A high-profile wealthy individual recently hit the headlines for taking a new approach to wealth transfer. In the third blog in our series reflecting on some of the hot topics raised in our Generation Game report and expert roundtable event, Rebecca Fisher and Alison Regan consider how families strike the balance between encouraging independence and fomenting conflict...
James Bond actor Daniel Craig went public last year about his decision not to leave his fortune to his children. As this runs counter to the prevailing view that we make money to pass on to our children it was seen by many as a radical notion. The press had a field day.
Craig wasn't the first high-profile person to go down this route, and won't be the last. Those that have come before him include Bill Gates, Laurene Powell Jobs (wife of the late Steve Jobs) and Michael Bloomberg. So, is the long-held tradition of handing down wealth to the next generation under threat? And, if so, how should families handle the decision to "spare" children the burden of wealth by limiting their inheritance or to use it for the greater good by giving most or all of it away?
One of the key issues discussed in our report, Generation Game - The Great Wealth Transfer and the Outlook for Families in 2021, was the challenges families face in having difficult conversations but how important those conversations are. It is vital to discuss key issues like succession and wealth transfer in line with the (often differing) needs of different generations and individuals early and openly. But we all know this is not easy to do, even at the best of times. How much harder, then, to have conversations around an individual's intention not to leave anything to their children, or to radically reduce the wealth they plan to hand down.
If a wealthy individual is determined to completely overlook the next generation in their will, then open discussions about it may actually do more harm than good. They might (indeed probably will) cause major familial fallout during their lifetime. However, these extreme situations are rare.
If you read between the lines of announcements from the likes of Warren Buffet, Bill Gates and Daniel Craig of their intention to depart from the inheritance norm, there is no indication that the children will be left penniless - far from it. The trend - if it can be called a trend - appears to be more about not leaving them an amount that is "distasteful", to use Craig's words. Whatever that means.
Buffet and Gates are interesting examples. In our experience, the desire of wealthy individuals to encourage children to stand on their own two feet by limiting or eliminating their inheritance is, very generally, more likely to come from first generation wealth. They are often entrepreneurs who have personally created the wealth and have a very personal investment in how it is used and/or that their "business legacy" is continued. It would probably be more surprising to see this happen with inherited wealth: legacy wealth holders have benefited from wealth transfer themselves and are keenly aware that they are guardians of it for the next generation.
In most scenarios where those with significant wealth are limiting what they pass on to the children (but are not cutting them out altogether), we would advise them not to leave conversations around what they have in mind on the 'too difficult' pile. They need to start managing the expectations of the next generation sooner rather than later.
It is often more palatable, and effective, to explain to children that they won't be named beneficiaries in a will if they are to receive significant financial support during the lifetime of their parent, or provision from family trusts. Sometimes it's more appropriate for a legacy to be created to meet the needs of children who have different desires and experience or life expectations; for example, if one child has no interest in the family business and there needs to be an unequal distribution. This will necessarily be a nuanced conversation.
Overall the urge to protect family wealth remains strong. Most people still want a legacy to pass down to their children. This throws up its own issues around whether that happens before or after their death.
Cutting someone out of an inheritance would be seen by many as an "anti-family" move. Many people still have expectations of inheriting wealth as a right. Going against 'natural justice' in this way could leave the whole family shaken. In many European countries there is a principle of a reserved portion for spouses and children - there is no such principle in this country. The principle of freedom of testation in England often comes as a shock to children when they are disinherited.
Those who decide to take the 'nuclear' option will need to make their will and any trusts and structures watertight to deal with the almost inevitable post-death legal challenge. They certainly need to consider the status and treatment of any children from outside a marriage. This is a controversial area and one that invariably ends up in litigation. It's certainly something to think about when contemplating what legacy (and not just financial legacy) will be left behind.
We would advise anyone considering this course of action to ask themselves what they are hoping to achieve. Do you want your children to stand on their own two feet, and is this the best way to help them "build character"? Or are you more focused on using your wealth now for the benefit of others? If so, are there other ways to do this; keeping the children involved and stirring them into action through long-term philanthropy and impact investing? Will the next generation 'buy into' what you are trying to achieve? And how much wealth is enough or too much to hand down?
Of course, the answers to all these questions are family-specific. But unless the next generation is brought into the discussion, going nuclear could lead to years of litigation. There is significant scope for disgruntled children to mount legal action, particularly where their expectations have not been managed in life. They could potentially challenge the will, trust structures or decisions made by trustees, or make claims under the 1975 Inheritance Act. Post-death litigation is a fast-growing area. Is it worth the aggravation?
A new way forward?
Moves like Daniel Craig's remain the exception not the norm. But, as we explored in our earlier blog Responsibility writ large: how families are broadening perspectives on philanthropy and ethical investing there is a growing feeling amongst UHNWIs that handing wealth down to the next generation is not the only right answer. We may start to see more people questioning what's best for the next generation. Some UHNWIs have suggested that they, and fellow members of their exclusive super wealthy club around the world, should be taxed more. The Patriotic Millionaires Club has suggested this very different form of wealth transfer could eliminate poverty and solve inequality - a fascinating idea.
In the meantime, while the conversation over who will inherit the role of Bond runs on and on, we should thank Mr Craig not just for his on-screen escapades but for bringing this important issue once more into the limelight. There's a parable there for many families. Having the conversations, even the difficult ones, about inheritance is fundamental. Whether you choose to hold them via the court of public opinion, and the world's media, is another issue altogether.
View all Family office articles in this series
- Responsibility writ large: how families are broadening perspectives on philanthropy
- The rise of the digital native
- The inheritance backlash
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