Like it or not, but without secure succession plans, a family has no guaranteed future and the risk increases of a gradual separation that can lead to accumulated wealth being more quickly squandered.
In this scenario, family money may become fragmented due to multiple separate inheritances; funds lost through poorly chosen investments and heavy tax bills. Furthermore, this situation may be exacerbated by the lack of a joint sense of purpose causing friction between some family members and a loss of interest among others.
In this article, we explore the topic of succession planning which, in our routine, constitutes a serious legal basis when it comes to building family continuity. We give you the ins and outs of the discussion
Cementing the future – a legal basis
In order to achieve an orderly succession, there are several core requirements.
First, a family needs an agreed Action Plan that includes a series of investments matching the philosophy of the family and the shared interests of its members.
Second, a Family Vision that summarizes family values, maps a direction and delivers significant benefits to each individual.
Third, a family heritage plan that provides a historical narrative to support education of the next generation. Last but not least, cementing the future requires the full cooperation of all next-generation participants.
Beyond theory and wishful thinking, the above points need to be all tied together by a legal structure – or Trust – that binds participants tightly in order to ensure their full participation.
Succession planning, practically speaking.
Generally speaking, succession planning involves setting long term goals and aiming to meet them over multiple generations and many decades.
A family should be able to enjoy a secure future, protecting its wealth and ensuring the integrity of its heritage. With the goals of its members aligned, individuals should be motivated to share management responsibilities while also enjoying its benefits. In this way, the risk of wealth dilution can be minimized and the family’s purpose sustained.
To achieve this goal, it can be very helpful to provide a structure by means of a legal agreement that simplifies the complexities of succession planning. After all, without such a solid foundation, there is limited motivation for members to take the family’s mission seriously. So? A Trust encapsulates all the points that have been agreed in a series of lengthy family planning meetings and serves to safeguard assets until certain conditions have been met.
Once the next generation has been fully briefed and understands the importance of contributing to family continuity via joint investment and wealth management, meeting agreements can be formalized using a legally binding format.
Trusts enable the future planning of financial disbursement under many different circumstances. This is critical in the case of the unexpected death of a family member, when a pre-established Trust can control payments from funds which might otherwise have been subject to highly disruptive disputes among surviving family members.
Trusts also serve as a detailed planning tool and conditions can be set to meet detailed criteria – for example, full participation in the management of family affairs – with future payments only made when those criteria have been met.
Tax efficiency is another notable benefit of using a Trust. And while this may not seem significant in low tax regimes such as Hong Kong or Singapore, the situation changes considerably once family members take residency in Europe or the USA. More effective distribution of money to charitable causes and protection against foreign creditors are additional benefits.
How a trust works.
Trusts are set up to safeguard assets until specific conditions are met. They are intended as a way of fulfilling the wishes of one generation as assets are passed on to the next. Hence, while a Trust is carefully protected by legal boundaries, many of the terms are highly subjective and can be used to protect the vision, values, wealth and future prospects of a family. Consequently, Trusts are a key component of a strategic approach to family wealth management.
The family vision sits at the core of a Trust and serves as a managing principle for how it will be executed: before future generations can benefit, they need to commit to meeting specific milestones that may extend for five, ten, or twenty years, or even longer.
These requirements may include:
- Educational commitments for young members to absorb the family culture and demonstrate an appreciation of the values and responsibilities of individual family members.
- A commitment by young adults to participate in the family’s joint decision-making and management process to ensure continuity of the family ethos and sustained investment success in the future.
- Commitments by family members to managing the Trust, maintain its integrity and invest money for the benefit of the whole family.
- Specific milestones matched to key dates such as coming of age or retirement – and in practical terms, a Trust manages the family resources in case of sudden death.
Succession planning: the bottom line.
If succession planning is key to ensuring the future prosperity and stability of a family, trusts are probably the most efficient way to turn planning from wishful thinking to life-changing reality.
Trusts are set up to legally safeguard assets until specific conditions are met, but they are primarily intended as a way of fulfilling the wishes of one generation as assets are passed on to the next generation.In broad terms, the more assets a family possesses, the more complex its situation and the increased value of setting up a Trust to pre-plan the outcome of various scenarios, ensuring continuity and common-sense action in the case of any unforeseen eventuality. Please get in touch with us for more information or for a free consultation.