Written by Daisy Reece
Can you call to mind the family name of any of the notoriously rich? Maybe you thought of the Kennedy, Vanderbilt or Rockefeller families, or perhaps a different but equally wealthy family. Such names are renowned in our society for their far reaching wealth. It cannot be said that all rich families remain as prominent as those mentioned here, however. Recent studies have shown that 70% of rich families lose their wealth by the second or third generation through shaky financial decisions or lifestyle choices.
It is thus unsurprising that many UNHWIs have one question on their mind when they consider the future: how can their family wealth be preserved in order that their grandchildren and great grandchildren might profit from their hard work? There are a great many factors that influence how future generations will handle wealth: family governance and values, where and how money is invested and the financial education of the heirs. If the combination of these factors is perfected, familial wealth is less likely to dissipate as generations progress.
Firstly, UNHWIs should consider their core family values. There are many questions to consider when attempting to leave a business to family members. It has been suggested that the best person to leave a family business to is a professional from an outside agency. In some cases, it may be that there is a family member who has the experience necessary to manage the family business. Family members joint involvement in the business may lead to disagreements, which can damage the family’s business interests in the long term.
To avoid such events, it could be beneficial to create a “family constitution”. A family constitution would detail what would happen in the event of a disagreement between relatives, and how the disagreement should be settled. It can also be used to detail exactly how the family should make decisions, whether this be a voting system or a different sort of process. To avoid complexities, it would be even better that the family were left a very clear financial strategy to follow; it would help ensure things run smoothly during the inheritance process, even if the strategy itself is adapted and changed in later years.
Another way that core family values impacts the preservation of wealth is through its investment in “human assets”. The nurturing of newer generations is not solely achieved through a high quality education, though that certainly plays a role. Leaders of the family should consider how later generations can mentor their successors. Can they pass on lessons about financial responsibility, which may help children handle money with more care as they grow older? Committing to growth and helping the next generation succeed helps ensure that family wealth continues to be built, rather than faltering.
Staying close as a family and attending regular family events is key in reinforcing the family unit’s strength, but it is also important that family members feel that they have the space to grow individually, as forced proximity may inspire rebellion from family values. Finally, the root of the matter remains that former generations may be proud of the wealth that they have created, whereas future generations may not treat wealth with the same care and respect without adequate preparation.
Though core family values are important to preservation of wealth, other elements also affect whether wealth remains in the family or spreads elsewhere. How the UNHWI chooses to invest the inheritance is also an important part of whether wealth is preserved. A well known investment truth is that diversification is key for returns on funds. Historically, precious metals have been a wise field to branch out into due to its likelihood to retain value during times of financial uncertainty. However, there are a huge range of diversified investments that should be considered.
Though some are obvious choices like the aforementioned precious metals, or real estate, perhaps investors have not considered collectibles, timberland and farmland. Collectibles can be risky and some require maintenance, but items like rare artwork and even rare books could provide good future returns. Another potential diversification would be to invest in timberland; sustainable and lucrative, as it provides fantastic returns, it seems a worthy contender. Some investors dislike that timber investments tend to run over a long period but for those looking to secure the inheritance of their family, timberland is a relatively low risk, high return investment, as well as providing 100% inheritance tax relief if held for two years. Farmland is also an attractive investment; you may associate farmland with low risk but also low returns, but its merit lies in the tax relief it provides. Inheritance estate tax is normally 40%, but any farmland that is worth over £325,000, is farmed in hand and has been owned for two years, will be allotted 100% tax relief – the same allowances given timberland.
Wealth preservation can also be achieved by investing money in what are known as dynasty trusts. Dynasty trusts usually consist of maintenance paid out to the beneficiary, with what is left of the sum being passed on when the beneficiary comes of a certain age. A dynasty trust is irrevocable, which means that when the initiator of the trust dies, it is not subject to inheritance tax. Though there is such thing as Generation Skipping Transfer tax, there is a way around the tax being applied to such trusts in some American states; if the investor donates $5.64 million, or $10.68 million if married, the money then becomes exempt to tax. If the trust grows beyond that amount through investment returns, the larger amount is still exempt to tax.
Tax exemptions are not as generous in the U.K, although there are several precautions that those who wish to preserve funds should take; one would be to file for life insurance, so that any family members do not have to pay for inheritance tax from their own pockets. Trusts do exist in the U.K, though beneficiaries have to pay 35% income tax on any income that the trust generates. Gifts are also a way of passing money to relatives and under certain amounts will not generate tax costs.
Some would argue that the single most important step that determines whether wealth grows or shrinks is the provision for proper financial planning. This can be done through two main avenues: the Single Family Office or the Multi Family Office. For families who prefer a high level of control, the SFO is the best option. SFO’s are usually run by a small team of highly trained experts who work solely for the family. A family board determines who the key agents are, the long term financial strategies of the office, and ensure that no regulations are being violated. MFO’s are different in that they work for several wealthy families instead of one alone. MFO’s financial solutions may be more creative as a result of working with several different families in different circumstances, and also may have access to discounted rates simply through working with a broader variety of financial experts.
There is no one size fits all technique to preserving wealth. That being said, there are ways to lay the foundation for continued prosperity and growth, from investing heavily in the financial education of your offspring to sitting down with your wealth managers and planning an effective long term strategy. It is worth the time spent doing so – though many believe that money does not lead to happiness, in passing on your wealth, you pass on your legacy.