As hard as we may try to avoid it, death is a certainty of life and 2020 marked new uncharted territory for the current generation. We faced the whirlwind that is COVID-19, global shutdowns and a new way of living, that left many confused and at times bereaved. We never truly prepare for death or the aftermath of it. In this time we have seen families losing their patriarchs and matriarchs, and family offices losing their principles. Families and family offices alike can feel large voids, especially when the assumption has been there that the principal had dotted their i’s and crossed their t’s, only to find unsigned wills and un-finalised trusts. The hardest part is having the “next of kin” decide on what happens next and who will lead. When someone dies, the whole family system is thrown off. Grieving family members find themselves disinterested and/or incapable of behaving in the ways they used to. Not only do people have to cope with grief, but they also must deal with the fact that a vital piece of the family is gone. This all boils down to the importance of succession planning for family offices and how they can protect the family in the aftermath of a death.
It truly all sounds like it’s a scene played out of a fiction book or a Hollywood blockbuster movie, those who have experienced it know that the truth is so much more bizarre. How can families who are bereft rise from the pain of losing a loved one and deal with the every day knowing very well that the family may feel like a rudderless boat? Choosing who has the responsibility to lead especially when no one was groomed for the position, and other underlying family conflicts will present themselves in no time at all and will need to be dealt with appropriately.
What a clear succession plan can do for family offices
Two things are apparent, the first is emphasising the already well-known fact that succession planning for family offices and the family itself is important. Without a doubt, a well established and governed family office can actually be the safety net that a family needs, especially during a time where their members are feeling the sting of loss. The family office, if well seasoned and prepared for the transition, can handle the family business whilst the family gather themselves and start preparing for a future without their loved one. Aligned family offices can handle the technicalities of organising the send-off of the deceased in a manner they preferred, whilst also ensuring that the wealth of the family continues to be kept safe.
The second issue is ensuring that family governance has been established even in its most basic of forms. The need for a clear articulation of the family’s goals and communication within the family is essential. Having some sort of family governance in place addresses the direction in which the family wealth will be handled. This can include creating legacy work like establishing philanthropic goals and objectives, and the development of transition or succession plans for the family’s enterprises – including the family office. Governance also identifies the way the family will continue to work together after the loss as well as highlighting the importance of togetherness in the family. Conflicts are also handled significantly better when there is governance as opposed to when it is none, as it helps family members act in the best interests of the family as a group. More specifically, it can improve the performance, communication and collaboration in the family, helping the family become more stable, productive, and able to unlock new opportunities. It can also be a positive indicator in reducing risks that the family faces.
How do you prepare your family for uncertainty and loss?
No two families are the same and one size does not fit all. One way is to assess the risks that the family faces and identify any areas of weakness whilst the principal is able to assist. Risks to families, especially families of wealth can be a vast maze. Categorising the risks and identifying them is not fear-mongering, but it is being prepared. We all agree that taking out insurance is a preparation, a ‘just in case.’ One of these inevitable in-case-of scenarios is death. We call it life insurance when we take out cover because we know that death is unavoidable, but the insurance is for those who must carry on with life after their family member is gone. With this in mind, examining the risks that the family and the family office face is in itself a life insurance policy, as it is actively preparing both for the inevitable. If anything COVID-19 taught us, is that no amount of risk preparation is too much or too extreme. Prior to 2020, being prepared for the worst (including a zombie apocalypse) sounded out of this world – but so did a global shutdown.
Once a thorough risk assessment is done, the next step is going through diligence exercises. Due diligence is an important part of any process and represents the orderly investigation of any matter. For example, in mergers and acquisitions, due diligence helps clients recognize any financial, legal, or operational risks that may not be noticeable from outside perspectives.
In this distinct situation, these due diligence exercises form the basis for succession planning for family offices, the family advisers, and most importantly, the family. It puts all parties in a significantly better position to address the implications of the death of a principal. The diligence exercises identify gaps in knowledge, documentation, staffing, and other areas that are best addressed while the principal is alive, as well as mapping out the key steps to be addressed following the death of the principal. The diligence exercises may include but are not limited to:
- Identifying necessary financial, accounting, legal, regulatory, and administrative action items to address immediately following the principal’s death.
- Financial implications of the death, including potential expenses, liabilities, and taxes, as well as identifying sources of liquidity to pay for them. Including analysis of the disposition of any assets that may be necessary to cover financial expenses.
- Transition planning can be a touchy subject in many families and organisations, but like death and taxes, it is a certainty and once done right, can serve to protect and build wealth effectively. Developing a succession plan for the family office helps address changes that inevitably come about in the wake of a principal’s death.
These exercises are created specifically for your family. As said before, there is no one size fits all. Understanding your unique dynamics makes it easier to create rigorous systems that fit your needs. In this preparation, a plan for succession is also taken into context. Leaving succession too late, even as a discussion piece can be a setback. In cases where there is more than one potential successor, it is important to ensure all the succession options are ready to step into the place they are intended for and are competent to fill the necessary needs.
We are never truly prepared for death, for the forfeited future that is taken away from us, sometimes without warning. However, there is small comfort when a loved one has the foresight to prepare us for a life without them – even when we are not ready for it. When family offices manage succession planning well, it takes all uncertainty out of dealing with the death. A recent example is the Duke of Edinburgh, who passed on this year. He passed at a time where his nation was in crisis and a pandemic had scoured the world. His loss was felt deeply by many, and even more so by his family. However, he had prepared his family as best he could and set in place, instructions on his needs, and thus his estate, and his funeral, was managed according to this. We continuously heard the repetition of the word ‘according to his wishes’. Although a difficult time for his family, they were comforted by the directives he made whilst he could and they honoured his legacy, and were then able to focus on recovering from their grief.