The right advice can help you formulate a succession plan that satisfies every member of your family.
While no one wants to face up to their own mortality, the heads of wealthy families must make detailed plans for the handing over of control to the next generation or risk causing severe difficulties for their children and grandchildren. More problems are created, and tax bills incurred, by too little planning rather than too much, says Dani Glover, personal financial planning director at Smith & Williamson. "It's much better to tackle succession issues during the key person's lifetime, to spare emotional and possible legal costs later on," she says.
It is sensible to opt for a belt and braces approach, the first part of which is to maintain an up-to-date Will, setting out what will happen in the event of an unexpected death. However, most parents do not want to continue in harness until they drop - they want a phased succession strategy that will see their children take on responsibility for the estate or family business while they themselves enjoy a comfortable retirement.
Planning should begin in earnest in your mid 60s, when typically children are reaching their 40s. The central question is deciding who you want to take over primary responsibility. Where there is a title involved, there is no choice about who inherits it, but wealth and title can be separated if the eldest son proves unsuitable to manage the family's financial affairs. "When characters are developing and you still don't know what kind of relationships your children will form, it's probably best to keep your options open," advises Rohan Armes, investment partner at Smith & Williamson. "Once someone is safely earning, perhaps has had their own children, and has shown themselves to be a worthy custodian, you can begin to make a final decision."
Even though one person - not necessarily a son, these days - is likely to assume overall responsibility, parents will want to find meaningful roles for their other children to prevent squabbles. If you are an entrepreneur, you can follow Rupert Murdoch's example and allocate portions of the business according to your children's skills and interests.
Most people don't want to take a back seat until quite late in life, especially if they made the money themselves. There should, however, be a period of co-ownership to keep children engaged. If this doesn't happen there is a risk they will go off and do their own thing, and only come back when things have gone wrong or when obliged to do so. Younger members can take on particular projects to 'earn their spurs' before being given a more formal role as a trustee or director. "Your advisers should help you decide if and when to bring the children into the management team," says Dani Glover. "Becoming a director alongside your parents is a big milestone."
For many families with assets that have been passed down through many generations, the most challenging step comes when parents hand over 'emotional assets' such as the house and important chattels. Cash and shares are more straightforward to give away, and many parents pass on assets as their children mature; these usually avoid inheritance tax liability provided the giver survives the gift by seven years. It is, however, prudent to plan for what happens if a divorce occurs. "It's a huge issue," says Rohan Armes. "Parents worry about what will happen if their child's marriage breaks down and assets have to be sold to meet the divorce settlement. Prenuptial tools can be useful but don't always function as you want. In practice you should only hand over money that the family can afford to lose if there were a divorce."
Formulating an effective succession plan occurs over a number of years, with expert tax and investment advice running alongside. "Your team of advisers will help you plan for all eventualities, and help you reach optimal conclusions rather than emotionally-driven ones," says Jerry Barnes, partner and head of private client tax services at Smith & Williamson's Bristol office.
At Smith & Williamson a detailed knowledge of the family's history, assets and aspirations, as set out in the 'Blue Book', helps parents plan for the next 70 to 100 years. Says Jerry: "The aim is for an agreed, smooth, happy transition that is not a shock to anyone. We can go a long way to creating a structure that satisfies all the generations."
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