The importance of written succession plans and preparing the next generation

As ultra-high-net-worth families navigate a major global wealth and succession transition, questions are being asked about implementation of plans and Next Gen readiness. Especially as, according to Campden Wealth’s 2022 European Family Office Report,  significant numbers of European family offices believe that the next generation is too young (36%) or inadequately qualified to take over (34%).

As a private client lawyer advising clients on succession and philanthropy for KPMG, Harriet Kwarteng is well placed to advise UHNW families on the successful steps to ensure a peaceful and prepared process.

In an exclusive interview with Campden FB, Harriet discusses how best to navigate the tricky subject of succession...
 

Campden Wealth’s 2022 European Family Office Report found that 67% of European family offices have a succession plan in place. But around half of these plans are relatively casual, being only informally agreed (19%), unwritten (21%) or still in the process of development (14%), raising a question mark regarding implementation. Does the fact that so many succession plans are not set in stone surprise you?
It's promising that a relatively high number have a succession plan in place! I am not particularly surprised that when you drill down, around half of these succession plans are informal. Every family office is unique and their management and operations have evolved to reflect this. However, there are certain methodologies and approaches which we recommend as best practice, and formal succession planning is firmly in this category. This is to best manage risk at the levels of the family, family fiduciaries/advisors, and the family office itself. As lawyers, we commonly see this on the death of a principal where family harmony can potentially be jeopardised if succession objectives are non-existent or opaque; fiduciaries/trusted advisors may be at risk of acting in breach of their duties should they not have clear mandates to act; and family offices can often be caught in crosshairs or left to pick up the pieces.

Of the remaining half who do have formal written plans in place, I would ask when these were implemented/last reviewed? Are they still ‘Fit for purpose’? Do they reflect the current family circumstances and dynamics? Once implemented, succession plans can too often be left languishing in a drawer for “When the time comes” but in fact they should be considered as living documents, which should be reviewed regularly (we recommend at least every five years) to ensure they are up to date.

We find one of the main barriers to formalising succession plans is disinclination on the part of the family. No one likes to think of themselves as mortal. But one of the ways we support our family office clients to broach the subject successfully is through ‘The How’: compiling practical steps to be taken to gain control of international assets during probate. This can help to focus the mind, and then often leads to discussions around ‘The Where’: to whom those assets should pass. 

Significant numbers of European family offices report that the next generation is too young (36%) or inadequately qualified to take over (34%). 36% of European family offices expect their Next Gens to assume control over the next decade, do you think we’re about to enter a period of familial turmoil or will there be an influx of external help to deal with the transition?
I don’t expect exacerbated familial turmoil to arise from this tension. In my experience, family offices are becoming more and more sophisticated at supporting next gens in gaining the skills, knowledge and training they need to become responsible custodians of wealth. The private client advisory industry itself is adapting to anticipate this transition of wealth and the complexity of international tax, legal and reporting requirements. Highly experienced individuals are joining family offices from a variety of tax/legal/wealth advisory backgrounds and specialisms are being developed in niche areas. Where Next Gens require particular support which cannot be serviced through the family office, we are seeing these services outsourced.
 

Campden Wealth and BNY Mellon Wealth Management’s report The Next Generation Of Wealth Holders In The United States 2022 (an in-depth report focusing on Next Gen family members and business owners) found that, despite the Next Gen’s involvement in the family office (86%) and family business (55%), only 37% of respondents feel very prepared for succession. What’s more, 63% of Next Gens require external support for their succession planning / wealth transfers. Specifically, 28% are finding it difficult to find advisors who can help with succession planning. Do you feel that Next Gens in the main are equipped to take over the family business?
We have many Next Gen clients who are very well equipped to take over the family business, either continuing it in its current form, or guiding it through a period of transition and transformation. This was a common theme at Campden Wealth’s European Families In Business forum which I attended in December, 2022. One of the keynote Next Gen speakers talked about how they and their siblings (who are now all owner managers in the business) have grown up with the business being discussed around the dinner table. As such, there are no greater experts on the business than themselves. But Next Gens can feel underprepared for a business transition because of an unclear/informal/uncommunicative succession plan and this is where we as legal advisors can add value by facilitating these types of discussions.

Discomfort discussing sensitive matters, highlighted by 15% of respondents, would naturally lead to an inability to engage with family principals on the subject of succession planning. What advice would you give to family members who want to broach the succession question?
Family offices may broach the sensitive topic of succession by framing the conversations around how they would practically deal with the probate administration of the principal’s international estate. We recently assisted an ultra-high-net-worth family office client with this very topic: the family office foresaw their role in supporting with the administration of the principal’s estate after their death. As such, they framed the initial discussions around the succession plan as a practical administrative issue. As such, they were able to engage with the principal, and this eventually led to a formalisation of the succession plan through the implementation of international wills. 

Most European offices believe they are well-prepared to support the Next Gens’ investment objectives (95%) and help them find bankers, lawyers and other service providers (81%). But when it comes to more important functions, such as helping Next Gens understand their post-succession roles or interfacing with trustees, a much lower percentage (73% and 76% respectively) believe themselves prepared. How can these educational issues be addressed?
This can be a tricky area for family offices and I would say that there is no one-size-fits-all solution due to the wide variety of trusts, fiduciaries and jurisdictions. However, in my experience, lack of communication about succession plans from the family principal can be the main contributing factor for family offices feeling under-prepared in this regard.

Commonly, the role of the family office after the death of the principal is that of a bridge between the family and professional fiduciaries/trustees. It is therefore important that they are empowered in this role to effectively hold fiduciaries to account and ensure they are acting in the spirit of the principal’s wishes.

While family offices and family businesses can be a useful training ground for Next Gens’ educational development, 64% of European families expect them to gain work experience elsewhere, such as at a bank or hedge fund, before joining the family firm. Would you agree this is the right tactic for preparing Next Gens to join the family business?
This is a very personal decision to be made by families and individuals, and depends on many factors. At Campden Wealth’s European Families In Business forum, we heard from a young Next Gen who entered the family business in his early 20s and successfully developed and operated a new business division. He had the right skillset, vision, and motivation to set up this business within a business.

A more traditional view is for Next Gens to gain work experience and knowledge outside of the family business, either within the sector or outside. They may also gain specialist education in a particular sector to enhance the firm, such as the medical education and training of another Next Gen speaker who then went on to join the family’s healthcare business.