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Planning a Successful Wealth Transition

By Cindy Radu and David Gould

What do you know about the importance of a successful wealth transition?

When a wealth transition is not planned successfully, it can put a family in conflict and send them into a financial and emotional crisis. Here is one story about wealth transition and how unaddressed conflict in a family and lack of communication can tear families apart.

A Story About the Bailey Family

Unfortunately, this story is one that is all too common.

Mr. and Mrs. Bailey, both in their 60s, have two children – Jeff and Anne.   Jeff and his wife, Sue, have three children.  Anne is single and does not have any children.  Mr. and Mrs. Bailey worked very hard in BizCo – the business they founded over 35 years ago.

Through the growth in value of BizCo, as well as savvy personal investments, the Baileys accumulated significant wealth and decided it was time to think about the future of BizCo and what to do with their wealth.

Jeff rose to a senior executive position in BizCo and was responsible for its recent substantial growth, but Anne insisted she had no interest in the family business and refused to take on any role in the company.  Jeff often butted heads with his dad, especially over Anne’s refusal to help out at BizCo.

The Baileys had not developed communication, conflict resolution, or decision-making skills as a family unit.

Over time conflicts were left unaddressed and tensions among family members built up.  Their family dynamics were unhealthy and – at times – downright dysfunctional. These conflicts exposed vulnerabilities in the family business and the family itself.

Without consulting Jeff or Anne, Mr. Bailey engaged accounting, tax, and estate planning advisors to develop a business transition strategy and estate plan.

Not surprisingly, when Mr. Bailey presented the plan to his family as a fait accompli, they blew up.  Jeff threatened to withdraw from the business and Sue threatened to prevent the grandparents from seeing their grandchildren.  Anne stormed out of the room and refused to have further discussions with anyone.

Mrs. Bailey was terribly upset at the thought of never seeing her grandchildren and was surprised by Jeff, Sue and Anne’s reaction to what she and Mr. Bailey thought seemed like a very good and fair plan.

Solving Wealth Transition Conflict Through Mediation

Fortunately, the Baileys agreed to retain a skilled mediator. Each family member was individually engaged by the mediator in the design of the mediation process. The mediator was empowered to intervene in difficult conversations about the family’s troubled past to help them stay focused on what they wanted for their shared future.

The mediation did not lead to instantaneous peace and reconciliation, but in addition to negotiating an agreement on a direction for the succession ofthe family assets, it did result in a shared vision for future communication and collaboration in the family.

The technical advisors were re-engaged, leading to an effective wealth transition plan that was agreed to by all family members.

Although the Bailey’s were able to get to a positive outcome through mediation. Mr. Bailey told the mediator that the mediation had saved his family.

The Importance of Communication in Wealth Transition

Unfortunately, the above scenario plays out all too often for families without the same happy ending.

Global statistics show that only 1/3 of families will successfully transition their wealth from the founder generation to the second generation; by the third generation that percentage drops to only 10%.

Research has established that family wealth transition failures are attributable to a variety of factors:

  • breakdown in communication and trust        (60%)
  • lack of preparation of the rising generation  (25%)
  • no family vision                                                    (10%)
  • inadequate tax and financial planning             (3%)

As happened in the Bailey family, parents tend to focus on the 3%.  Typically, a triggering event will push parents to meet with their accountant, tax, and estate advisors.

The common process that ensues is:  the parents agree on a plan that is presented to them with few questions asked; they proceed to sign documents without fully understanding how the documents will actually play out; often the documents are then stored in a “safe” location for a future game of hide-and-seek at the most inopportune time.

There is a saying: “plans that affect us but do not involve us, are not for us” which sums up how these approaches typically play out.

Parents rarely involve the rising generation – those who will be affected by the plans – in critical wealth transition discussions.  Furthermore, parents don’t do a great job preparing their children to be good owners and stewards of the family wealth they will inherit.

This happens for all kinds of reasons such as:

  • planning by default (this is the way our parents/friends/colleagues “did it”)
  • this is what our advisors recommended
  • we don’t talk about these things in our family
  • we just wanted to get it over with and the documents in place
  • “father knows best” or “it’s my stuff, so I’ll decide what happens with it and when”
  • they are smart kids and they will figure it out
  • they know what we would want them to do
  • we’ve done our job, it’s up to them after we’re gone

The Emotional Cost of Conflict

Conflict, a prevalent outcome of traditional approaches to wealth transition, frequently results in plans being unwound at great financial expense, with families often headed to litigation.

Even worse, this conflict comes at a high emotional cost.  Families can be torn apart for current and future generations:  summer vacations, weddings, births, graduations, and other family traditions become tension points instead of something to look forward to.

Excuses are made and events are avoided. Cousins don’t get to know one another or share experiences that create life-long family bonds.

The health of families, our communities, the economy, and charitable institutions are all in play as we face the largest global wealth transition in history.  There is too much at stake to not get this right for the Baileys and millions of other families.  So how do we get to the 95% and avoid the path of mediation or litigation?

How do we get ahead and stay ahead of conflict?

Subsequent blogs will explore wealth transition processes and tools that focus on the 95% including:

  • What would it look like for a family to be able to discuss challenges, concerns, dreams, goals, and opportunities?
  • How does a family develop listening, communication, and negotiation skills and learn to have difficult conversations?
  • What do decision making and conflict resolution processes in a family look like?
  • How can families pursue financial growth and stability, and also nurture each person’s intellectual, social, and human growth?
  • Where do our values and vision for the future fit in?

For more help on conflict resolution, click here. You can also view a list of our leadership services here.

Cindy Radu FCPA, LLB, LLM, TEP, ICD.D – Independent Family Wealth Transition Advisor

David Gould LLB QC C – Med, Mediator and Conflict Coach

Cindy and David are members of the Full Spectrum Leadership, Council Team in Residence.  For more information about our services, click here.

For more help understanding wealth transition, or to learn more about how we can help you with your development, feel free to contact us today. We offer personal and professional development, conflict mediation and resolution, relationship reconstruction, corporate and individual coaching, and much more.

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