Wondering how to protect your family wealth when you’re no longer around?
Only 30% of family businesses survive to the second generation and a measly 12% to the third. 7 out of 10 family businesses end up in the hands of someone other than their children or grandchildren.
And…
The majority of family business failures are not due to a lack of planning.
In This Post:
- The critical role of succession planning for family wealth
- The top mistakes families make when transferring wealth
- Legal and financial strategies that work
- Steps to prepare your family for the wealth transfer
The Importance of Succession Planning for Family Wealth
Here’s something that will surprise you…
Almost two-thirds of family businesses don’t have a documented succession plan. They spend 20 or more years building wealth but don’t have a plan to pass it on.
You’re not ready to talk about succession because it means dealing with the harsh realities of mortality, death, family issues, power, and control. Telling yourself you have time. Thinking “I’m too busy now to plan for the future.”
Professional advisors in the field of wealth management and legal planning play a critical role in this area. Firms like Confidence Wealth Management provide guidance to families by helping them manage their wealth, offering investment management services, and creating legal strategies and structures to protect wealth and assets while setting in place the legal and financial framework for generational wealth transition.
The Great Wealth Transfer is Already Underway
Did you know?
In the next 10 years, those with net worths above $5 million will collectively pass on almost $31 trillion to the next generation. This is by far the largest transfer of wealth from one generation to the next in history.
And…
Approximately 3/4 of heirs have not received any financial education, with nearly 30% of single-family offices saying future heirs are not prepared to succeed their predecessors.
4 Pillars of Successful Succession Planning
Building a successful succession plan isn’t hard… It just requires focusing on the following 4 key areas.
1. Legal Structure & Documentation
This is your succession plan’s foundation. It should include airtight wills and trusts, power of attorney, and business succession agreements. Estate planning attorneys can help you put in place wills, trusts, power of attorney, and other legal documents you may need to establish your wishes.
2. Tax Optimization Strategies
Did you know…
Bad tax planning kills family wealth faster than bad investments. The federal estate tax exemption level will drop at the end of 2025 by approximately 50%. This means that after the end of 2025, passing on generational wealth will be far more expensive for families than it is now.
But if you take advantage of the current high exemption levels through effective wealth transfer strategies, you can transfer significant wealth tax-free. Smart wealth transfer strategies include gifting strategies, irrevocable life insurance trusts, grantor retained annuity trusts, family limited partnerships, and more. The right strategy for your family will depend on your specific circumstances and goals.
3. Family Communication & Preparation
You can have perfectly crafted legal documents and great tax strategies…but if the next generation of family members is not prepared or willing, it’s all for nothing.
Building a family governance structure that works for your family is key. The most important thing you can do for your family and business is to get started on family communications and conversations sooner rather than later.
Prepare heirs and family members for their future roles. Teach the next generation about wealth, philanthropy, and the family legacy. Address family expectations about future responsibilities.
4. Professional Advisory Team
As the saying goes…
Nobody plans a succession plan alone. An effective plan will bring together a team of advisors who will work collaboratively to provide the comprehensive planning that includes the 4 pillars listed above.
Advisors can help with the complex issues that surround the building of an airtight legal structure and tax strategy. It also requires that you address the family communication and preparation pillar which will require the skills and experience of a qualified team of advisors.
5 Common Succession Planning Mistakes
Let’s go over the most common mistakes families make…
Mistake 1: Procrastination
Waiting too long to plan and failing to prioritize wealth transfer and family legacy building are a recipe for failure.
Act now. The average age of family business owners is currently in the late 60s. Waiting until then to plan is too late.
Mistake 2: Assuming
Never assume the next generation wants your legacy or what that means to them.
55% of next-generation family members say they felt they had no choice about taking on the family business. This resentment festers and poisons succession for everyone involved.
Mistake 3: Neglect
Neglecting outside resources and expertise can be a major mistake.
26% of family businesses globally expect to look to outside investment within the next three to five years. Being open to non-family leadership or ownership can preserve family wealth.
Mistake 4: Avoidance
Trying to do everything yourself is a recipe for failure.
You need professional advisors you can trust, but it’s your job as a family wealth creator to research, vet, and manage those relationships. These advisors will be key to ensuring your family and wealth plan works as intended.
Mistake 5: Lack of Documentation
Documenting your succession plan is critical and taking anything for granted or relying on verbal agreements or assumptions is a disaster waiting to happen.
Your Succession Planning Timeline
Ready to create your succession plan?
Succession planning can take time. Here’s how to structure your timeline.
- Years 1-2: Start the succession planning process. Begin family conversations and planning sessions. Develop initial wealth transfer ideas.
- Years 3-5: Design your legal and tax strategy with your advisors. Create or update estate planning documents. Begin formal trust creation and other wealth transfer vehicles.
- Years 6-10: Put your legal and tax structures in place. Transfer responsibilities and ownership. Continue developing the next-generation capabilities of potential heirs and leaders.
- Ongoing: Review and adjust your plan on an ongoing basis with your advisor team.
Implementing Family Governance
Successful multi-generational family offices all have one thing in common.
Formalized family governance in the form of a family council, shareholder agreement, and documented decision-making processes. These structures provide clarity on roles, responsibilities, and expectations.
Family governance is critical because it can help with separating the business and family aspects. They also give younger family members a voice and skills in a safe environment to develop and show leadership potential and for generations to communicate openly.
Takeaway on Family Wealth Protection
Succession planning isn’t about you.
It’s about protecting what you’ve built and passing it on to the next generation. Your family, your way.
For example, 69% of family offices have a succession plan in place. That’s up from only 53% just last year. The planning trend is going in the right direction.
But just having a plan is not enough. It must be solid legally and tax-wise and also consider the communication and preparation required by your family.
Family wealth protection takes professional advice and support. Advice and support from a team of qualified advisors in wealth management and law who understand the issues families face when building successful succession plans that last.
Start now. Schedule a family meeting. Call an advisor to discuss next steps and to get started. Sort your legal documentation.
The time to plan for succession is yesterday. The second-best time is right now.
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