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Rags to Rags in 3 Generations? Governing a family

It is not always easy to ensure that wealth is maintained in a family for many generations. There are two broad paths taken by families, where a daring, hard-working patriarch has grown significant wealth:-

1 – The wealth may be preserved in the family for multiple generations.

2 – The wealth lasts only one or two generations. Americans describe the process as “shirtsleeves to shirtsleeves in three generations”, the wealth being built up by one, to be dissipated by the following generations, returning them to their grandparents’ “shirtsleeves”.

Unfortunately, most British and American family-owned businesses are lucky to span two generations. Why is this? Possible reasons are:-

  • The negative personal effects of inherited wealth

  • Legal ties over succession to wealth

  • Matrimonial claims

  • Taxation

  • Mismanagement and misappropriation

  • Family strife

  • Greed of succeeding generations without balancing commitment to growing the wealth

Any of these can cause serious financial loss. Good advice may help to remove or reduce the impact of some of these possibilities.

Family governance may be part of the answer, and can be included in the estate planning process.

Estate planning is the means by which the succession to wealth is managed between generations. All estate planning involves the technical aspects of passing on a person’s wealth, but it also comprises further elements:-

  • identifying and implementing their aims and wishes

  • protecting wealth from unnecessary taxation

  • protecting wealth from outsiders

  • protecting wealth from destruction by insiders

  • protecting insiders from destruction by wealth

  • averting family strife

  • preserving and growing its value

Estate planners have a variety of tools – trusts, companies, foundations, partnerships, and so on. An estate plan for a wealthy individual will rarely comprise only a simple will: where there is significant wealth, or perhaps a family undertaking, it must sometimes include “family governance”: a means of regulating involvement of the wider family.

Any plan needs to address the specific family concerned. In some contexts, there is little need for family governance: Hoshi Ryokan is a family owned Japanese hotel business that has run in the same family for 46 generations, with no need for anything but an ethos that each generation knows what is expected of it.

Where it is needed, what elements could make up a family governance structure? Some include:-

  1. Identifying the objects and vision of the family undertaking.

  2. Preparing a constitution, defining roles and benefits for family members who wish to participate.

  3. A body of family members, representative of different parts of the family, introducing a measure of democracy in decision-making.

  4. Succession to management of the family undertaking: managing the generational change, rather than merely passing on the assets.

  5. A family office dedicated to the organised, professional management of the wealth.

  6. Periodic family meetings, to share information and views.

  7. A specific plan for the family undertaking, to ensure stability and success and yet a fair sharing of the benefits.

  8. Flexibility: not only must the structure be bespoke for this family, but it must be able to adapt to changing circumstances and time.

This bears more than a passing resemblance to corporate planning and governance, from where many of the ideas have been drawn.

Ultimately the planning must generally be aimed at ensuring that the wealth is retained, and that the family members live healthy, happy and valuable lives, leaving the wealth behind for succeeding family members.

For, as Margaret Ward put it:

“Our most important tasks as families are to make ourselves redundant and to die in peace.”

We can advise on the estate planning and on family governance issue.

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