The challenges of intergenerational wealth transfer

The challenges of intergenerational wealth transfer

For entrepreneurial families, one thing is certain. At one time or another, they will all have to grapple with the question of how best to pass their wealth and their family’s legacy on to the next generation. If done right – with openness, clarity and consideration intergenerational wealth transfer can lead to a range of positive outcomes, from the natural and necessary evolution of a family business to the preservation of family unity into the long term.

Yet almost as inevitable is the fact that each family will face obstacles along the journey. “Transferring wealth without incurring unintended consequences – such as family discord or an overly complex financial structure – is no easy task,” says Honora Ducatillon. As Head of Family Advisory at Pictet Wealth Management, she works with wealthy families and their advisors worldwide, helping them to chart a clear path for generational transition. As such, she has seen the various challenges up close – and the different strategies families use to overcome them.

One of the main obstacles is straightforward: family leaders are generally very busy. They might as well still be at the helm of a large business, spinning multiple plates, so planning the estate is often seen as a lower-order priority. At the same time, it’s simply a monumental task. “What is decided may reverberate for generations,” says Honora, “so it’s not a process that you can do quickly or easily.” On top of that, succession is also connected to highly sensitive issues, she notes, “such as mortality, identity and fairness,” which most people avoid discussing openly anyway. “Once you understand these challenges, it’s easy to see why it’s not a topic people rush to address.”

This is merely compounded by the fact that there are complex emotional dynamics at play. For instance, Honora often sees parents who want to empower their children, but at the same time try to protect them; meanwhile, she has worked with next-generation family members who desire autonomy, but still rely on their parents for financial support and their sense of identity. “There are paradoxes all over the place,” she says. These are often exacerbated by the contradictory systems – the family system and the business system – which coexist but follow vastly different internal logics. “These overlapping systems create fertile ground for tensions,” says Honora.

Philanthropy as a strategy for preserving family unity

Another key difficulty that wealthy families face stems from a misunderstanding of what is at stake. “People think it’s mainly about transferring financial wealth and assets,” says Honora. “But through their decisions on wills, donations and inheritances, families can – at times – convey narratives about their values and identity.” In her experience, these implicit messages can even have a more powerful impact on a family than what is set out in legal documents.

This notion that wealth can be a powerful communicative tool is familiar to Christoph Courth too. As Pictet’s Global Head of Philanthropy Services, he advises philanthropic families and has seen this firsthand. “For many wealthy families, philanthropy isn’t just an act of altruism,” he explains. “It can also play a powerful role for the family itself, in contributing to the family identity and legacy.” Indeed, one of the first exercises he commonly asks his clients to do is write a letter to their descendants, so that generations further down the line can, as he puts it, “get a feel for the person who generated the wealth, for their values and what they saw as the responsibilities that come with wealth.” This letter might not necessarily be physically passed on, but the exercise seeks to uncover the “why” of their philanthropy, the values that will ultimately guide their giving.

Philanthropy is a powerful force for good. Yet it can also play a crucial role in uniting a family. One family Christoph works with, for instance, decided to sell their fourth-generation company. “The business was the cornerstone of the family, so when it was sold, they were concerned that the family would lose the glue that bound it together,” he says. “They established a family foundation and used that as the new pillar of the family.” Selling the company is, of course, not a prerequisite, though. As Christoph points out, a foundation can create different roles and opportunities outside of the core businesses or family investments, for family members who want to contribute. It can also be a great training ground for “preparing and engaging the next generation as they come up in the family,” he adds.

The importance of planning

Periods of wealth transfer can be flashpoints for tension and, at worst, disunity. Honora believes it’s therefore vital for families to prepare in a comprehensive way, not simply addressing the tax and legal side of the equation, but also how family dynamics might be affected. The process also has to be collaborative, bringing all parties to the table, so that their views can be aired. Moreover, it’s crucial to understand, she adds, that planning will always take place to a degree amid uncertainties about the future. “You never know what the future will hold, so you’re making decisions now based on imperfect information,” she says. Since it’s impossible to know in advance who will be part of the family or how relationships might evolve, families have to design systems that are anchored not in specific individuals but instead in purpose, values and guiding criteria. “This means creating mechanisms with built-in flexibility,” says Honora.

Arguably most important, however, is that the planning simply starts early. “It can easily take five to seven years, so it’s essential to start early, when everyone is in good shape,” says Honora. “If you leave it too late, it can have disastrous consequences for family dynamics.”

In Christoph’s experience, preparation and planning are also of primary importance on the philanthropy side. “This is probably one of the most common questions that we get asked: How do I engage my children?” he says. “In my view, it’s never too early. You’re never too young to learn empathy, values, and how to be a good human being.”

Integrating children or young adults into philanthropy isn’t always easy, however. “People growing up in a world of wealth don’t always have access to the experience of poverty, inequality and injustice,” Christoph adds. “Sometimes they’re living in a bit of a bubble and don’t always realise the need.” Volunteering is one way to remedy this, he says. Volunteering on family projects can be an eye-opening and formative experience. There are also a range of companies that organise curated private family expeditions which aim to foster curiosity and awareness in children and young adults. “Values are caught, not taught,” says Christoph. “You can’t force someone to be philanthropic, but you can lead by example.” As with any family enterprise, says Christoph, there will be differences between the generations when it comes to philanthropy too.

Generational differences in philanthropic priorities

Studies have shown that for young people in the 18-to-25 bracket, climate, the environment and biodiversity are the top priority for philanthropic capital, followed by inequality and conflict. For their parents’ generation, the top three causes were typically healthcare, education, and arts and culture. As such, it’s not uncommon for a next-generation family member to feel that they don’t identify with their family’s foundation, that its causes don’t resonate with them.

In this scenario, says Christoph, it’s important “to give the younger generation space and responsibility to explore their own philanthropic passions.” Some families ringfence a pocket of capital within their foundation for the next generation to pursue their own areas of interest; others set up donor-advised funds for their children or grandchildren, so that they have their own mini foundation to champion the causes they care about.

The younger generation of wealth owners is also more likely to take a more hands-on and holistic view. “Their philanthropic capital is perhaps less about writing cheques,” says Christoph. Instead, they are more interested in avenues such as responsible and impact investing. “There’s a sense among the younger generation that if we really want to move the needle on some of these huge topics, we’ll need to mobilise many more resources,” he says, referring, for instance, to this generation’s tendency to look at their wealth and investments in their entirety through an impact lens, rather than just a portion of it. It’s for this reason that Christoph believes we are “on the cusp of a new Gilded Age of philanthropy,” led by this new generation of wealth owners.

The role of dialogue in family wealth transfer

Given these differences between the generations, we need to accept that avoiding friction entirely is impossible. “We shouldn’t frame conflict as something to be totally avoided, because it’s a normal part of evolution,” says Honora. In fact, she argues, it can even be healthy: “Tension can be creative, it can be the spark to create new ideas.”

For her, the important thing is that this tension be managed in a controlled environment. One tool she recommends is using external coaches and mentors. External advisors can provide leaders with unbiased guidance and support. “We tend to think that only the next generation needs help,” says Honora, “but there is often self-awareness work to be done on both sides.” She also believes that experimentation is key, given that every family is different and will benefit from different governance approaches and decision-making models. “It’s important for the family to feel that they don’t have to find a perfect way to function immediately,” she explains. “It’s by prototyping, iterating and experimenting that they will get to what suits their objectives and their culture best.”

Finally, facilitation is another tool Honora uses regularly with entrepreneurial families, which involves opening up “a safe space, where everyone can uncover the assumptions they have,” she says. Alongside the other methods, this is designed to “foster and create more intergenerational empathy,” she says. “Engaging in a family dialogue can foster greater understanding on all sides, which helps everyone find common ground.” And this common ground is essential forintergenerational wealth transfer to succeed.