Riding the wave

Riding the wave

In this article, first published in the STEP Journal Issue 3 2024, Accuro’s April Hamel assesses how practitioners should respond to the next great wealth transfer and how to best prepare the next generation.

With the largest wealth transfer in history afoot, involving an estimated USD84 trillion being passed into the hands of younger generations between now and 2045,[1] it is prime time for trustees and families to focus on building relationships with the next generation and to concentrate on generational wealth planning.

Although most businesses focus on succession planning and the next generation, many families miss this opportunity and can often be left rudderless when a patriarch or matriarch dies. Regrettably, the saying ‘clogs to clogs in three generations’ still holds true for many families.

Engaging clients to help prepare for and facilitate these conversations may aid in bridging the intergenerational communication gap and preserving wealth across generations. Although traditional estate planning focuses on the mechanics of transferring wealth, what is often overlooked is whether the infrastructure to sustain wealth exists.

Mission statements and family constitutions

The lack of communication that hinders most wealth transfers can be alleviated by the preparation of a mission statement. Mission statements generally reinforce values, purpose, priorities and goals, ensuring that the family is aligned in these areas. The act of coming together to draft and agree a mission statement is, for many families, a valuable exercise in building trust and confidence. Families might also consider preparing a constitution, which is a document that sets out the family’s objectives and governance structures to determine how important decisions will be made. Knowing that the younger generations will be guided by a commonly agreed mission statement or family constitution can be reassuring.

Observers and financial literacy

Access to conversations about family wealth should be seen as distinct from tangible access to wealth, which comes with the inevitable concerns of demotivation for the next generation. An invaluable way in which to enhance an adult child’s financial literacy is to allow them to become observers on boards or investment committees. The right to participate in meetings, take part in discussions and provide input can prove extremely beneficial. This is especially significant when considering that the primary reason cited as a cause for concern when considering a business transfer was that the next generation was not ready.[2]

Sustainable investing and ESG awareness

Including the next generation in investment decisions may have a positive impact on financial returns due to their interest in ever growing sustainability and the environmental, social and governance (ESG) space. This is an area where the next generation could bring something to the table, as they can be more aware of the issues in this space than their parents might be. The next generation are prioritising sustainability, inclusivity and transparent ESG metrics. Further, the next generation are particularly in tune to where assets are likely to become stranded as the world moves away from, for example, fossil fuel investments. Impact investing has graduated from being solely the domain of socially conscious individuals to being on the radar of those seeking top financial and other returns. Now, more than ever, incorporating sustainability thinking into one’s investment decisions is vital and many of the next generation are perfectly poised to provide valuable input on this subject.

Digital acumen

Many of the next generation have amassed knowledge in areas with which the existing generation may not have experience, such as cybersecurity, digital assets, artificial intelligence, machine learning, digital transformation and social communication. Capabilities in these areas can enhance operational efficiencies and, in some cases, are critical in order to remain competitive.

The future

As the stewards of wealth and legacy, advisors’ focus should be concentrated on educating and involving the next generation, and the support of a trust company business in the education process can prove invaluable. Sustainable success for family legacies will only be possible if the transition process is thought through and embraced as early as possible. The next generation can often bring fresh perspectives and innovative approaches that will better position family businesses for long-term success. Although many view the great wealth transfer with trepidation, with the right planning it will provide ample opportunities for success.

[1] The Cerulli Report—U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021: Evolving Wealth Demographics

[2] Family Enterprise Foundation—Preparing the next generation: A family business roadmap

‘Riding the wave’ article first published in the STEP (Society of Trust and Estate Practitioners) Journal – Issue 3 2024

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