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7 Challenges of Succession Planning

30 November 2021 Johan van Zyl, Chairman and Partner at Stonehage Fleming South Africa
Johan van Zyl, Chairman and Partner at Stonehage Fleming South Africa

Johan van Zyl, Chairman and Partner at Stonehage Fleming South Africa

The challenges faced by South African families in bringing up children can be further complicated by the presence of substantial wealth. Add to this the unprecedented wealth creation of the last few decades and succession planning becomes a top priority for ultra-high net worth (UHNW) families, according to independent multi-family office Stonehage Fleming.

Latest research reveals that while families are consistent in identifying the primary risks associated with intergenerational wealth transfer, they are failing to put in place mitigating strategies to prevent them.

SA Chairman and Partner at Stonehage Fleming, Johan van Zyl, says that since the onset of Covid-19, families are having more open conversations about the future and succession planning with the next generation.

But he warns that “in order to escape the shirtsleeves-to-shirtsleeves in three generations parable, where wealth built up by one generation is lost by the third generation, it is crucial for families to consider all risks posed by intergenerational wealth transfer, in order to develop suitable succession strategies to alleviate them.”

In a recent STEP webinar, Stonehage Fleming identified the top seven challenges of succession planning garnered from decades of experience working with global UHNW client families and provided recommendations on how to deal with them.

#1: Lack of a clear vision and purpose of wealth
While the first generation creates a family’s wealth, by the time it is transferred to the second, there is often a discrepancy in what this wealth means to the family or how it should be invested, even who should benefit from it.

“For the best chance of intergenerational success, a family should set out the purpose of its wealth while the first-generation wealth creator is still alive and of sound mind,” says Van Zyl. “How a family decides to deal with wealth gives the next generations a sense of purpose to do something useful with their lives and their money, rather than remaining passive beneficiaries of the work of their predecessors.”

#2: Expectations of family members
If children are not properly trained or up to speed with how wealth structures work and how wealth is preserved, it is highly likely that their expectations may exceed reality, which could lead to stress and destruction later on.

“Next generation training and engagement play a crucial role in mitigating the risk of unrealistic expectations,” adds Van Zyl. He recommends families involve children from as young as possible, not just for financial planning, but culturally and socially too.

“The challenge of unrealistic expectations also highlights the importance of an independent trustee to actively manage a family trust and objectively balance the conflicting interests and sharply differing views and needs of beneficiaries.”

#3 Family relationships and inter-family politics
At family meetings, it is not unusual for children to bring up past issues from their childhoods as a source of friction. Similarly, there are often concerns from parents surrounding ‘problem children’, to whom they may be reluctant to pass on stewardship of the family’s wealth.

“Once families have articulated a vision or a purpose for their wealth, it can be used to build a decision-making framework for all future decisions including establishing different roles for each member of the family,” says Van Zyl, “which helps reduce family friction.”

#4 Financial implications
When tax and investment implications are not thoroughly understood, or the mid to long-term generation of liquidity is not sufficiently planned for, it can lead to a significant loss of wealth down the line.

“It is critical to regularly review wealth structures and the performance of underlying assists in order to ensure they continually cater to the needs of the family and comply with all current laws and regulations.” advises Van Zyl. “In addition, it is important for families to draw on the necessary skills, experience and competence in this process whether from within the family or from external professional advisers”.

#5 Physical location of heirs and beneficiaries
These days, with many UHNW families spread out around the world, across multiple jurisdictions, the tax and legal implications add several layers of complexity to the intergenerational wealth transfer process.

“Financial planning is one of the key areas we see many families investing time and money into developing and articulating strategies for wealth transfer. The appointment of trusted, independent financial and legal experts in this process and drawing on their practical experience is invaluable,” adds Van Zyl.

#6 Continuity of family affairs
There are always big decisions to be made regarding the continuity of family affairs from one generation to the next. For example, in the case of a family business, should the next generation continue operating as their parents did, or should the business be sold? Should the collective family wealth be managed collectively or should it be split and distributed to each beneficiary?

“Each situation is different and needs to be assessed on its merits”, says Van Zyl, “but there are certainly learnings of what has worked well and what has not worked so well that we share with our clients.”

#7 Leadership
While it is common for the wealth creator to lead autocratically, this tends to evolve into a more democratic style with the next generation. Yet, the involvement of more family members often leads to jealousy, feelings of favouritism or lack of trust. In addition, retiring leaders often find it hard to let go, while incoming leaders, who have deferred to their elders for so long, may find it awkward to do otherwise.

“Building on the foundation of setting of a purpose of wealth and decision-making framework, the likelihood of friction can be reduced by a well-planned generational transition, with a clear route map, providing support to both generations in adapting to new leadership roles. This is another good example of where experienced advisers can play a valuable role in the transition from one generation to the next,” concludes Van Zyl.

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