THE DESTRUCTIVE POWER OF FAMILY WEALTH
WHAT FAMILIES AND THEIR ADVISORS NEED TO KNOW
by Philip Marcovici
This article is based on a book I recently wrote, entitled The Destructive Power of Family Wealth. My hope in writing the book, and excerpting it here, is that the thoughts expressed will help wealth owners and their families understand their considerable opportunities to avoid wealth being destructive of their family and of the relationships that exist and will exist in future generations.
While my professional experience has been primarily oriented to families at the upper end of the wealth spectrum, I am absolutely convinced that wealth can and does destroy any family, no matter what the level of wealth involved. A single asset, whether a piece of jewellery, a sum of money or a small property, can carry with it enormous importance to the younger generation whether due to its value or for sentimental and emotional reasons or, as is more likely, both. How wealth transfers from one generation to the next, who gets what and when, carries messages that are remembered, rightly or wrongly, as being what the transferor “meant”. Gifts of one asset to a son and another to a daughter may be well intended but may also end up leaving one of the children with a wrong sense that they were less loved than their sibling.
I also hope that this article and the book of which it is a part, The 2018 G9 Journal, will, like my book, also be a guide to those in the wealth management industry, and that it will help them to understand the real needs of their clients, leading them to become effective, trusted advisors. The wealth management industry, sadly, is in chaos, and often does little to address the real needs of wealth owning families. For those involved in management and strategy, this is a time of opportunity for those who can understand how an alignment of interests with those of client families can produce results.
Hopefully, some of my criticism of the wealth management industry can positively influence the way forward. For the wealth owner, understanding how the business of wealth management works is an important step towards taking ownership of the succession and asset protection process, and helping to protect wealth and family relationships.
My own book begins with some stories – stories about real families and the difficulties wealth has presented to them. Sadly entertaining, the challenges I outline are meant to show how easy it is for wealth to destroy families and relationships and how advance planning can reduce the risk of the same patterns recurring. We all have to learn through experience – our own experience and, importantly, the experience of others. This is one of the main objectives of the 2018 G9 Journal – to share experiences, and help families learn from them.
Wealth and business owning families often neglect the psychological issues that all too often accompany wealth. There are many psychological issues that arise in and around wealth, and these impact the thinking of wealth owners as they get older and their life circumstances change. There is also an effect of gifts on the recipients of the gift – as well as the effect of not receiving wealth that one may expect to receive. Gold-diggers, mistresses, toy boys, illegitimate children and many more interested players come into the mix. I am sometimes playful in writing and teaching in relation to the messy relationships that come into the picture, but I do believe there are some very practical lessons to be learned from the news stories we hear about every day in relation to the travails of wealth owning families. Not everyone is as evil as I might suggest, and there are many nuances to the complexity of human relationships. But protecting wealth, businesses and families requires that families approach things in a frank and practical way. These psychological issues are often referred to as being part of the “soft” issues in wealth planning – but the reality is that they are not so soft and certainly are not unimportant, despite their neglect by many associated with guiding wealth owners through the asset protection and succession process.
International taxation was the primary focus of my career, and clearly tax issues are relevant to most families considering the succession process and the protection of their wealth. Tax laws are ever changing, and in too many countries unfair approaches to taxation is part of political risk, making the navigation of the tax world a critical thing for any wealth owner. My view, however, is that all too often tax is a distraction in the succession planning process. An over-focus on tax minimisation leads to the neglect of what may be more important issues to the family. Where the wealth owner does not fully understand the tax planning being implemented, dangerous losses of control and other consequences result. All too often it is the tax advisor, obsessed with taxation and ill-equipped to address other areas, who handles succession planning for a family. The inevitable result is an insufficient focus on the many other needs of the family.
The global tax landscape is fast changing, and my hope is to equip wealth owning families with the information they need to understand the advice they receive, and to permit them to ask the right questions. But it is important to understand that tax is only one of the many needs families have. Families need to focus on these other needs, ranging from protecting assets from political risk to dealing with second (and subsequent) marriages, divorce and the many other challenges to wealth and family harmony that lurk around the corner. All wealth owners have needs, but many of these needs are latent - needs the wealth owner has but does not know he has. And if the need is latent, and the right questions are not asked, the succession and asset protection plan may fail a family that neglected to address a need that only comes to the surface when it is too late.
Some of the needs of wealth owners are shared by all wealth owners, while others are needs particular to a family. Yet other needs are driven by the laws and circumstances of the countries to which the family is connected by residence, citizenship or investment. Growing tax transparency, technology and other developments are challenging the human right to privacy – and making the maintenance of privacy a key need of families globally. But is it politically correct to champion privacy in a world of growing wealth inequality? Or is privacy a real need in a world where dangers to those with wealth are increasing? The issue of inequality of wealth is a growing topic politically and otherwise around the world. What does this mean for the wealth owner, and are there risks of increasing taxes and overnight capital levies and other means of wealth re-distribution that may arise? Can a wealth owner protect their family against populist governments that may have other than the genuine best interests of society in mind? Has the abuse of secrecy laws in Panama, Switzerland, the British Virgin Islands, Singapore and elsewhere created an environment where governments will overreact, against the interests of not only wealth owners but of their own economies?
But how does the wealth owner address their needs? This is done using the help of advisors – lawyers, accountants, private bankers, trustees and others. Advisors who, in turn, use the “tools” of wealth planning to address the needs of their clients. The “toolbox” is a big one, containing trusts, foundations, onshore, “midshore” and offshore companies, partnerships, insurance strategies and many more structures and approaches that can be mixed and matched and adapted to meet changing circumstances. It is these too that the wealth owner and their family need to understand to be able to ask the right “what ifs” and to make sure that the succession plan will do its job in addressing the holistic needs of the family. What is a trust, and how does it work? What are the right checks and balances to protect the interests of the family for the long term? Not every trust or foundation is the same – there are huge differences from one to the other given how they are set up and maintained and because of who is involved. Families need to know the ways the tools of wealth planning can be used, but also how they are all too often misused.
Relevant to the use of wealth planning tools and how they work is an understanding of the business of wealth management. Private banks, insurance companies, trust companies, lawyers, accountants, family governance advisors, asset managers and many others participate in the process. Advice and help for many families is a real need, but key is to understand the conflicts of interest that inevitably exist, and how those advising families should best be managed by the families consuming their services. My book, The Destructive Power of Family Wealth, Here, sheds light on an opaque industry, hopefully helping families to ask the right questions and make the right choices.
Finally, a bit more on the soft issues - When should the older generation discuss succession with the younger generation? Should detail on assets be provided, and if so when? Should in-laws be involved in family retreats that are organised to allow the older generation to communicate matters relevant to succession to the family? Will wealth destroy the dreams of the younger generation, or are there ways to avoid this happening? Are there ways to avoid wealth coming in the way of family relationships or is it normal for a parent to encourage their child to call their elderly aunt on their birthday because if you don’t, your cousin will get her money when she dies? As wealth owners age, is there a risk of their becoming paranoid about staff and family members stealing and are they afraid that if they give up their wealth their family will no longer visit? Do failing memories put assets at risk? Are the grandchildren only spending time with their grandmother for fear that if they don’t, their cousins will, and that they will be disadvantaged in an inheritance? At what age should the younger generation come into wealth, and how do decisions their parents and grandparents make affect their life? Is it fair for a grandparent to spoil a grandchild with money, destroying a parent’s attempt to help their children lead a fulfilled life?
There are no right and wrong answers here, but what is clear is that the soft issues count. The families that get it wrong on dealing with the many issues that come up are the families that allow wealth to destroy relationships and enrich lawyers who live from disputes among the younger generation.
Is it possible for a family to get it right?