One rule for family wealth transfer: Talk early and talk often

There needs to be real clarity about when you are operating as a family versus when are you are operating as agents and owners of the business.

It’s far less likely that the third generation will squander their wealth when they have such a strong sense of purpose.

The classic proverb is rags to rags in three generations. What does it take to ensure the transfer of family wealth goes well? Justin Greiner explains.

Consider the fact that many of us are about to be part of the most significant intergenerational transfer of wealth in Australian history – $3.5 trillion over the next two decades, according to the Productivity Commission.

It’s a salient reminder of how lucky we are to live where we live – not only because our markets have enjoyed a 28-year bull run, but because we’re able to reap the benefits of a country that gives us considerable freedom to forge our own path, making business and investment decisions that align with our own values.

Yet this good fortune does come at a price. A significant inheritance is not a windfall but rather a responsibility; one that may entail considerable pressure and stress as we take our turn as the custodian of the family wealth – to not only provide for ourselves and our family, but to go beyond the everyday and do something that has purpose and meaning.

Sharing is caring

The responsibility, however, shouldn’t be a solo one; it falls to both the older and younger generations.

Research shows that the vast majority of family wealth is lost by the third generation. The first generation makes the money (going from rags to riches); the second generation holds or keeps the money; while the third generation squanders or loses the money (returning once more from riches to rags).

Making sure this doesn’t happen to your family will require consultation and input from all sides. It can’t be a matter of the first generation telling the third generation what to do. And, conversely, the third generation can’t afford to ignore the history and the wisdom of those who created the wealth in the first place.

Rather, it’s about two-way communication that involves respect, transparency and a ‘talk early, talk often’ approach. Understanding the direction your family is heading – and what your wealth is for – can help you move forward and put in place the strategies to preserve and grow your wealth as it continues to work for what you all believe in.

Finding common ground

True, it may be more difficult to find common ground by the third generation when it’s no longer two or three family members listening and being heard but 20 or more individuals. However, the sheer size of the undertaking makes it that much more important to achieve.

And you may be surprised. We find that while each aunt, uncle, cousin and great grandchild has their individual perspective, there is often a common thread in what they view as important.

How you go about building that consensus though will differ with each family. If your affairs are relatively straightforward, it may be as informal as sharing your hopes and plans – past and future – around the dining room table. If you’re dealing with multiple assets over multiple generations, you might wish to turn to structured third-party mediation and even a family contract.

The benefits of a business

 A larger family poses other challenges. At the end of the day, you’ll need to make sure the real value of your wealth keeps pace with the growth of your family, bearing in mind issues like inflation and taxation. This requires taking on greater risk, whether that’s in your portfolio of investments or your family-owned business.

After all, we’re not necessarily talking about liquid assets. Instead of receiving a pool of money, you may be faced with an operating business. That will require much more input, including choosing the right family members to oversee or manage it, and all in accordance with your family’s long-term vision. Many multi-generational businesses in Europe have significant track records in managing family businesses with this principle at their core.

On the upside, an active business can help with the inevitable growing pains that come with each generation. A business that is successful, and that you can influence strategically, can be a good complement to a more passive portfolio of investments.

Why clarity is crucial

Of course, today, we see many family businesses being sold – either in a trade sale, management buy-out or floated on the stock market. This raises other questions, such as whether the family will ever get the business back. And is that the right decision for the next generation?

Whatever your family decides, it’s important that you don’t put your business at the centre of your decision-making. Ultimately the business must serve you, as one asset among many.

Again, transparency and communication are critical. If you continue to own and run the business, it’s important to avoid friction between the perceived roles of the family members and the business itself. There needs to be real clarity about when you are operating as a family versus when are you are operating as agents and owners of the business.

It’s also crucial that you operate your business for the benefit of all shareholders – of which the family may be a part or all. This means bringing a highly commercial lens to decisions, but one that is still consistent with the family values.

Investing in a shared future

Today, we see more and more young clients who are keen to ensure their family wealth is invested for good. Clearly evident is a strong sense of stewardship and custodianship.

That’s not so surprising in the current climate. We’re at a time in history when so much is at stake and when, for many, there is a need to step up and address the challenges at our very front door.

We should find this reassuring. It’s far less likely that the third generation will squander their wealth when they have such a strong sense of purpose. Whether they are intent on pursuing responsible investing through an Environmental, Social and Governance (ESG) framework, impact investing, or a philanthropic cause, their focus and resolve mean they are much more likely to preserve and grow their capital – for the good of their family and the wider community.

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ©2022 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686