Imagine… you build a successful business and created significant wealth through years of hard work. Through your passing or incapacitation, the business and family wealth are now in the hands of new management. However, the new managers have little to no understanding of your business, assets, goals, history, values or purpose. They have no experience and have never had to make decisions together, let alone a basic knowledge of day-to-day business and financial functions.
There is great likelihood management will not succeed under these conditions, and realistically, you would never trust these individuals with even one dollar of your hard-earned wealth.
Unfortunately, this is exactly what you are doing with your estate if you do not take the necessary steps to prepare the next generation for the roles and responsibilities that lie ahead.
A robust estate plan will include (at a minimum) a recently prepared (or reviewed) Will and an Enduring Power of Attorney (EPOA). It may also include a Letter of Wishes and possibly an Explanatory Note to the beneficiaries.
Unfortunately, after working with family business owners and families of wealth for over 35 years, I can share with you that is rarely the case, and that their responses to questions regarding their estate and plans for succession are often as follows:
Q: When was your Will last updated?
A: “I don’t have one”, or, ”I haven’t updated it since my divorce/marriage”, or, “Probably 5 – 10 years ago”.
Q: Have you discussed your Will and succession plan with the kids?
A: “No. They will sort it out when we are gone”.
Remember, the estate plan, only directs where assets and responsibilities go after a passing/incapacitation. They do not prepare the family for the roles and responsibilities that go with those assets, nor the family dynamics that play out from such an emotional time.
Any robust Estate Plan should also include clear planning, communication and engagement with the entire family.
So, what do we know about Succession? Here are the facts:
- Globally, 70% of wealth transfers fail from one generation to the next
- In 95% of cases that failure rate is due to the following keys issues:
- 60% is due to trust and communication issues within the family
- 25% is simply due to the next generation not being prepared
- 10% is due to the lack of a clear, defined, and understood purposes of wealth.
Families have great difficulty in discussing family wealth – Why?
Recent studies have found the top 5 reasons below:
- Families fear that their children will develop a sense of entitlement and lose ambition. (Warren Buffet’s philosophy - leave his children enough to do something with their lives, but not so much they choose to do nothing).
- They fear their children will develop a sense of superiority that will harm relationships with their peers.
- They fear their children will blow the family fortune.
- They are trying to protect their children from the burden and responsibility that wealth brings.
- Families avoid direct conversations to preserve family harmony.
Our experience in working with families have found that by not having the appropriate conversations with family about wealth and succession, it increases the chances of entitlement issues, damaging relationships, destroying the family wealth, perception of burden and responsibility and damaging family harmony. Why? Simply because they are unprepared and unaware.
How do we work towards a successful wealth transfer and avoid the “Shirtsleeves to Shirtsleeves in 3 generations”, curse?
Step 1 – Awareness: What are the risks?
- Know, understand and communicate the failure rate of succession, and the key drivers that determine its success or failure.
- Understand the importance of trust or communication.
- Discuss ways to prepare the next generation for roles and responsibilities.
- Understand why a purpose of wealth is so important and how you prepare one.
- Sometimes this is unpopular however, “Mum and Dad’s Plan is not always the family plan”. The thoughts, wishes and intentions post succession should be discussed and agreed upon.
Step 2 – Assessment: Is my family at risk?
- Seek independent expertise to help navigate this area.
- Seek feedback individually on the areas of trust and communication.
- Seek feedback of ways to prepare the next generation and in fact their wants and desires to do so.
- Do you indeed have a purpose of wealth? 9 out of 10 families we ask, when starting this journey do NOT have a purpose of wealth. HINT – it has nothing to do with money, nor specific assets or the family business. It’s your Why! Why have we created this wealth and what do we want this wealth to do for our family both now and in generations to come.
Step 3 – Actions: What actions can my family take now?
- That will depend on the assessment above, but all driven by the 4 key risk areas
- Seek independent guidance/facilitation
- Family meetings
- Family Charter/Constitution
In summary, a good succession plan includes the will but also….
▲ Be Aware of risks after the transition
▲ Assess the risks to you and your family
▲ Take Action to minimise those risks . . .
Can you or your family afford not to be prepared?
EWM Group was formed in 2005 and is Australia’s first independent multi-family office. Our clients are current or former family business owners, inheritors of wealth, single family offices, philanthropists, sporting and entertainment individuals, not-for-profit organisations and traditional owners. The extent of the firm’s services encompass: Family enterprise structuring, governance, & succession planning Investment and wealth management Corporate and business advisory Philanthropic advisory Compliance, reporting and administration Family member engagement and education.
Brad Scott is the Founder and Managing Director of Australia’s first independent Multi-Family Office, EWM Group.
He is a keynote speaker and independent facilitator and family governance expert.
