Family Wealth Report talked to Atlantic Trust about its sharpened focus on pulling the next generation into family wealth awareness, education and wealth stewardship.

With an estimated $41 trillion expected to be transferred from one generation to the next through 2052 - the largest wealth transfer in history – Family Wealth Report talked to Atlantic Trust about its sharpened focus on pulling the next generation into family wealth awareness, education and wealth stewardship.

In recent years it has been more widely recognized that the biggest cause of wealth transfer failures is a breakdown in communication within families - something which many industry players have capitalized on by introducing programs and strategies focused on effective family communication and governance.

“One of the techniques we use with a number of our wealthiest families is a vehicle to pool family assets. What that does is address a number of issues that senior family members – or the creators of wealth – are seeking to address: diversification, education, asset protection, stewardship and wealth transfer,” said Linda Beerman, head of the wealth strategies group at Atlantic Trust.

One of the main objectives of the “pools” is to allow people - typically younger family members - to have access to investments they wouldn’t otherwise have access to. It is often the case that while younger individuals may have some liquidity, most of their wealth is tied up - in a family business, for example - and thus they can’t access alternative investments where, for instance, an individual would have to be an accredited investor.

She added that while industry studies have pointed to fairly low levels of understanding among the younger generation when it comes to financial literacy, “the good news is there is a high level of desire to learn,” particularly as the investment strategies are “interesting and high-tech.”

There is also a growing desire among next gen individuals to be more hands-on with their philanthropic endeavors, and this type of structure gives them a platform to do that.

“When you get the younger generation around the table talking about their money, they’re keenly interested,” Beerman said.

She also noted that intensifying demand for technology is linked to the next generation and how they synthesize information and learn – all of which can be facilitated by shared pools.

How it works

Atlantic Trust creates the pools in the form of a Limited Liability Company or a Limited Liability Partnership – a simple structure to create, Beerman noted – which “achieves a lot of things.” (An LLC can be described as a flexible form of enterprise that blends elements of partnership and corporate structures.)

It is managed by a manager, with the ultimate investment decisions made by them or the management committee. If a family member has a minority interest, they can vote, but they can’t control.

“It is run like a business in that sense,” Beerman said.

“In the past, when very, very wealth families wanted to achieve this, they would look to create a common trust fund or a family private trust company. But with the advent of doing this in an LLC structure, it has made the opportunity available to families with, say, $50-100 million, rather than many hundreds of millions of dollars,” Beerman said.

Indeed, the LLC is a strategy that has been around in itself for many years, usually for discounted wealth transfer purposes or asset protection.

However, there are some challenges with this strategy in the family wealth planning context and they relate to the entering and exiting of the vehicle.

“These things should be for the long term; putting money in and taking money out doesn’t present advantages,” Beerman said.

This is primarily due to the nature of the investments and the nature of the fact that “you are in it with other people” (participants each have a percentage share of the pool).

For example, an individual entering and exiting on a regular basis is likely going to alter the tax impact on the other members, so Atlantic Trust advises families to not put in money they expect to need in the next five years.

For this reason, individuals usually enter at the same time and then there are periods of time whereby if they wish to put more money in or if new family members want to enter, they do so at a specific point.

One of the other reasons a long-term time horizon is desirable is that the LLC will often have private investments that are illiquid, Beerman explained.

“If a member taps the LLC for a material amount, the contours of the investment allocation could be skewed because of the illiquid portion of the portfolio cannot be monetized.  Encouraging long-term patient capital, and investing it in strategies that require a long-term commitment, reinforces to future generations that successful investing is a long-term proposition.”

Atlantic Trust is the US private wealth management division of New York-listed CIBC.

The firm has offices in Atlanta, GA, Austin, TX, Baltimore, MD, Boston, MA, Chicago, IL, Denver, CO, Houston, TX, Newport Beach, CA, New York, San Francisco, CA, Washington, DC, and Wilmington, DE.