Financial succession planning is all about transferring the equity in the single-family office or family business to future generations. Very often, critical to the effectiveness of the financial succession plan is its ability to mitigate taxes on the transfer. Having a financial succession plan is often critical, however, what is also essential is that the financial succession plan delivers as expected.
Have A Financial Succession Plan
According to Cliff Oberlin, Chairman and CEO of Oberlin Wealth Partners and co-author of Family Fortunes: How Family Enterprises Thrive Across Generations, “Based on our research of 403 family enterprise respondents, 64% of them have financial succession plans. Having a financial succession plan is characteristic of 80% of single-family offices. Financial succession plans were less common in family businesses with slightly more than two-fifths of them having such plans in place.”
Very often, financial succession plans are interlaced with, or subsumed under the ultra-wealthy family’s estate plans. This does not mean that as part of the estate plan there are times when the ultra-wealthy family that owns the single-family office or family businesses are not transferring ownership—usually incrementally—to the next generation during their lives. It is just that built into their estate plans are instructions that ensure the final transfer of ownership rights.
Multigenerational Financial Succession And Estate Planning
In some cases, the ultra-wealthy family members have financial succession plans for the future generations beyond the subsequent one. Almost 60% of single-family office senior executives report that the succession and estate plans of the ultra-wealthy family span multiple generations. More and more single-family offices are being used to help ensure the long-term future of the ultra-wealthy family. This ties into the interest of these ultra-wealthy families in family dynasties.
In contrast, only slightly more than 10% of the C-level ultra-wealthy family business owners are engaging in significant multigenerational succession and estate planning. Proportionately, this is more the case for the founders compared to the inheritors. All in all, very few of these C-level ultra-wealthy family business owners are making any efforts to address the matter beyond their immediate heirs.
There are several reasons founders and inheritors might take a multigenerational approach to financial succession planning for their family enterprises. The most common rationale is to ensure the ultra-wealthy family maintains control of the family enterprise. “The family office or family business is often cornerstone to the success, stature, and legacy of the ultra-wealthy family,” says Frank D. Paolini, Partner of the Neal, Gerber & Eisenberg, LLP law firm and member of the firm’s Private Wealth Services Group. “Baring necessity, the idea is for the family enterprise to perpetuate for many generations and if actions can be taken to help foster that scenario all the better.”
According to PJ DiNuzzo, Founder and President of DiNuzzio Middle-Market Family Office and author of The DiNuzzo Middle-Market Family Office”™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business and Affluent Families, “Tax litigation is often a driving factor for multi-generational planning. There are various wealth planning strategies and financial products that can be used to lower the taxes across several generations.”
The Value Of Stress Testing Financial Succession Plans
Having a financial succession plan is usually instrumental to the tax-efficient transfer of the single-family office or family business across the generations. The complication is the quality of the financial succession plan. “Unfortunately, we find many succession plans will not deliver the results the family is looking for,” says Homer Smith, Managing Director of the Integrated Family Office and Founder of Konvergent Wealth Partners. “That’s why stress testing can be instrumental in ensuring the family will transfer the single-family office of the family business to heirs effectively and efficiently.”
Stress testing is a process whereby family enterprises often in conjunction with leading independent professionals evaluate the viability of their financial succession plans. More specifically…
Stress testing challenges the succession planning ultra-wealthy family members who own and control a family enterprise have taken or are considering taking to assess the likelihood of the plan holding up in different scenarios and will deliver desired results.
“Only about 30% of family enterprises with financial succession plans have stress tested these plans within the last three years,” says Oberlin. “Concerning the single-family office senior executives where there are financial succession plans in place two-fifths of them reevaluated the viability of these plans within the last three years. Meanwhile, very few C-level ultra-wealthy family executives engaged in financial succession plan stress testing.”
Failing to stress test financial succession plans can prove quite detrimental. Among these family enterprises that did indeed stress test their financial succession plans, about nine out of ten of them found some sort of problem that needed correcting or they spotted a previously unidentified opportunity. The same was the case with both single-family offices and family businesses.
“Stress testing is becoming increasingly normative among single-family offices,” says Vince Annable, CEO and Founder of VFO Advisory Group and author of The Household Endowment Model: Wealth Planning for Affluent Families. “It’s usually triggered by a change of circumstances or when the ultra-wealthy family is not sure the advice and expertise they are receiving or considering will accomplish their goals and objectives.”
Presently, stress testing is not nearly as prevalent among family businesses. According to the elite private client lawyers we surveyed, stress testing—in any form—is not particularly common among wealthy families without single-family offices.
“In all likelihood, stress testing will become much more common at all levels of wealth,” says Anthony Glomski, President and Founder of AG Asset Advisory Family Office and author of Liquidity and You: A Personal Guide for Tech and Business Entrepreneurs Approaching an Exit. “This will occur because the affluent are increasingly understanding and adopting the best practices of business savvy ultra-wealthy and high-performing single-family offices. Multi-family offices are becoming much more pervasive and a sizable percentage of them understand the value and are quite adept at stress testing. Also, A broad array of high-end professionals from wealth managers to lawyers to high-net-worth accountants are recognizing the value of providing stress testing to their high-net-worth clients.”
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.