Key points
- Trusts, family investment companies and advisers can help young people manage substantial wealth.
- Deciding when to start advising a young person who will inherit large sums.
- Create a financial creche for investment to inspire a beneficiary.
- Common sense and sensitivity are important.
There is an art to passing great wealth successfully between generations. It involves understanding expectations and social pressures at least as much as tax structures and investments. Social concerns can include protecting children from unwelcome attention as they grow and when they inherit: a transfer that can start to happen at a very young age. In a digital world, these concerns are even more acute.
Few substantial estates are passed on now without the protection of trusts, family investment companies and advisers. All of these help the process.
But whatever protection is given to substantial wealth, the emphasis for those passing it on is financial education and good stewardship. Above all, there is usually a family dynamic to respect and often a shared purpose.
However, as with any family, conflicts can arise and these can test the bonds holding people together. Making sure that all needs are met can involve a great deal of thought about the individuals concerned, their interests and how to find a balance with the family’s needs as a whole.
There may be duties to employees and shareholders. There may also be a wish to display a particular public profile, or even none at all.
Timing is important
Advising young people who are in line to receive life-changing fortunes therefore requires emotional intelligence and sensitivity. This is never more the case than when appointed to advise a teenager – or an even younger child.
It can be an awkward or even anxious time when an ultra-high net worth family decides to engage in educating their children or others in the family about their inheritance. Awkward because families with substantial wealth usually dislike drawing attention to themselves and that can be another reason to put off this discussion with heirs. Anxious because the instinct may be to shield children from too much knowledge about the extent of family wealth, for fear of overshadowing their childhood.
In my experience as a private client adviser, most teenage heirs do have a sense that there is considerable wealth in their lives, but rarely an idea of how much, why it is there and what they might expect to inherit.
Deciding the right time to start the conversation with them is a judgment call that depends on the individuals concerned but, in my view, it is best started in the mid-teens. As the trusted adviser to one family, I was asked to help in the process of advising a 13-year-old, who was unaware that he was already due to inherit millions of pounds. I began by encouraging him to understand the idea that what is important is what things mean, not their cash value. Therefore, an important first step in preparation and education is to give a grounding in whatever combination of property, business, shareholdings or land sustains the wealth that the heir will inherit, and the expectations that come with those.
Key steps
There are some key steps I will advise a family to take as the transition takes place. For example, trusts are helpful in allowing trustees to support, protect and encourage a beneficiary. I worked with one family with an heir whose trust ‘rewards’ him by matching pound-for-pound the income he goes out and earns himself. The success of this plan has given the heir a purposeful and happy lifestyle.
In any family it is important to help young people to understand money – the only difference with the very rich is the scale. One effective option where a great deal is at stake is to create a ‘financial creche’. This gives a relatively small sum of money for an heir to invest in a venture, often charitable. It acts like stabilisers on a first bicycle.
The process of managing some form of enterprise helps reduce the risks of becoming confused, overawed or reckless when the full inheritance arrives. A glance at how many lottery winners ‘blow their fortune’ shows what can go wrong. A financial creche can avoid that by inspiring and rewarding the beneficiary, not to mention giving them enormous pride in their work. But crucially, it is where financial and management lessons can be learned, and mistakes made, without threatening the substantial inheritance. It also helps personal development by giving a focus, drive and purpose.
Aside from such strategies, common sense and sensitivity are central to guiding young lives as they prepare to inherit. This enables them to enjoy their wealth and feel comfortable with any attendant duties. As an adviser, it will be interesting to see what strategies a new beneficiary generation employs to maintain and grow wealth, and how they compare with the tactics used by earlier generations.
My instinct is that teaching good stewardship directly, using experience and emotional intelligence as well as technical skills, will remain a vital part of the strategic support as wealth is passed between generations.
This article was first published by Taxation magazine and is available here on the Taxation website.
You can learn more about Adrian’s experience of advising wealthy clients in this article.
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