Inherited wealth: ‘What, and when, do I tell the kids?’

Many people would no doubt regard being super wealthy as a rather nice sort of  problem to have. But, as Guernsey-based Trust Corporation International founder and executive chairman Michael Betley,  pictured, explains here, the super wealthy actually do have some challenges resulting from this wealth that genuinely are no laughing matter. And one of them is when, and how much, to tell their children about the extent of the family’s riches.

Ultimately, how and when children are told about their parents’ wealth will be a decision for the parents, as well it should be. However, it is likely that a close adviser to the family, such as a trustee, may become involved in the process of managing the appropriate information flow.

Two extreme approaches we see are either total transparency about the family finances, or a strategy of telling the younger generation nothing at all — potentially meaning that they will only discover the extent of their wealth on the death of the patriarch or, in acute cases, resort to probing or litigation to find out.

Of course, there could be very good reasons why the settlor, or family principal, may consider it inappropriate for a younger member of the family to know how wealthy they are, or are likely to be in the future, not least in the case of a young person who already has the makings of a spendthrift.

Indeed, one of the most often quoted reasons for establishing a trust is to protect assets from an individual not deemed responsible enough to behave appropriately, perhaps  especially at a young age.

It is also not uncommon for the family to withhold information about, or access to, assets from young people until they have chosen their careers, and are showing signs of financial maturity. The age of 25 is a popular age threshold for many families, who fear that young people below that age may squander the wealth, or go off the rails in some way.

Also, particularly in the case of self-made entrepreneurs, there is sometimes a sense that the children should be encouraged to follow suit – to be motivated by their parent’s success, and be tenacious about creating their own wealth.

Others will hold a very different view, regarding financial support as a gift that they are able to give their children, to ensure that they do not have to work as hard as their parents did.

‘Cautious line to tread’ 

In all such cases, the trustee has a cautious line to tread in observing the wishes of the settlor, while also acting in the best interests of the beneficiaries, and it’s incumbent on the trustee to manage the information.

There are various ways of achieving this, including the use of family governance memoranda, or frameworks. The approach ultimately taken is normally down at least in part to the individual family in question, and whether their wealth has been inherited or created.

Family businesses, ‘landed’ families

In the case of a business which has been in the same family for a few generations, there is likely to be tried and tested process for wealth transference already in place.

Appropriate individuals within the family may have a role to play in the business which can help manage expectations as to what the younger generations are to receive in terms of income. For example, if there is no intention to sell the business, they won’t achieve capital value.

Depending on the exact nature of the family business’s assets, there could be an opportunity to allow the younger members to work from the shop floor up, especially if there’s an intention for them to participate in the enterprise in the mid to long term.

As for so-called “landed” families, these are often likely to have a large allocation to property which produces a certain type of income – generally on the low side  – and which also requires investment, so that the family is asset rich but cash poor.

It is possible – as novelists have been known to include in their storylines, for reasons of plot – to own a large swathe of countryside but be on a modest annual income. This is why an element of family business or enterprise on site, such as a farm, is often combined with the maintenance and upkeep of the estate.

Extremely wealthy families

When a family is extremely wealthy, meanwhile, the dynamics of the balance sheet can resemble those of a company at the lower end of the FTSE 500.

Here, there will be significant infrastructure, with a sizable family office staff, including accountants, lawyers and so on, just for the benefit of the family. The challenge for the trustee will be to sympathetically allow the younger members of the family to understand and participate in the process.

Where families include members of the third, fourth or fifth generations, the sheer number of younger family members means an entirely different proposition and the trustee will provide some continuity.

A private trust company is also sometimes used by very wealthy families to allow greater influence from a wider number of people.  Those family members on the board are able to participate in decisions, and be privy to information.

For example, younger members of the family may sit on the board, where they can participate, but their influence is reasonably diluted.

There may also be a separate investment committee, which makes recommendations to the board. In this way, the younger generation can gain a gradual understanding of the dynamics of the wealth.

Family governance memoranda

As we mentioned above, family governance memoranda, or frameworks, can be a useful way of setting out a family’s ethos and values, including how family members are expected to behave in relation to the family business or assets.

They may also outline what will happen in extremis, should a family member breach these guidelines, or in some way threaten its key assets.

In their handling of the members of the family who comprise their clients, trustees may find themselves drawing on such basic skills as wisdom and diplomacy. Sometimes they may act as a foil, diverting attention from the patriarch or matriarch, when there are difficult messages to deliver, or where the family is not very adept at clear communication.

At times, a trustee might feel shackled or bound by the terms of the trust in question; or it may not be clear how much they are at liberty to reveal to the younger family members, and when.

It may also be politic to allocate a younger adviser from within the trustee organisation to deal with the junior family members, on their wavelength, rather than relying on the often older individual who manages the trustee relationship with the family principal, which can lead to a perception of bias and an element of distrust.

Failure to manage this sort of situation properly could lead to the younger family members seeking out their own, independent advisers, who may have an altogether different style and approach.  For example, the senior family members may be comfortable with a conservative exposure to equities in the family investment portfolio, while the younger generation, with their different time horizon, may wish to opt for a riskier but potentially better-performing range of assets.

In the worst case scenario, this could lead to a challenge over investment performance in the courts.

Ultimately, it is worth remembering that all dealings with families will undoubtedly be aided by clear communication with the family members, so that parameters and expectations are recognised and understood.

Often, decisions will have to be made where there is no exact science, especially where there is little in the way of structures and guidance in place.

As with all private client dealings, success for the trustee in his or her efforts to help wealthy families to handle the delicate question of informing the younger generation of its wealth, responsibilities and expectations will often come down to a strong and trusted relationship being formed between the trustee and the client, typically built up and earned over many years, and informed by an in-depth understanding of its unique dynamics.

Michael Betley is founder and executive chairman of  Trust Corporation International, a Guernsey-based trust, corporate services and family offices services provider. Prior to establishing Trust Corporation, he was a private client partner of a London law firm. He continues to be a member of the Law Society of England and Wales; the International Tax Planning Association; the Institute of Directors; the Guernsey International Legal Association; and Society of Trust and Estate Practitioners.

ABOUT THE AUTHOR
Helen Burggraf
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