Family Office

Best Practices For The Successful Transfer Of Financial And Social-Emotional Wealth

Dr Lilli Friedland President Executive Advisors September 13, 2012

Best Practices For The Successful Transfer Of Financial And Social-Emotional Wealth

Financial advisors and estate attorneys in the US are currently being deluged with requests by high net worth families deciding to gift family members varying sums of financial or other assets. Citing the uncertainty surrounding future US tax laws, HNW families are frequently electing to gift family members rather than potentially pay higher government taxes (Source: BYN Mellon, Entrances, Exits, and Mid-Course Corrections for Wealth Transfer Tools). Many families focus on financial assets. Upon further reflection, however, most family leaders recognize the significance of also imparting their family values, history, and traditions – their social-emotional legacy to their children.

When considering their unprecedented opportunity to give, family leaders frequently confront conflicting emotions. Many family leaders fear that their children may squander the financial wealth that they inherit due to a lack of financial discipline or a lack of professional ambition. Other family leaders want their children to develop themselves and achieve financial independence on their own prior to receiving these gifts.

Due to the 2008 financial crisis, some family leaders are now concerned about having sufficient funds for themselves (source: Peter Orszag, Bloomberg). Adding to the complexity of the decision, grantors are aware that the transfer of financial wealth is often compromised by (i) interpersonal conflict and incompatible narratives among the inheritors, (ii) disagreements on mutually-required decision-making, and (iii) the lack of maturity and development of individual family members. As such, it comes as no surprise that 70 per cent of intergenerational wealth transfers fail, according to Forbes.

The role of advisors

What can financial and legal advisors do to facilitate the successful transfer of family wealth? Trusted advisors, often with the assistance of family systems experts, incorporate the concept of wealth transfer on multiple occasions as they work with the family, noting that financial and social-emotional wealth are intertwined. Both elements of the transfer of family wealth must be part of the ongoing conversation between the advisor and family leaders over the years that they work together.

The transfer of wealth between generations is a multi-year process, not a momentary event. Just as achieving financial goals requires careful and strategic planning, so too does the achievement of social-emotional wealth goals. According to research conducted by Barclays, whether transferring financial wealth of a family business or other assets to the next generation, the planning is frequently not started early enough. To ensure success, family members need to be accustomed to incorporating and using the tools and processes that promote effective family relations (source: Dennis Jaffe and Jane Flanagan, The Best Practices of Successful, Global, Multi-Generational Family Enterprises, Family Business Network and Family Office Exchange).

HNW families are distinctive from one another in various ways. Before earning trust and building confidence in their role, advisors need to understand the intricacies of each family with whom they work. Most importantly, advisors must identify how the elder generation defines the family, and who is considered to be a part of the family. This is often a complicated and fragile process as some families have gone through multiple marriages, divorces, disinheritance decisions, inclusion of family-of-origin decisions, and adoptions.

Although family leaders have multiple expectations for the next generation, frequently their thoughts have not been shared with family members or integrated in parenting practices. Family members have a much greater opportunity to succeed when they know others’ expectations of them. Further, the earlier individuals learn about their roles and responsibilities within the family system, the less likely they are to grow up with a sense of entitlement. As a result, family wealth and financial advisors are increasingly introducing family systems experts into the transfer of family wealth process, particularly at early stages.

These family systems experts (i) clarify the family vision, values and shared narrative, (ii) integrate family legacy practices, (iii) build interpersonal dynamic skills, (iv) facilitate conflict resolution, and (v) develop each family member’s strengths. When extended family members feel secure about their roles, knowledgeable about their obligations, and consistently use established processes to resolve conflict, family members are more aligned with one another and share in the family’s legacy. More specifically, family systems experts become part of the trusted advising team focusing in the following areas:

• Creating the family’s social-emotional legacy: clarify and integrate the family leaders’ most significant priorities regarding the family’s values, unique family traditions, and history.

• Building relationship skills: understand interpersonal similarities and differences, and cultivate trust and interpersonal bonds among the members of the extended family system.

• Developing family continuity processes: facilitate conflict resolution, and incorporate conflict resolution strategies into the extended family system. Build a shared narrative.

• Identifying each family member’s social-emotional motivators: establish processes to assess and cultivate each member’s capabilities, interests, and drive. Align the individual goals of family members with the family’s long-term vision, mission and values.

• Facilitating knowledge transfer: support inter-generational general discussions about the family’s personal social and financial history, social-emotional priorities, and anticipated future needs so that all family members understand the family’s “big picture” perspective.

• Managing social-emotional influences: promote the understanding, through open dialogue, of societal pressures from non-family members regarding the perceived financial/power status of the family. Help family members manage their own and others’ expectations.

• Clarifying boundaries and expectations: communicate any criteria regulating the transfer of family wealth at an early stage in the next generation’s life in order to prevent undesired behaviors and  minimize surprises when consequences are enforced (e.g. substance abuse).

• Grooming the next generation of family leaders: develop both the social-emotional and financial leadership competencies among the extended family members. Build leadership skills to promote the family’s goals. Integrate strategies of inclusiveness and engagement in the extended family system.

Studies indicate that the most successful multi-generational families routinely employ these best practices. The family needs a shared narrative, effective communication processes, and a desire to continue its legacy in order to ensure the family can manage situations of transition and crisis.

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