Fairness: Crafting Your Wealth Allocation Principles
The principles that you establish underpinning how wealth is shared across your next generation will determine your legacy.
If these principles are not carefully crafted, they will seed conflict, legal disputes, declining business performance and family division. And with that, the end of your legacy.
Do your wealth allocation principles address all the key issues?
As we have discussed over the past few weeks, establishing clear principles for the allocation of wealth across your next generation is a vital task in succession. Bear in mind succession is all about ‘enabling the compounding of wealth from generation to generation while ensuring family unity, individual growth and a sense of contribution’.
Fairness is essential to underpin unity, and that requires setting principles, testing them, inviting contribution and being transparent. Determining an allocation of wealth where an active business/es exist on the basis of your judgement, and leaving its communication until the reading of your Will, is to invite disaster from a succession perspective.
To allow you to craft a set of principles that can be tested and then opened up for the next generation to comment on, firstly answer the following questions:
- As a basic principle, do you propose to allocate wealth across your family members in equal proportions?
- Has anyone received monies in advance of others that should be adjusted for in any final allocation?
- Do you propose holding over or preserving capital for future generations that cannot be accessed by your next generation?
- What do you believe your total wealth to be, what may be preserved and therefore what sum would each family member receive?
2. How will you ensure the ongoing financial independence of your spouse and yourself?
- What capital sum and annual income do you think you will need?
- Where will that capital sum and income come from?
3. How do you think you will pass your wealth over to the next generation, e.g. shares, cash, freehold, trust entitlements etc.
4. Are you intending to simply ‘cash-out’ of your business/es and divide the wealth across family members or will the business/es be retained and eventually owned by the next generation?
- A robust governance structure will be important to underpin the continuing performance of those businesses.
5. When do you think you will pass control over?
- At what point in time or upon what event?
6. Will ownership, of say the business, be given for no consideration, or do you think the next generation should pay something for that asset?
7. Will only family members actively involved in a business be the future owners?
- If so, how will you fairly compensate the family members not presently involved in the business?
8. At this time, who do you think will get what assets and what is their value?
- What about grandchildren?
- Any bequests?
- Will your children’s spouses have any entitlement, and if not, what financial provision may be made for them?
9. What mechanisms will be used to ensure that wealth continues to compound?
And based upon your answers to these questions, begin to craft your principles of wealth allocation. Once done, take those principles and apply them to your wealth then step back and reflect on whether the outcomes are fair. If not adjust your principles and try again. And be ready to explain why someone may receive more than another and why you consider that fair. After this step, you are ready to share your draft principles with your family and invite their comment.
Throughout this process, you must always bear in mind that fairness will require open communication. Your goal is to preserve what you have built during your lifetime, allow it to grow and provide well for future generations of your unified family. That is your legacy at work.