Financial succession planning is all about transferring the equity in the family business to future generations. Very often, critical to the effectiveness of the financial succession plan is its ability to mitigate taxes on the transfer.
Sometimes, family business owners have financial succession plans beyond the subsequent ones for future generations. Based on a study of 164 ultra-wealthy family business owners, we found that only 10.4% have engaged in significant multi-generational succession and estate planning. At the same time, of the remaining ultra-wealthy family businesses, 70.1% are very or extremely interested in ensuring their family businesses continue past the next generation, and 59.9% want their family businesses to last for three or more subsequent generations.
There is keen interest among ultra-wealthy business owners in perpetuating their family business for multiple generations. The appeal of ensuring the continuity of the family business is clear.
According to Anthony Glomski, principal and founder of AG Asset Advisory Family Office and author of Liquidity and You: A Personal Guide for Tech and Business Entrepreneurs Approaching an Exit, “The most common rationale is to make sure the ultra-wealthy family maintains control of the family business. The family business is often a cornerstone of the ultra-wealthy family's success, stature and legacy. Baring necessity, the idea is for the family business to perpetuate for many generations, and if actions can be taken to help foster that scenario, all the better.”
Another major consideration is tax mitigation. “Through the use of legal strategies and structures, there are a number of powerful ways wealth managers and other professionals can lower the tax burden, especially on the intergenerational transfer of the ultra-wealthy’s family business across a number of generations,” says Paul Saganey, founder and president of Integrated Partners and co-author of Making Smart Decisions: How Ultra-Wealth Families Get Superior Wealth Planning Results.
Another motivation for some ultra-wealthy families to plan for multiple generations is that it can bring family unity, as the wealth plans are often intended to encourage and sometimes require ultra-wealthy family members to work together. Forcing ultra-wealthy family members to work together can be detrimental in certain circumstances, although it is clearly being done. Keep in mind that there are some highly productive ways of promoting family togetherness that are not autocratic or deterministic.
A financial secession plan is usually instrumental to the tax-efficient transfer of the family business across the generations. The complication is the quality of the financial succession plan. Many ultra-wealthy family business owners might have a financial succession plan, but it might not be very good. “Very often, we’re called in to evaluate the financial succession plans of highly saucerful business owners,” says Glomski. “More often than not, their plans are lacking. Interestingly, they tend to be lacking in different ways, recuring different fixes. Almost universally, we can find ways to help them mitigate taxes on transferring their family businesses.”
Within the next decade, trillions of dollars worth of family businesses will transition from the older generation to heirs. The family businesses of the ultra-wealthy will represent a significant disproportion of trillions of dollars shifting hands. While there is tremendous interest among the ultra-wealthy in financial and succession planning, few are doing so today, and many working on it could be doing a better job.
Russ Alan Prince is the executive director of Private Wealth and a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.