.e., “council of elders”) to the retention of executive search consultants to analyze potential leaders from family and/or non-family members based on an established set of guidelines.

Family Governance. In almost no aspect of the family wealth dynamic is there as wide a range of approaches taken than those relating to family governance. Decision-making grows vastly in complexity with transfers of wealth to children and extended members, bringing more voices and global perspectives to the discussion. For many, the traditional “family council” has shown itself to be easily transmuted to the generational wealth preservation role, with families incorporating similar elements of the structure and governance, such as through “family charters” or “family constitutions.”

In other cultural settings, where the nuclear family unit is favored, familiar legal structures, such as trusts and partnerships, have long been the preferred vehicles for ownership, protection and direction of assets. The use of a legal entity can provide the means for formalizing thorny governance and succession questions by establishing a framework for the composition and selection of governance bodies, for allocating voting rights among elements of the family, and providing criteria for distributions. As is the case with operating businesses, families often look to independent trustees or directors to participate in the governance of their family entities, even those that are purely investment holding vehicles, in order to provide external perspectives and to add an element of independent judgment to the governance process.

In our next installment, we will discuss common pitfalls that can dissipate a family’s assets.


Daniel G. Berick, Esq. is Americas Chair–Global Corporate Practice and Co-Chair, Global Family Office Practice at Squire Pattton Boggs.


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