“Wealth does not pass through three generations” this adage holds true to many wealthy families in today’s standard. Many wealthy individuals today fail to see the importance of successful business succession planning, they disregard the critical selection of future leaders of their established companies. Countless family feuds and court cases arise from succession triggered by the departure of the founder, and no succession plan has been left behind. Take a good look at the Vanderbilt family, the once wealthiest family in the world during the 19th century; now they are outranked by new money, and all these steps from the lack of succession planning that resulted in their wealth lasting only seventy years.
In this article, we will be tackling the benefits of succession planning and how to do effective succession planning.
Why is succession planning so important?
It is important because it makes sure that a wealthy family is able to keep its wealth even to the last generation. It fixes the four problems families face the moment the founder dies; this results in the downfall of the family business and the break-up of the founder’s hard earned fortune.
The Succession Problem
The goal of effective succession is to prevent the family fortune from being wasted or diminished, the four problems listed below are the common causes of an affluent family’s downfall.
1. Wealth Squandering and Failure to Accumulate Wealth
The uncontrolled spending of the next generation is a founder’s nightmare, the founder’s heirs born into a privileged lifestyle fail to see the value of hard work and wise spending. The adage “Wealth does not pass through three generations” is an excellent mirror of what is commonly happening to the families of high-net-worth-individuals, their heirs are spoiled and reckless when it comes to money causing them to squander away their ancestor’s hard earned fortune. The second scenario is that these heirs don’t know how to manage the business or much less increase its profit. The excessive spending paired with no input of money naturally ends in the family becoming poor.
2. Dilution or Splitting of the Wealth
One of the so-called succession planning of best practices is distributing the family fortune to the heirs. When a company founder dies and leaves his company to his heirs, there is a big possibility that the heirs left behind will have conflicting ideals. Many family feuds begin with siblings having different ideas on how to run their father or mother’s company. This lack of clear leadership results into the downward spiral of a business.
3. Diversified Interests of Heirs
Not every person born into a wealthy family running a business would want to do business, there are cases around the world where heirs choose to take a different career path from their parents or ancestors. A family known for silk production might produce a son who loves music and would want to pursue a career in the music industry than produce silk. This scenario leads to these heirs selling their shares or worst abandoning the business altogether. Many companies fall due to less passionate sons or heirs of the founder running it.
4. Lack of Family Mission or Vision
A family that does not have a shared vision or mission will not have unity to achieve something as a whole in the future. If the next generation is not taught to value the hard work of their ancestors and be instilled with a well-rounded family value and vision, then they will not treasure the fortune that they have. A family mission keeps the company going and brings to life what the founder has envisioned.
What are the Benefits of Succession Planning?
By creating a succession plan, one can avoid the succession problems mentioned above. A succession planning strategy will eliminate the problems of a wealth disintegration through the following points:
- Forming a Trust
- Creating a Family Mission & Vision
- Ensuring the accumulation of wealth
- Keeping the company running under capable hands.
A Private Trust Company (PTC)
Succession planning goals will lead to creating a Private Trust Company which is a hybrid of a limited company and a trust. A PTC has the following functions:
- Distribution of wealth is not done outright and can be made conditional which eliminates the threat of family members squandering the family fortune.
- The set-up of the family trust is responsible for controlling the family wealth.
- A family council is set up allowing the seniority to monitor and direct the progress of the company formed from the trust.
- The family vision and mission is instilled upon the members of the family as well as the company.
- Capable directors help the growth of the company increasing the family’s wealth.
Business succession planning helps company founders ensure that their companies continue to exist and prosper generations after their death, and a private trust company is the vehicle that would allow them to do so.
Want to learn more about succession planning and PTC? Send us a message or grab a copy of the book “The Rockwills Guide to Succession and Trusts in Wealth Management” it contains comprehensive knowledge about estate planning. Click the link below now.