Maintaining and growing wealth requires a lot of responsibility, and all the more so if you are doing this job for other people, such as a family – especially if the wealth is distributed down the generations. If you are responsible for a family’s wealth, you have to proceed in a very structured, careful way.
Before you can start, there are questions to be asked: how do you educate the adults and children so they can deal with the wealth in a sensible manner? This becomes important not only when the wealth owner dies, but perhaps even more so if he or she becomes incapacitated. Who should act in their place, and according to what instructions? What conflicts of interest could there be? And how can these be resolved beforehand to ensure the family and its assets aren’t damaged?
An open conversation at the right time, led by an outsider, can save endless frustrating attempts to sort out the situation
later on
In many cases wealth owners make good decisions about the family finances while they are still alive, which makes things easier for the family. But if something unexpected happens to this person, or if they die before leaving instructions, it can be very difficult for the survivors to know where to start. If they haven’t been involved until this point, the situation can often be overwhelming, even for the smartest and most well-educated heirs and partners.
On the same page
Timely ‘training’ in the family finances is very important. It can help family members understand what is going on and what the original wealth creator’s intentions were. Family seminars, for example, are a good way of gathering and aligning the family’s intentions and ideas. These can then feed into appropriate training measures that will stand future heirs in good stead and help keep the family’s ideals alive.
This type of training requires a partner who takes the time to understand the family properly. At least one whole day should be set aside for a discussion involving all the relevant family members. The expert partner can then put together a training programme that should only last a single weekend. These family meetings bring a lot to the surface and often create the foundations for the family’s wealth to flourish.
Everything hinges on the question of what the wealth is for. Should your company remain in the hands of the family for generations to come, or should the wealth be maximised regardless of what its constituent parts are? Should the whole fortune be kept together, or when the time comes should it be divided between the heirs? Should everything be passed on to the next generation, or should some of it be used for charitable purposes?
Discussing these matters can be a very delicate business, and all too often the issue is avoided. But this can lead to the decline of the business, disputes between siblings and cousins, or consternation at having to deal with large sums of money. An open conversation at the right time, led by an outsider, can save endless frustrating attempts to sort out the situation later on.
The issue of structuring also comes up here. These days many families live scattered around the globe. Grown-up children may be studying in England, the US or Australia. They may fall in love, get married and stay abroad. Wealthy people may fall in love; they may have children out of wedlock who they would like to care for.
Many Swiss people are attracted to life in the US. But Swiss banks often want to close accounts if a child or the family as a whole relocate to the US. Managing assets in a way that keeps the US tax authorities happy is also a massive challenge. This is a particularly sensitive issue if the family is considering, perhaps for business reasons, a move to the UK. The UK still offers the attractive resident non-domiciled regime, which supposedly offers tax exemption for the first seven years of residency.
Interestingly, however, some of the conditions for asset management in the UK for a resident non-domiciled citizen are diametrically opposed to the obligations of a US taxpayer. In such a situation a wealth owner needs a partner with comprehensive capabilities who can reconcile all the different requirements. Only then can any unappetising, and especially unintended, tax consequences be properly mitigated in a timely and competent manner. Measures can be taken at the asset level but also at the structural level using vehicles like foundations, trusts and insurance solutions. But again it is important to find a partner who knows and can take account of the specific circumstances.
Looking at the options
Many companies are bought, split up and sold. Business partnerships can be forged with people who live in jurisdictions for which the current structures are not beneficial. Such matters need to be planned and analysed to avoid problems later on. Owners can suddenly find that they are no longer running a company but simply sitting on a pile of cash generated by the sale of the company, and the temptation may arise to start a new business.
Families may decide to change their domicile for many different external reasons, but such a change always needs well-managed exit and entry planning. If this isn’t done properly, whole fortunes can be frittered away. Which is why you need a partner who can put a task force together. Usually this will include experts from both countries who can examine the tax and legal aspects generally, as well as in relation to real estate, art and other assets.
Entrepreneurs who have sold their companies don’t just have to cope with the material wants of families and partners, but also suddenly find that they are now full-time asset managers. This could be something that has never previously interested them, and they may need help. Friends often advise them to set up a family office, but this entails a staff, governance, compliance, regulatory constraints, all of which can seem overwhelming.
Who should head up the family office – a family member perhaps? Is this person sufficiently qualified? And most important of all, where should the family office be domiciled, in what form, and with what structures? Who can you trust? In a family office a lot of information is centralised, and employees may change employer, meaning that knowledge and information can be lost.
This is yet another responsibility for the entrepreneur who wants to set up a family office. Tax implications must be checked and sorted out, while entrepreneurs may face completely new challenges involving previously unknown partners.
An entrepreneur who suddenly has a large cash fortune as a result of selling a company has other dangers to navigate too. Many acquaintances will immediately see him or her as a potential investor. They will propose supposedly lucrative investment opportunities that sound very attractive. An entrepreneur who does not know this terrain well may quickly become entangled in assessments of private equity deals and private debt. Again, it is vital to know who you can trust. Many entrepreneurs trust other businesspeople that have already been in this situation. But are they really the best advisors? Where might their interests lie?
It is important here to find a neutral, independent, knowledgeable partner who can stand at the investor’s side, helping them with diversification and with choosing these new investment forms, some of which may have a much longer investment span than originally supposed.
We live in uncertain times – legal action against companies is on the increase, governments are moving aggressively against presumed wrongdoing, and patchwork models are often replacing traditional family structures. All of these factors can potentially put the maintenance of family wealth at risk. A legal ownership structure in the form of a trust or foundation creates additional protection, makes succession planning easier and can create legal opportunities for tax optimisation. Such structures can be used to hold companies, financial assets, property, art collections and yachts.
With collections, however, there are many things that wealth owners need to consider, though most only do so when it is too late. What should happen to the collection? Should it be sold, kept in a museum, should you set up your own museum, should it be distributed among family members? And if so, what formula for distribution will ensure the legacy doesn’t cause decades of dispute and jealousy? This is where a collector needs a partner who understands, who already has the experience needed to make the necessary arrangements with a steady hand.
Collections can be a tricky matter. If wealth owners aren’t careful, a collection can take up a lot of their time, or end up costing a fortune in advice and tax. Many questions arise about passing on the collection, VAT and asset tax, storage, security and climate control, access, usage and management. Again, the wealth owner will ideally have a partner who has done this kind of thing before and who is prepared to use this experience to help.
A structured, careful process increases returns but above all reduces risk, avoids possible strife within the family and gives you more time to enjoy life. The costs involved are far outweighed by the gains. This is why wealth owners and their families need an independent, entrepreneurial partner by their side to help them make the right critical decisions based on all the necessary information.
