Traditional Succession Planning
Traditional succession planning involves two people: the client who has wealth and his (or her) lawyer. The planning is generally kept confidential from the rest of the family (in some cases even the spouse is not given the information).
The amount of freedom the client has will vary considerably. In English-based common law jurisdictions the client will usually have a fair amount of “testamentary freedom”– and can decide which members of the family will receive what assets and under what conditions. They can even decide to leave everything to strangers or to charities.
States in the United States do add a variety of protective provisions for a surviving spouse (but not for childreni). Unless there is proof that the client was not mentally competent or exercising free will, any sort of succession planning will be upheld (including large gifts for household pets). Indeed, it is well-known that billionaires like Warren Buffett and Bill Gates, Jr., will leave the vast majority of their fortunes to charities, and not to their children.
England also has a wide range of testamentary freedom. Two important practices restrict that freedom, however. One is a provision that if all of the heirs agree, they can rearrange the deceased person’s succession plan among themselves (with no tax consequences), during a time as late as two years after the death. The other is the ability of any survivor to make a claim to a court that the deceased person should have left a provision for the claimant, who depended on the deceased for support of some typeii. Clients in civil law countries generally are much more restricted in their ability to leave assets as they wish. There are generally fixed portions that must be left to children. The laws vary considerably (sometimes many lifetime gifts can be pulled back to satisfy these fixed portions).
Finally, religious systems, such as Shariah law, also restrict the client’s testamentary freedom considerably, although there is still a portion that can be given as the client wishes. Sometimes clients in those or other restricted jurisdictions deliberately create structures in other jurisdictions in order to have more testamentary freedom over those assets.
Many offshore jurisdictions actively solicit clients to have their assets (or structures) governed by their local law, which promises more testamentary freedom than the home jurisdiction might allow.
Family’s Lack of Certainty
Given the amount of testamentary freedom, it follows that to various extents other family members will not be certain about the succession planning of the principal family member. Future inheritances are generally taboo topics in family conversations. Also the principal is legally free to change the succession plans at any time and from time to time. In many cases the promise of a future inheritance is used to reward certain family behaviour. The converse is also true: the threat of withholding an inheritance is used as a negative incentive for undesirable family behaviour.
Litigation and Family Rifts
As seems inevitable, the combination of testamentary freedom and privacy often results in surprises for the rest of the family. Adult children may learn that the majority of the parent’s assets were given to a charity, or that there are serious restrictions (e.g. the use of trusts) on their access to their inheritance, or that one sibling was given more than the others, etc. The result is litigation (if there is any ground for a claim) or in any event a rift between the family members (or simply hurt feelings about the treatment by the deceased.).
International Family Governance
Very wealthy families, across the globe, are paying attention to the adage of “shirtsleeves to shirtsleeves in three generations” and are taking proactive steps to preserve family wealth and family harmony. By creating their own family governance systems, these families are cooperating in deciding how they will make rules for their own families, which areas they want to have family rules for, etc. In some cases they are even creating their own family constitutions.
The purpose of creating effective family governance systems is to avoid uncertainty, arbitrary treatment, resentments and family rifts. Families engaged in family governance reach agreement on many difficult issues. They follow communication and decision-making processes that allow each family member to have a voice.
Traditionally, however, even sophisticated family governance has stayed away from covering the issue of succession planning.
My proposal is to consider treating succession planning as one more topic to be handled by a family governance process.
Using Family Governance for Succession Planning
Let us assume the family has established a Family Council, which is a representative body that has been given authority by the wider family to represent the interests of the entire family. Let us assume that the family has created its own Family Constitution, which contains the rule-making provisions for the family. Let us assume the family has had some experience dealing with some of the difficult family issues, and has resolved them to the general satisfaction of the family.
What would happen if the Family Council addresses the future plans for the family wealth? It seems to me that this is a very logical piece of the family continuation puzzle. If we return to the adage of “shirtsleeves to shirtsleeves in three generations” the core purpose of engaging in family governance is to find ways in which to keep the family wealth intact for more than two generations—and indeed to keep the family relations intact for more than two generations.
If the Family Council addressed the topic of succession planning in the family, I see many resulting benefits. First, one of the most taboo subjects in the world would become safe to talk about. The constant threat of surprise and uncertainty would be removed. The thoughtful input of all of the “stakeholders” in the family could add to improved succession plans. Those who will be affected will have participated in the planning.
There are benefits for the senior family member also. Instead of relying on outside advisors to choose a succession plan, they will be able to receive advice from their own family members, who will be the ones to live with the plan. They will also benefit from having an opportunity to explain to the rest of the family why they are thinking of a certain plan, and what their goal is for the future well-being of the family. This can strengthen the generational bonds in amazing ways.
The entire process will work only if it is treated like other topics in family governance, that is with trust and respect among all of the family members. If a family can accomplish this, they will have removed the single greatest threat to the future of their wealth and the very future of their family.
In reviewing these ideas with another strong proponent of family governance who works in the Asian marketiii I have been cautioned that this may not be possible (at least currently) in the Asian market, where the entire subject of succession planning is an extremely taboo subject. In fact to discuss the topic at all is seen as bringing very bad luck.
Also, a specialist in mediating succession disputesiv adds that in his experience the emotion behind the conflict is often the driver – often there is no sort of valid ground for the claims that are brought, and where there is, settling those claims does nothing to address the underlying issues. On a more positive note, he adds that when there is a family business he is seeing more family cooperation in planning for the future of the business. (I think those same motives can be extended to the future of the family's wealth in general.)
Why not treat succession planning for the future of the family wealth and the future of the family itself – as one of the most important issues to be addressed by a family governance system?
i With a limited exception in Louisiana.
ii See Inheritance (Provision for Family and Dependants) Act 1975.
iii Christian Stewart in Hong Kong, formerly with JPMorgan and now the founder of Family Legacy Asia (see www.familylegacyasia.com for a number of his articles).
iv Ian Marsh, a former private client lawyer, who now works independently to resolve family disputes concerning succession and inheritances (see information at www.familydr.co.uk)
Barbara R Hauser, M.A., J.D., TEP