How Family Wealth Goes from Fleeting to Repeating…

estate-plansShirtsleeves to shirtsleeves, clogs to clogs, riches to ruin. For those with wealth, these are not just catch phrases, they are the truisms that plague the wealth succession plan and lead to sleepless nights. If your wealth succession plan is poor, so too will be your descendants. To be clear, there is a responsibility that comes with wealth, and it does not end at death.

After years of planning for the high net worth, ultra high net worth, and family office clientele, the following are a summary of my best strategies that you can implement today to prevent dissipating wealth tomorrow:

1) Give in trust, not outright. In order to ensure that the family wealth is protected, it is always best to make gifts to the descendants in a trust. Outright gifts are ill-advised as they are subject to the claims of creditors, settlement with spouses in the event of divorce, and mismanagement of the asset directly by the descendant. A trust can appoint an independent trustee to manage the assets, utilize a spendthrift clause to block any attachment by creditors, and serve as the pre- or post-nuptial agreement for your descendants. Properly created, there may be no need at all for your descendant to pursue a pre- or post-nup. In addition, trusts avoid the very public court process known as probate at your death, thereby maintaining privacy and confidentiality over the family wealth.

2) Use perpetual trusts. It is imperative that your counsel “breaks free from the form” they use and create a long-term trust with customized planning provisions. All too often, I see a basic provision that provides for fixed distributions of trust assets at specified ages – e.g., 1/3 at 25, 1/3 at 30, and 1/3 at 35. With significant wealth, this may be woefully deficient to accomplish your planning objectives. It may give too much too early (e.g., $5M to a 25-year old is rarely prudent). It ignores the actual needs of the descendant at the time as well as those descendants who may follow. All of this leads to unnecessary waste of the assets that have been accumulated. The better approach is to create a perpetual, or “dynasty,” trust that does not arbitrarily distribute all of the assets at certain ages; rather, it provides for a descendant as needed throughout their entire lifetime, and continues to provide for future descendants in the same manner until the trust is depleted.

3) Use customized “best interests” clauses. Who’s to say that giving 1/3 of the trust at 25, for example, is in the best interests of the descendant at the time? It is an unknown quantity until that very point in time. Distributions may be needed for a wide variety of matters, some advisable and some not, or no distribution may be needed at all. It is best to create a distribution clause that is based on the “best interests” of the descendant at the time – with the “best interests” clause being specifically defined by you. This clause can be as broadly or as narrowly defined as you’d like; it only needs to be within public policy. This allows you to impart your own preferences and philosophies on the trust as a guide toward future distributions, allowing for a more personal and long lasting legacy. Lastly, distributions should always be discretionary as opposed to mandatory, to ensure the assets remain fully protected until distribution.

4) Create a “Family Office” structure. The deficiency of the typical inheritance plan is that the assets are viewed simply as gifts or entitlements. To combat this, the more effective wealth transfer structure is built upon a business foundation. Utilizing an entity such as a limited liability company (“LLC”) to own the wealth, to provide for its management, to better control the succession of the interests, and to create desirable restrictions or parameters for access, will afford you the best chance for a more permanent and disciplined wealth planning structure. When a formal business structure is used to facilitate the personal wealth plan, this is known as “family office” planning. Depending on the size and complexity of your plan, the family office structure design generally falls into one of three categories: a) single family office (“SFO”), b) multi-family office (“MFO”), or c) the virtual family office (“VFO”). In either case, the structure imposes a level of responsibility and respect for the wealth that helps to “institutionalize” the family asset pool and promote more reliable, long-term planning.

5) Establish a family wealth governance document. When utilizing a family office structure, it is imperative that the senior generation creates governance documents that set forth the rules, rights and restrictions surrounding the wealth along with the investment objectives and parameters. These family governance documents create a reliable framework in the form of bylaws, operating agreements, or mission statements. Clarity in the governance and wealth management parameters is what prevents litigation and dissipation in subsequent generations.

6) Begin the rearing of the next generation early. It is a mistake to wait too long to bring subsequent generations into the fold. Descendants who are educated early and often on the family wealth, the senior generation’s overriding philosophies, the investment and growth opportunity, and the discipline surrounding the family wealth management platform, develop greater respect for the wealth opportunity provided and are better equipped to handle the responsibility that comes with it. Education can certainly be phased-in through time, but should begin sooner rather than later.

7) Maintain a focus on philanthropy. The for-profit aspects of the family wealth structure can be stressful and divisive for any number of reasons. It is best to counteract the for-profit influences with a not-for-profit focus. Make charitable giving a formal component of the family wealth proposition from the start as it tends to have a more unifying effect within the family while reinforcing the good side of being financially fortunate. The lessons learned through philanthropy have long-lasting effects on how your descendants will care for all transferred wealth as proper stewards.

8) Cohesive counsel is a must. In order to successfully structure one’s wealth plan, it requires a coordinated approach among all the advisors. You must have qualified attorneys, accountants, financial advisors, insurance agents, bankers, and whoever else is necessary or desirable, and they must work in a cohesive manner with the family’s best interests at the forefront. A disjointed group of advisors will create gaps in planning that jeopardize the wealth and the senior generation’s planning objectives.

Jim DugganIn the end, the goal is convert what is otherwise a fleeting inheritance into a perpetual wealth management opportunity for the family. This goal can only be accomplished through proper planning.

Jim Duggan, JD



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