Wealth transfer: handle with care

Written by: Gill Wadsworth Posted: 30/05/2019

BL62_wealthtransferAs baby boomers prepare to pass on unprecedented amounts of wealth to their millennial children, how can they and their advisers ensure that the next generation holds on to this hard-earned wealth? 

Over the next three decades in the UK, £1.2trn worth of assets are forecast to be passed to the under-45s by their baby boomer parents, according to 2018 research from wealth management specialist Sanlam.

The owners of that wealth, and their advisers, would do well to pay heed to the ancient Chinese proverb: wealth does not sustain beyond three generations. So proven is this wisdom, irrespective of geography or industry, that almost every culture has its own version. In the West, it’s sometimes expressed as ‘from rags to riches and back again in three generations’.

Time and again, successive generations have proven incapable of sustaining or growing their inherited fortune, instead squandering it either foolishly or wantonly. 

However, such decimation of the family fortune need not be inevitable. Timely, careful planning, coupled with effective communication between the generations, can make the difference between an inheritance that lasts the distance and one that doesn’t make it past the grandchildren.

Start early

Guernsey-based Sam Bird, Managing Director, Trust & Corporate Services at accounting and consultancy group Moore Stephens, says it’s never too early to start succession planning.

“As soon as you have successors, you need to think about how you would want your wealth to be passed on,” he says. “Planning is not just for the wealthy; it’s for everyone. If you’ve created any sort of wealth, then you need to have a succession plan.”

Succession planning starts with advice. There are so many potential permutations when dividing an estate, particularly for high-net-worth individuals, that making the wrong moves early on could undermine the whole process.

Gavin Ferguson, Partner in the Guernsey Private Client & Trusts team at Ogier, believes one of the most common mistakes is people “seeking proper advice too late”.

He adds: “Sometimes people will have already started selling assets or putting assets into trusts based on anecdotal recommendations, and it can be too late to undo the effects where there would otherwise have been more favourable options.”

Advisers will need to understand the extent of the estate, where all the assets are, and any complexities or unusual arrangements. Individuals must decide how much of their estate they want to pass on today, what needs to be protected for the future and what they want to spend today.

Importantly, those passing on their estate need to be entirely truthful about the possibility that there will be additional or surprise claims made on the family fortune.

Ferguson warns that a failure to admit to one’s true personal circumstances upfront can lead to unfortunate issues further down the line. He says: “Clients are invariably concerned about their privacy and are naturally hesitant to disclose full details of their personal history – is it possible that illegitimate children may come forward? An open and honest conversation regarding who is intended to benefit, and who is expressly not to benefit, at the outset, can help avoid significant problems in the future.” 

An open and honest conversation with an adviser should extend to the relevant family members, too. Successful succession planning relies on all parties cooperating. If intended recipients are aware of what’s coming their way, they can plan their own lives and ensure they are prepared for what might prove a considerable amount of money.

Ajay Wiltshire, General Counsel at accountancy firm Saffery Champness in Guernsey, says: “The biggest pitfall in succession planning is not discussing things within the family. Historically, there’s been a view that dad or mum knows best – but that does not always lead to effective planning.”

This is particularly important in cases where a business is expected to pass to the next generation. If the future generations are not interested or equipped to take on the family company, forcing it down the ancestral line can be disastrous. 

Beneficiaries can still participate in the profits from the firm without being expected to run it, by giving them certain classes of share or by using trust structures or foundations.

Different attitudes

However, despite the importance of open dialogue on succession planning, the Sanlam research – The generation game – found that just over a third (38%) of under-45s who are set to receive a substantial inheritance have not spoken to the person gifting about their plans for the money. This could be because of differences in attitudes to money between generations.

Richard Prosser, Jersey-based Global Head of Private Clients at Estera, says the older generations have a fear of encouraging a lack of work ethic in the next generation, who might see their future as already bought and paid for. 

“Some clients say that they’d rather their children were not fully aware of their inheritance – they want to encourage them to make their own way in life. We do see some from the next generation who have a reduced appetite for work because they anticipate an inheritance on the horizon,” Prosser says.

His experience is borne out by the Sanlam survey, which found that a third (34%) of respondents aged 25–45 are relying on their inheritance to help them out financially in later life. An additional third (31%) say the impending inheritance has deterred them from saving so they can ‘live in the now’.

Controlling access

However, this sense of entitlement can be circumvented by putting stipulations on how and when any assets or money can be accessed. 

The first port of call is a will, which is the foundation upon which additional succession plans can be based. These are straightforward to set up, can be low cost depending on the complexities involved, and are the easiest guaranteed way of ensuring that the estate is divided according to the gifter’s wishes.

However, a will should not be treated as a ‘set and forget’ document. As Paul Hodgson, Managing Director at Butterfield Trust (Guernsey), says, it’s important to review a will on a regular basis and to keep it up to date.

“We should probably revisit our wills more than we do. That doesn’t mean a formal process; it means just reading it and checking that everything is still appropriate. It may be a case of ensuring that the expensive new watch goes to the right person, for example,” he says. 

Another popular means of managing intergenerational wealth transfer is by setting up a trust. Dating back centuries, trusts ensure that estates are managed according to the family’s wishes, both before and after death. The same is true of foundations, which provide certainty that estates can be passed on before death, but without the next generation taking immediate, uninhibited control.

While it might be tempting to put in all manner of rules into succession planning, Moore Stephens’ Bird recommends retaining some flexibility in the system. “Circumstances change,” he says. “People disagree or remarry. It makes sense to set up something that achieves what you want but permits a degree of flexibility.” 

Succession planning is not necessarily straightforward, but it’s certainly easier if it’s done as early as possible, and with openness and honesty. Regulated, professional advisers are critical in ensuring that the process is above board and can meet realistic expectations. 

As the baby boomers’ trillions trickle down over the decades, if the recipient millennials take the right advice at the right time, they might yet be the first generation to keep their riches for good. 

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