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Seven Challenges of The Great Wealth Transfer

In the coming decades, trillions of dollars are set to exchange hands as the wealthy bequeath inheritances to children and grandchildren. Such a handover brings challenges for families and for their advisers.

It has been dubbed The Great Wealth Transfer and is already underway, but it is set to gather pace, as millennials step into the shoes currently occupied by baby boomers and bring with them wholly different approaches to the management of wealth. At its peak between 2031 and 2045, Accenture estimates that 10% of the total wealth of the United States will be changing hands every five years.

Estera gathered a group of senior professionals for a roundtable discussion about this sea change in the industry and here we examine the solutions and approaches the advisers shared. The over-riding observation was that these challenges can all be overcome with careful planning and consideration.

Challenge 1: Failure to plan

For advisers, the biggest challenge is facilitating the smooth handover to the next generation with evidence suggesting that as only very few families have put proper planning in place, many are likely to encounter conflict as the process unfolds.

According to the Knight Frank Wealth Report 2018, only 26 percent of families have a full wealth transfer plan in place, with further evidence that the next generation is not being educated early enough about the management of wealth and has limited understanding of the expectations of their parents about what they intend for the money.

Through a combination of tenacity, longevity and reluctance to cede control, some wealth-creating entrepreneurs may be handing over not only to their children, but also to their grandchildren. What’s more, as family norms shift, succession planning increases in complexity as it must take into account non-traditional family structures such as adoptions or children from other marriages.

Michelle Tring, Client Director at Estera commented “What is interesting to me as an adviser is how you tackle it sensitively where you have the settlor of a trust who does not necessarily want the next generation involved. But, planning ahead is in everybody’s best interest and it really helps a smooth transition.”

Challenge 2: Beneficiaries in the dark

An added complication is that parents do not always make their intentions clear for their wealth after they are gone.

Richard Prosser, Group Director at Estera talked of one client he had worked with who had not wanted to leave money to their children, but rather the grandchildren, given that their children had benefitted from money during his lifetime. “When the settlor died, the children turned to me and asked about the trust,” said Richard Prosser. “Their parent had not actually told the children that they were excluded from the trust and it was for the benefit of the next generation.”

In a family business scenario, it can be even harder to manage a smooth transition to the next generation of leaders when the founder exits, because the successor group may include some children who are more capable of, or more inclined towards, running the company than others.

Richard Prosser added “It brings home the importance of making sure that it is clear what the providers of wealth want from the next generation and who might be best placed to deliver it.”

Challenge 3: Poor communication

The challenge is to set up an open, honest dialogue between the generations. Establishing a decision-making family council and putting in place a constitution and a framework for transition is a proactive approach that will prove invaluable when planning for succession. But too often this work does not happen until the wealth generator dies, either because they have not shared information about their wealth or wishes with their children, or because they have wanted to avoid family conflict.

Matthew Braithwaite, Partner, Wedlake Bell, said “If you have a constitution in place and the framework is agreed early on, then you have a point of reference to say this is what was decided as a family. It makes the whole dialogue that much easier.”

Challenge 4: Lack of education

Richard Prosser, commented “Reports state that the older generation think they have imparted 70% of their knowledge to the next generation and that the next generation think they have been imparted 10% of the knowledge.”

A critical aspect of a smooth transition is therefore education, to make sure the beneficiaries are equipped to deal with the assets that they stand to inherit and to guide the founders on putting the best structures and arrangements in place. Here, advisers have an important role to play, not only in supporting the next generation as they build an understanding of trust structures and investments, but also in preparing them for what might lay ahead.

Many advisers offer training programmes or opportunities for beneficiaries to visit their institutions and spend some time building their knowledge of business leadership or investment management. They may also increasingly need to play a bridging role in building an understanding of what the next generation seeks to prioritise going forward, while also facilitating a smooth handover.

Michelle Tring, Trust Director, Estera, pointed out the need for education for everyone when she spoke at the roundtable. She said “We talk a lot about educating the next generation, but we may need to also focus more on educating the settlor, in terms of what can go wrong if they do not address these issues and do not think about family councils. We need to give those individuals the knowledge of the things that they can set up that will work best in terms of their values and beliefs in handing over the wealth.”

Challenge 5: Cultural differences

There are vast differences in the way that different cultures deal with the subject. In parts of the Middle East and Asia, for example, where wealth generation has been particularly phenomenal in the past 30 years, it is still extremely sensitive to ask business owners about their money, let alone their plans for their wealth after their death.

Matthew Braithwaite, Partner, Wedlake Bell said “The concept of even talking about a will for somebody in the Far East, for Chinese individuals, is the most heinous thing you can possibly think about. As for getting people round to the idea of thinking about it, it is about phrasing it in the right way. It might not be death that you focus on.”

Challenge 6: Conflict within the family

Statistics show that one in three families suffer conflict when addressing succession issues.

The adviser has to be discrete, adept, and sensitive; whatever the cultural context. Conflicts can arise from a lack of education, a lack of communication, and a lack of clear vision. An adviser at the roundtable gave the example of a settlor wanting only to leave a fraction of their wealth to their children, but not having a clear idea of what they wanted to do with the vast majority of the fortune. These actions could have sent the message that the settlor really did not trust any of their children to have a large amount of wealth which would almost certainly have led to conflict within the family.

Ella Pinnock, Client and Operations Director at Estera added “There is an old saying that 'where there’s a will there’s a row'. As advisers we seek to avoid any potential rows by addressing the issues and encouraging families to have open conversations, be clear about their wishes and plan ahead.”

Challenge 7: Changing advisers

As advisers, if we are not careful we can be seen as too closely associated with the first generation. One of the attendees at the roundtable expressed the argument that if the adviser is doing their job well, they will be seen to not be representing the next generation’s interests sufficiently.

However, Michelle Tring commented “We are very mindful of having open dialogue with all generations involved. The demands from each generation may very well be different but we can adapt our solutions and even deploy different members of our team to help keep the family’s interests intact.”

No challenge is insurmountable

With these issues set to become more widespread over the coming years, advisers need to encourage their clients to get ahead of wealth transfer challenges now. Thinking broadly and having solutions in place for each of these potential challenges is where advisers can add value for their clients and should spend their time, effort, and focus.

Richard Prosser concludes “What we bring to the party is the experience we have gained from working with clients. We have seen the scenarios where things go well, and those where they don’t. It’s essential as advisers that we pass on this knowledge not just to other clients and the next generation of wealth inheritors, but also to the younger advisers coming through in the industry. The importance of careful planning, clear vision, open dialogue, and well-timed education simply cannot be overstated.”


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TAKING THE TENSION OUT OF SUCCESSION AND MANAGING DIFFICULT CONVERSATIONS

With the largest wealth transfer in history set to take place over the next three decades, advisers have a key role to play in bringing about a succession free of tension