Financial succession planning is all about transferring the equity in the family business to future generations. Very often, critical to the effectiveness of the financial succession plan is its ability to mitigate taxes on the transfer. There are two big reasons for having a financial succession plan:
- A financial succession plan can result in paying lower taxes.
- A financial succession plan is often essential to minimizing or eliminating severe family conflicts.
In a study of 164 ultra-wealthy family business owners, about two-fifths of family business owners have financial succession plans. And then there is always a question about the efficacy of those financial succession plans.
As financial succession plans are often interlaced with or subsumed under the ultra-wealthy family’s estate plans, there is a high probability that the estate plans of these ultra-wealthy business owners are also lacking. This does not mean that as part of the estate plan, there are times when the ultra-wealthy family that owns the family businesses are not transferring ownership, usually incrementally, to the next generation during their lives. It is just that built into their estate plans are instructions that ensure the final transfer of ownership rights.
Based on a worldwide survey of 128 private client lawyers who predominately work with the ultra-wealthy, 100% confirmed that without a well-structured succession and estate plan, the ultra-wealthy will pay more taxes than otherwise. For some, this will severely burden the heirs and can prove ruinous for the family business.
If there is no definitive financial succession plan, there is a higher likelihood of some battling between ultra-wealthy family members. According to Vince Annable, CEO and founder of VFO Advisory Group and co-author of Your High-Performing Virtual Family Office: Maximizing Your Financial and Personal Lives, “Even with a financial succession plan set, there can be family conflicts. Still, with the plan set, especially severe conflict is considerably less likely. Therefore, any potential damage to the family and business is meaningfully lessened.”
Among the private client lawyers surveyed, 82% of them report that it is common for ultra-families to have serious conflicts when there is no financial succession plan. Furthermore, at least 50% of these conflicts result in the family business’s sale or “collapse” within ten years.
“Having a financial secession plan is regularly great; however, what’s also essential is that your financial succession plan delivers as expected,” says Annable, “As this is not always the case, there are ways to make certain that the goals and objectives of the ultra-wealthy will be met. Increasingly, we find ultra-wealthy families are asking us to take a hard look at what they’re doing or considering and provide them with options. Often, we find many holes in what these ultra-wealthy families have done or are thinking about doing. We’re then hired to help them ensure the best tax-efficient ways for them to hand the reins of the family business to heirs.”
Financial succession plans are commonly instrumental to perpetuating the ultra-wealthy’s family businesses. What is evident is that there are extensive opportunities for private wealth professionals to help ultra-wealthy business owners transition their businesses to the next generation.
Russ Alan Prince is the executive director of Private Wealth and a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.
