Does your family have a succession plan? Tips for maintaining family harmony

Harmony across families can be maintained by having multi-generational dialogue. Learn how you can start the conversation with your loved ones.

The COVID-19 pandemic has forced many people to think more about their health and wealth — and what the future could look like for the next generation.

For enterprising, global families in particular, succession planning and family governance have always been an essential part of successful wealth planning, but the health crisis has only highlighted their importance.

“With COVID-19, succession planning has been more top of mind,” says Angie O’Leary, head of wealth planning at RBC Wealth Management-U.S. “The environment is spawning some interesting conversations around business and estate planning.”

For some, the pandemic has been a reminder to revisit wealth plans to ensure they meet the current business and family realities for all generations.

Increased wealth means more planning

Advisors have long recommended family members with an ownership stake, who may also be involved in the day-to-day management of the business, have a succession plan. This keeps the company moving ahead and also helps grow and preserve wealth for future generations. A succession plan can also ensure family harmony because there’s less chance of a surprise that could lead to disagreements.

Still, many next-generation family members feel they don’t have a formalized plan in place. According to 2020 research from RBC, in partnership with Campden Wealth, 33% of next-generation wealth holders are either without a plan, unaware of any plans, or are in the drafting stage of creating a plan.

The next generation is key to lasting wealth

The same research shows the biggest obstacles to succession planning are discomfort around discussing the sensitive topic of finances (33%), or that the main wealth holder may be unwilling to relinquish control of the business (22%).

To smooth things out, O’Leary suggests regular facilitated communication and formal meetings to help families make crucial decisions. This is often referred to as family governance.

Starting family conversations around wealth succession

One of the biggest issues around successfully transferring wealth is how prepared the next generation is, says O’Leary. The average age when Next Gens talk to their families about succession is 37, according to Campden Wealth, which is just a few years after they typically begin managing a portion of the family wealth.

Families also need to understand the tax implications of selling or transferring the business to the next generation, as well as approvals from a board or other shareholders that may be required.

Business planning versus succession planning

Business owners may be unprepared to transfer their companies because they don’t fully understand the difference between business planning and succession planning, says Tony Maiorino, head of RBC Wealth Management Services, based in Toronto.

Business planning is more about the company’s future growth, including its products and services, while succession planning deals more directly with people, in particular, who will take it over.

The other part to consider are the two different forms of succession: ownership structure and management structure. Both must be accounted for when preparing for succession.

Parents may have a vision of one or more of their kids taking over the business. If some children aren’t involved, the plan will need to consider how to equalize the assets, Maiorino says.

Dividing assets between siblings

One family situation could include two siblings who founded a business and each own 50%. Adam has two children and Bryan has one child. Should the ownership transfer 50% to Adam’s children (25% each), and 50% to Bryan’s child? Or, should it be 33% to each of the three members of the next generation?

Succession planning may also include discussion of selling the business to a third party, and either keep the family involved, or not.

These are all questions to consider, and the more complex the decisions, the more that formal communication becomes even more critical.

Review the succession plan regularly

Having a succession plan is important, but an outdated plan can be just as problematic as no plan at all, Maiorino says.

“It needs to be a living document,” he says, adding that many clients are reviewing their business and succession plans amid COVID-19. “You want to make sure your plan fits, both from the perspective of a growing business and one that’s in a bit of difficulty.”

The result might be a change in plan, or simply leaving everything as is. But having that reassurance is important.

Harmony across families can be maintained by having multi-generational conversations. Maiorino recommends families have an ongoing dialogue to ensure everyone’s needs and considerations are brought to the table.

“We often say to parents, before you transfer money, transfer your knowledge. Make sure your values and things that are important to you have been adequately transferred to the next generation,” Maiorino adds. “That’s going to allow for far greater success than just handing over the business.”

This article was originally published by RBC Wealth Management. Find more content at rbcwm.com.

For more information, or to arrange a complimentary consultation, please contact us today.

Devin St. Louis, CFP, FCSI, BBA, CIM, FMA
Vice-President & Portfolio Manager
St. Louis Private Wealth Management of RBC Dominion Securities
403-299-7074 | devin.stlouis@rbc.com | www.stlouiswealth.com
1400 – 333 7th Ave. SW, Calgary, AB T2P 2Z1

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