The majority of ultra-wealthy family business owners have succession, personal trust and estate plans, but even the most successful owners are poorly prepared when it comes to protecting their wealth and planning for future generations.
Unfortunately, most succession plans are rarely acted on and are sitting on shelves gathering dust, according to a 2008 study by Prince & Associates and Campden Research for U.S. Trust, Bank of America's Multi-Family Office Group. Trust and estate plans are often out of date and families simply are not implementing asset protection strategies, the study found.
The study, entitled "Protecting the Family Fortune," is the first to focus on ultra-wealthy family business owners. More than 242 families from the U.S. (49.2%), Europe (34.7%) and the Far East (16.1%) participated in this global survey, which was conducted in the third quarter of 2007. Respondents were senior officers of their family businesses, with 75.6% being second generation and 24.4% third generation. The businesses had an average value of $731 million, indicating the families had successfully transitioned their business to at least one generation and that the businesses were thriving.
Only 38.3% of those who have succession plans are implementing them, according to the study. Yet more than 75% of those surveyed want to keep their businesses under family control. More than three-quarters of respondents have succession plans, but they are dominated by strategic business issues rather than family issues. When 183 high-net-worth families were asked to identify "highly important issues" in their succession planning, 72.7% cited strategic business issues and 55.2% cited family issues.
The study also showed that business owners are failing to keep their succession plans up to date. About 78% of the families have an estate plan, but 79.4% of those plans are more than three years old. The failure of families to update their plans is magnified by the fact that 89.4% of respondents say they have had life-changing events, such as a death or birth in the family or a divorce, since the plans were last updated. More than 85% say they have grown far wealthier since they last visited their plans.
Failing to regularly review and update succession plans could be a costly mistake for many of these families, according to experts.
"Families need to work with an advisory team that not only ... looks at estate and succession planning and asset protection but also tends to family dynamic issues," says Chris Zander, managing director and head of the Multi-Family Office Group at U.S. Trust, Bank of America Private Wealth Management.
"The personal and financial objectives of the various family shareholders change and may become less cohesive as the family grows. Sometimes they diverge from the business," notes Zander. "This makes it harder to find commonalities and can result in families not addressing important planning issues."
Advisors should be aware that family members who are active in the business could be at odds with those who are non-active shareholders and this could raise tensions in the succession planning process, he says.
"Estate [and] wealth transfer plans need to address the allocation of asset ownership and voting control with an increasing number of family members as the business transitions further out in generations," Zander says. "Ownership, control and management cover both financial and non-financial areas. For example, shareholders who are active in the family business can still stay strongly bonded to those who are taking non-operating company roles, such as running the family foundation or working in or running the family office."