The Art of Wealth Transition

In July, Our Tax Partner and Leader, Family Office Tax Services, welcomed back family office attendees for the first time since the pandemic. EisnerAmper’s Family Office soiree was held at EisnerAmper’s new, state-of-the art New York City headquarters.

Natalie McVeigh, Managing Director, presented on “Family Office Succession and Transition” and discussed why this is the area where many family offices fail. Natalie used an interactive approach to help the participants gain an understanding of why 70% of wealth transitions fail by the third   generation (“G3”).

She discussed some of the main factors that are apparent in the younger generations that eventually cause G3s to fail which are:

• Lack of communication and trust among generations.
• Lack of preparation from older generations.
• Different generational missions and values.

Family offices continually fall short for many reasons. For example, founders of the family office often become successful on their own merits, and their innate knowledge is difficult to transfer to the next generation. Also, because the children were not involved with the creation of the wealth, they do not understand the inner workings of the business. Family members working together daily can also be a cause of conflict. G3 often find decision making difficult, especially when family possessions with emotional attachments are involved. 

Generation 1 (“G1”) frequently finds it difficult to trust others, and this pattern of distrust impacts the behavior of future generations. The privacy of G1 is a critical factor because it wants to ensure security, is cautious about competition and is often humble. The concern over privacy can lead to distrust, which initiates an unsuccessful transition to future generations.

A common strategy for G1 to transfer wealth is through ownership in trusts that are unable to be decanted. As a result, ownership, control and management of the company become the focus, while family relationships fall by the wayside. To have a successful transition, there must be an equal balance between the family, enterprise and ownership. Natalie explained as each of these areas holds value in different ways. Studies have shown that a successful transition takes an average of 10 years. 

Why is succession or transition so challenging? In many cases, G1 wants fairness for the next generation, but this does not always work out as planned. Frequently, G1 uses wealth as a power tool, threatening to cut the younger generation out if they do not behave in accordance with expectations. This causes animosity amongst the family.

Natalie discussed the tools she uses to assist families with this difficult transition and help normalize conflict. The most important criterion for change is awareness.

What goals are they trying to achieve? Families must gain an understanding of what each person’s unique values are—including their own. Individual family members are often not aware that their values are different, and this is a cause of controversary.

There is a huge differential between who you are and how you are perceived by others. Natalie uses exercises to work with families to help them truly understand each other, their values and what makes them tick. Trust and honestly are imperative for a successful transition.

It is critical to ensure the well-being of the family is equally as important as the other factors for there to be a successful succession and transition. Wealth transition and succession planning for future generations are extremely difficult. It would benefit the family to work with a trained specialist to do preventative work to help ensure a smooth transition.