• Mr Family Office
  • Posts
  • How Family Offices Plan for Inheritance (and where they go wrong)

How Family Offices Plan for Inheritance (and where they go wrong)

Author

Mr FamilyOffice
January 12, 2024

How Family Offices Plan for Inheritance (and where they go wrong)

For family offices, inheritance planning can be an art form

But the landscape is changing

The very essence of what constitutes a family is changing. Legal systems continually expand and societal norms and expectations are evolving

Today, we look at the challenges of inheritance planning and some of the techniques family offices are using

First the bad news…

Family offices do not have all the answers

In fact, UBS has estimated that only 42% of family offices have a succession plan in place

💣 This is a time bomb waiting to go off

While most people have wills, the transfer of wealth without guidelines and defined intentions can cause acrimony and can lead to an erosion of the family wealth

So why are so many family offices failing to grasp this issue?

It’s probably a reluctance to engage in the messy, emotional and human side of succession and inheritance planning

Much easier to focus on neat quantitative topics of investments and wealth management and to put off the difficult discussions about mortality and relationships for another day

But this is a dereliction of duty. It’s a fundamental role of the family office to build, manage and maintain generational wealth.

The Great Wealth Transfer is underway. In the US, the Bank of America estimates that baby boomers will distribute $127 trillion in personal assets over the next 25 years… Inheritance planning is more important than ever

🌳 Adapting to the Times

Let's face it, the traditional family tree has branched out in all sorts of directions

With longer lifespans, the rise of gender equality, and a kaleidoscope of family structures, from single-parent households to blended families, the old one-size-fits-all approach to inheritance just doesn't cut it anymore

Family offices have to stay nimble and adapt to these changes

When planning inheritance, family offices find themselves not only as custodians of wealth but also as navigators through a complex legal maze. As the tides of family dynamics, legal systems, and societal expectations continue to shift, understanding the legal intricacies becomes paramount

Family offices must have a grasp on the evolving legal frameworks that can vary significantly from one jurisdiction to another. The nuances of tax laws, estate regulations, and compliance requirements demand meticulous attention

Failing to interpret and align with these evolving legal paradigms can leave even the most well-intentioned plans vulnerable to pitfalls

In this ever-changing terrain, family offices must seek legal counsel that specializes in the intricacies of inheritance planning. These legal experts help family offices decipher the legal jargon, navigate regulatory complexities, and ensure that wealth transitions smoothly align with the intentions and desires of the family

🧑‍🤝‍🧑 Unmarried Partners in the Picture

Marriage is not what it was

Unmarried partners often find themselves in a gray area when it comes to inheritance rights

Without a legal union or a clear will, they could be left out in the cold

And it's not just about people; those who are neither kin nor legal partners can face hefty tax bills

📜 The Power of the Will

Inheritance isn't just about what you leave behind; it's about how you leave it

Wills are evolving and extend well beyond the mere transfer of assets

Today's wills address not only the distribution of wealth but also the intricacies of family dynamics, tax optimization, charitable endeavors, and the preservation of legacies

It's a departure from the conventional, embracing a holistic approach to wealth transition that caters to the multifaceted needs of modern families

💔 When Love Goes South

Divorce and splits can ruin the best-laid plans

It's a reminder that estate plans should be living documents, changing as life does

When couples part ways, the impact on estate plans can be profound. Here's why:

  1. Estranged Partners' Benefits: Failure to update wills and estate documents can inadvertently lead to estranged or former partners continuing to benefit from the estate

  2. Changing Family Dynamics: Divorce often reshapes family dynamics, introducing stepfamilies or different financial dependencies. Ignoring these changes in estate planning can result in assets being distributed in a way that does not align with the testator's current wishes

  3. Impact on Children: If children are involved in the divorce, ensuring their financial well-being and inheritance can become more complex. Estate plans must reflect any changes in custody arrangements and guardianship decisions to provide the necessary safeguards for the children's future

  4. Tax Implications: Divorce can have tax implications, such as changes in the filing status, capital gains, and the treatment of alimony and child support. A failure to address these changes in estate planning can lead to unnecessary tax burdens on the estate and beneficiaries

In essence, divorce and relationship splits underscore the need for estate plans to be agile and adaptable. They should serve as living documents that reflect the current state of affairs and align with the testator's evolving intentions

The best family offices ensure that regular reviews and updates are made to wills to ensure that the legacy intended to be passed on remains intact, and that the wealth goes to the intended recipients, even when life takes unexpected turns

💼 Keeping the Business in the Family

For those who've built business empires or a strong family business, passing the baton is about more than just money; it's about legacy

Governments tend to recognize the benefits of keeping family businesses together. The family office should work with advisors to ensure that control over family businesses can be maintained, helping prevent the splintering of a lifetime's work

🧩 Solving Family Puzzles Peacefully

Even with the best plans, disagreements happen

That's where arbitration comes in. An arbitration process can help the family office keep discussions civil and private

Arbitration helps resolve issues without airing the family laundry in public courts

Arbitration has several features and advantages:

  1. Privacy: Keeps family matters confidential

  2. Expertise: Involves specialists in family and estate disputes

  3. Tailored: Allows customization of the process

  4. Relationship Preservation: Aims to safeguard family bonds

  5. Efficiency: Streamlines resolutions, saving time and resources

  6. Enforceable: Provides legally binding decisions

🗣️ Communication is King

Inheritance planning isn't just a paper exercise; it's a conversation, sometimes a tough one

Regular chats about these plans, coupled with updated documents, can avoid a lot of heartaches later. It's about being clear, open, and sometimes, a little bit brave

😆 The Curious Case of Conditional Inheritance

Conditional inheritance: for those who either want to direct life from beyond the grave (or those with a sense of humor)

Inheritance can be conditional - where heirs must fulfill certain conditions to claim their inheritance

  • marrying within a time frame

  • having kids within a time frame

  • following a specific career path

  • remaining within the family business

  • staying off drugs or alcohol

  • bizarre challenges (see Brewster’s Millions below)

But rather than conditional inheritance… how about allocating a part of inheritance to a specific purpose - an all-expenses paid vacation, an experience… something to bring people together

⚖️ Balancing Act

In the end, planning for inheritance is about balancing the old with the new, the legal with the personal, and the practical with the emotional

It's about creating a legacy that respects the past, serves the present, and prepares for the future

But for the well-being of individuals and the long-term strength of the family, it is a balancing act worth mastering.

𝕏 highlights

Estranged family members

January Spring cleaning!

Some fun with conditional inheritance

📚 what to read

A topical one this week. The Cycle of the Gift by James E Hughes Jr, Susan E Massenzio and Keith Whitaker explores the dynamics of passing down family wealth. It looks at the emotional and psychological aspects of wealth transfer. As is so often the case, communication is key

📻 what to listen to

Green Lights by Matthew McConaughey - a book, but you should listen to the audiobook

A memoir read by McConaughey himself. A wild story, a fascinating man - and if there is a better-read audiobook, I have not found it yet

📺 what to watch

See Tweet above… a great movie about conditional inheritance. Brewsters Millions has Richard Prior and John Candy at their very best

📰 family offices news roundup

 

And finally…

A well-crafted will can have such a positive impact

And a poorly crafted will can cause unnecessary resentment, pain and suffering

I’d love to hear your ideas and thoughts on inheritance

What are some great ways to preserve legacy and set your heirs on the right path?

X