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Succession planning

Succession planning

The world has recently been enthralled with the breakdown of the once tight bond between William, Duke of Cambridge and Harry, Duke of Sussex.

Harry has relinquished his rights and duties to the throne in favour of a luxe life in America, causing debate as to whether he and his children should remain in the royal line of succession. His decision is likely to have an impact on how the royal wealth will be distributed amongst the family in the future.

It is circumstances like this that bring to the surface the importance of a well-planned family wealth succession plan (SP). The purpose of a SP is to maintain family harmony and relationships to ensure an enduring legacy and enjoyable Christmas dinners in the future. The succession of family wealth is not centred on just having your estate plans in place, such as wills, power of attorneys, enduring guardianship and letter of wishes, but also providing the framework to manage the family wealth and communicating this with future generations.

The discussions associated with the SP are important although they can be uncomfortable, especially if the conversations do not go to plan. These discussions can be by way of a formal family advisory board structure, family meetings, a third-party advisor or informal family discussions.

The primary focus of relaying the SP to family members is to ensure transparency regarding family wealth, managing family expectations, protecting wealth for future generations and solidifying the testamentary wishes of the current owners. The SP can be considered as an education tool for the next generation. From experience, families that begin these conversations early often benefit from reduced stress upon the passing of a loved one, as already heightened emotions are not further amplified due to uncertainty in relation to estate administration.

Pitcher Partners 2021 Business Radar report: Understanding the businesses that drive Australia’s economy unveiled that businesses that engage in a SP are significantly more confident with their decision-making processes and the business’s future success. Although the report did have a focus on businesses, the same concepts can be applied to a family’s personal wealth.

When it comes to SP, it is important to ensure that family members are comfortable with the wealth and the responsibility it will entail. It may have been succession discussions that triggered Harry’s realisation of the high volume of responsibilities and lack of self-autonomy for his future that pushed him to leave England.

The discussions and how families go about them depends on the dynamic of the family, the key concerns and the quantum of wealth changing hands. There are certain considerations and decisions made today that may directly impact the value, structure and legacy that is left behind for future generations.

Key considerations

  • Current family structure
    The family structure should be considered as family wealth is often spread across a number of entities and structures, potentially with differential ownership. It is important to have a clear understanding of this and how succession may look for each entity. For example, superannuation is not part of ones will, so it is important to address this as part of the overall plan.
  • International considerations
    With families becoming increasingly mobile and international investments becoming more common, specific considerations may need to be given to international wealth, including mechanics and legal requirements of any transfers (now or upon ones passing), alongside the associated taxation implications this may have. Jurisdictions such as the United States and United Kingdom have estate taxes which may apply. Similarly, civil law countries such as France have strict succession rules which may apply and therefore one’s wealth may not be distributed to the intended beneficiary.
  • Decision makers
    A decision should be made regarding the next generations involvement in key decision making, in the immediate future or at a trigger event occurring, such as a beneficiary turning 25.Thought should be given to whether the 25-year-old beneficiaries involvement will relate to a particularly business, specific entity or alternatively the family group as a whole. Special consideration may need to be given to entities with non-family members involved such as Private Ancillary Funds (PAF) and the family business.Additionally, it should be considered if there would be value in having a family charter or even a family advisory board, especially if there are plans for the next generation to hold directorship of various companies. A family advisory board can have specific family members, external advisors and/or professionals that meet regularly to discuss the strategy direction of the family’s financial affairs.
  • Transfer of wealth
    A consensus on the transfer of wealth should be made that includes how much of the family wealth is to be transferred in the medium-term verses upon ones passing. It should also be decided if the transfer of wealth is conditional.The tax impacts will need to be managed on any transfers in the medium-term as this could have a significant impact on after-tax position. There are potential income tax rollovers that can be utilised to minimise these costs or perhaps assets are pre-CGT being acquired prior to 20 September 1985.
  • Philanthropic endeavours
    A SP should also consider if a portion of wealth is set to be donated or used for philanthropic pursuits. Perhaps this is already occurring by way of a PAF or another vehicle. This is an important discussion to have with family heirs that are set to inherit a pool of wealth as it is crucial that they are agreeable on this from the outset.
  • Backup plan
    Attention should be brought to spendthrift beneficiaries, wayward spouses and poor investment decisions that are made by beneficiaries. This also includes drawing attention to beneficiaries who are of special needs, disabled or of poor health who may require additional financial support. Decisions should be made on how much money will be distributed to these peoples and how it will be managed.

You and your family would not be alone when it comes to requiring the involvement of several professionals to consider the asset protection, structuring, taxation and insurance considerations to execute a strategic SP. As outlined in the Pitcher Partners Business Radar Report, 62% of middle-market businesses intend to increase their focus on succession planning and 67% plan to engage professional advice to do so.

To save your family possible stress it is best to gather all relevant documentation and store it in a location that can be easily found and accessed. Plans should also be revisited every few years so that they take into account current family dynamics and wealth factors.

Discussing your succession plans with your family can be difficult, but it is vital to ensure the longevity of family wealth while it ensures that the family’s legacy, values and views are all kept aligned in accordance with your wishes.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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