According to Angelo Robles, founder and CEO of Family Office Masterclass, “Both financial and operational succession plans need to be implemented to ensure the most effective transition of the single-family office between the generations. Financial succession plans are versatile and can address one or more generations; they need to fit the objectives of the wealthy family. The bigger potential problem is the lack of operational succession plans resulting in many inheritors being ill-equipped to take over and effectively manage their single-family office. Without solid attention to the financial and operational succession plans, there are greater possibilities for family conflict and for single-family offices to fall way short of their potential.”
Financial succession planning: Based on a study of 239 single-family office senior executives, about 80% have a financial succession plan. Financial succession plans are often interlaced with or subsumed under the super-rich family’s estate plans. This does not mean that as part of the estate plan, there are times when the family that owns the single-family office is not transferring ownership, usually incrementally, to the next generation during their lives. It is just that built into their estate plans is the final transfer of ownership rights.
More telling is that several super-rich families do not have their financial succession plans set. Homer Smith, founder of Konvergent Wealth Partners and co-author of Making Smart Decisions: How Ultra-Wealth Families Get Superior Wealth Planning Results, “If there is no definitive financial succession plan in place, there is a higher likelihood of some battling between family members Even with a financial succession plan set, there can be interfamily conflict. With the plan set, conflict is less likely. Also, the potential damage to the family and the single-family office is lessened.”
Multi-generational financial succession planning: In some cases, the founders structured the financial succession plans of second generation single-family offices. In their single-family office succession plans and their estate plans, with attention to dynastic concerns, about a quarter of the founders, who have plans in place, have implemented structures and wishes to ensure the transfer of ownership across multiple generations. A similar percentage has done this to some extent. Meanwhile, almost half the founders with single-family office financial succession plans have not taken this approach.
According to Cliff Oberlin, chairman and CEO of Oberlin Wealth Partners and co-author of Family Fortunes: How Family Enterprises Thrive Across Generations, “Generally speaking, based on a study of 148 leading private client lawyers, there are several reasons founders might take a multigenerational approach to succession planning for their single-family offices. The most common rationale is to ensure that wealth is well protected. This also entails ensuring the family maintains control of the single-family office and other assets. Also, about 70% of the leading private client lawyers identified tax mitigation as a driving factor. A third of the lawyers pointed to fostering family unity as the wealth plans are intended to encourage, if not require, family members to work together.”
Operational succession planning: While many single-family offices have financial succession plans, the same is not the case for operational succession plans. Only about 30% of the single-family offices surveyed are engaged in systematic actions to prepare the next generation to take over the single-family offices.
Whether or not an operational succession plan is in place, less than 15% of inheritors of single-family offices reported that they were prepared to take control of their single-family offices when the time came for them to do so. Thus, it might be highly beneficial for the current generation to address this matter, thereby ensuring the effective perpetuation of their single-family offices.
According to the leading private client lawyers surveyed, interfamily conflict is very possible, if not likely, when there is a lack of preparation for heirs to take control of the family wealth, including operating business and their single-family office. Aside from bad feelings, such conflict often results in wasting family assets and sometimes the disillusion of family enterprises. Some disputes can be avoided or mitigated, for instance, when the founder puts legal structures that compensate for the inheritors’ lack of knowledge and abilities.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.