Wealth owners adopt different strategies to transfer assets across generations.

Some transfer assets early. Others prefer a gradual approach. And some wait until the last moment.

Whatever the strategy, the key questions are the same:

• Is the older generation ready to relinquish control?
• Is the younger generation ready for responsibility?
• Are the terms and expectations of the transfer clearly defined and agreed upon by all parties involved?

This last point might seem straightforward on paper. In practice, it is far from simple. As John Lennon sings, “Life is what happens to you while you are busy making other plans.”

Likewise, wealth transition often occurs in response to life events that necessitate – even hasten – the transfer of assets.

Such transfers exacerbate the challenge of aligning technical aspects of wealth transition with equally important non-technical elements, including:

• Managing family dynamics
• Establishing communication strategies
• Facilitating effective governance

To illustrate this challenge, let us consider two common scenarios.

 

1. Planning during business transitions

Imagine an entrepreneur whose business is approaching a significant liquidity event, like a partial sale, merger, or public offering.

Corporate planning would typically be managed with considerable foresight, covering all corporate, financial, and governance aspects to meet the needs of the investors or buyers who will ultimately strike the deal.

Despite meticulous corporate planning, the personal interests of the shareholder and their family typically receive attention only once the transaction structure is defined.

This delay can be attributed to last-minute changes and adaptations, as well as a tendency to prioritise business planning over personal planning. The complexity and urgency of the deal, the focus of advisors on business aspects, emotional investment in the business, and the assumption that business success will automatically provide personal financial security all contribute to this prioritisation.

When the focus switches to personal planning, advisors may recommend transferring ownership or shares to the next generation to facilitate inheritance processes and secure favourable tax rates. While this pre-emptive strategy may align with the goal of a financially efficient wealth transition, it often overlooks essential aspects of family and business governance.

If assets are transferred without clearly specifying the terms, the younger generation may perceive this grants them full authority to make key decisions. For example: they may distribute dividends instead of reinvesting profits for business growth — contrary to the older generation’s strategy and expectations.

Such oversights and potential conflicts can occur if the family and their advisors are either unaware, or overwhelmed by the fast pace of events.

 

2. Rapid protective measures to tackle urgent risks

Premature inheritance can also be driven by external or internal threats to the family and its business.

Think of an entrepreneur facing changes in national security laws or stringent currency controls that threaten access to essential foreign currencies.

Or a family focused on immediate business growth, failing to diversify their wealth or prepare for political and economic risks. This can leave their enterprise vulnerable to threats like rapid changes in trade and customs laws, sanctions in key markets, or unexpected legal proceedings.

In such precarious situations, business owners might feel compelled to hastily transfer assets to family members abroad as a protective measure against potential losses. These “anticipatory inheritances” aim to safeguard assets amidst turmoil – but are sometimes executed without a comprehensive wealth planning strategy.

However, business owners rarely intend that these transfers grant full ownership, control, or income from these assets. Yet, in our experience, little attention is paid to communicating (or documenting) this. Such lack of clarity can lead to unintended consequences, as legal ownership vests the recipient with unrestricted rights.

What’s more, when family members become full legal and economic owners, they are also exposed to legal risks and moral conflicts they may not be prepared to handle.

This misalignment, coupled with a lack of preparedness and a sudden increase in responsibilities, can lead to pressure and confusion about their roles and duties, potentially resulting in poor decision-making.

While such transfers may be strategically advantageous or necessary to protect assets, they often also carry significant emotional and relational costs, potentially undermining the familial bonds they aim to protect.

These issues are exacerbated if the transfers create unintended inequalities among younger members, such as uneven distribution of assets, differing roles and responsibilities, or unequal legal and financial risks and burdens.

 

Critical considerations for effective wealth transitions

How, then, can a family avoid a mismatch between the technical and relational aspects of wealth planning? How can they avoid straining the family ecosystem, or damaging the family’s values, reputation, or business?

We believe the answer lies in thoughtfully addressing these perspectives before any transfer. In doing so, a family can safeguard assets, foster positive relationships, and prevent future conflicts. Addressing these questions can help guide the process and highlight the importance of comprehensive planning:

1. Readiness for transition: Is the older generation, who are still operationally in charge and hold principal shares — thus exercising voting rights and reaping financial benefits — truly ready to transition both legal and beneficial ownership?
2. Role clarity for the younger generation: Is the younger generation being asked to step in primarily for technical reasons, such as asset protection or tax planning? If they are essentially acting as nominee holders of the assets, does everyone understand and agree to this arrangement? Have the overall legal and relational consequences been thoroughly considered?
3. Mechanisms for dispute resolution: Is there a mechanism in place to resolve significant disagreements among the parties, as outlined in a shareholders’ agreement or other asset transfer documentation?

As we have discussed, time constraints or lack of focus may make it impossible to comprehensively address all issues before a transaction. In such cases, managing the implications and concentrating on post-transfer relationship dynamics may become essential.

The first step is to openly acknowledge discomfort or conflicts that have arisen, ideally through family meetings guided by professionals. These structured dialogues help clear grievances and enable collaboratively exploring solutions, contributing to strong family dynamics.

Revisiting roles and responsibilities (as well as the overall terms of the transfer) can also be useful. This process typically involves drafting or updating legal documents to ensure they accurately reflect current understandings and agreements.

Finally, establishing a continuous process to review and adjust agreements helps ensure that wealth planning strategies remain relevant and compliant with applicable laws — and that all family members feel their interests are safeguarded.

 

Preparing to succeed

Life is unpredictable, but as Benjamin Franklin would say: “if you fail to prepare, you are preparing to fail”.

Developing a strategic wealth plan that encompasses business and financial assets, family relationships, and the broader family ecosystem helps ensure long-term success. Such a plan enables effective decision-making, even in urgent situations.

Incorporating a strong ‘what if’ strategy to prepare for potential risks and contingencies helps avoid common pitfalls, such as a narrow focus or reactive decisions prompted by urgent situations.

Lastly, clearly understanding, communicating and documenting the purpose behind wealth transfers — whether for legal benefits, asset protection, or succession planning — is essential to mitigate confusion and conflict.

By aligning these strategies with evolving conditions, families can strengthen their bonds and enhance the resilience of their wealth in a challenging environment.

 

Key questions to protect you from hasty and narrowly-focused wealth planning

1. Proactive versus reactive planning: Have you primarily engaged in wealth planning reactively to life circumstances, such as relocating, selling a business, or getting married?
2. Comprehensive approach: Is your wealth planning process comprehensive, or is it primarily driven by specific technical topics important to you or your advisors?
3. Alignment of technical and relational aspects: How are you aligning the technical aspects of your wealth planning with the relational aspects? How do you involve relevant people, consider their viewpoints, and keep them informed?
4. Diversification and emergencies: What diversification and emergency measures do you have in place?
5. Contingency planning: Do you engage in contingency planning and rehearse “what if” scenarios?
6. Unspoken and unconscious dynamics
   • Implicit agreements and tacit conditions: are the roles and expectations in your wealth plan clear to everyone, or might some members have different ideas?
   • Underlying assumptions: have you examined the beliefs that shape your wealth planning decisions and identified potential conflicts?
   • Unspoken expectations: what are the unspoken expectations driving decisions that have never been openly discussed? What hidden themes need to be addressed within your family?
   • Unconscious dynamics: have you considered the psychological factors influencing behaviour and decisions in your family relationships and how they might affect your wealth planning?

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