Estate Planning For High Net Worth Clients: What to do with the Family Business?
A large portion of the nation’s wealthy are self-made—besting the competition and building their large fortunes. The average age of the nation’s billionaires are now 67, and they’re facing a new set of problems: How do they pass on their wealth? And what do they do with the family business?
This is one of the most crucial issues that financial advisors will assist their high net worth clients in the times to come. Transferring a business to heirs that haven’t been properly prepared is dangerous, fortunes can disappear quickly after being divided between multiple generations.
Simple algebra shows how difficult it can be to keep high net worth client’s wealth together. Total wealth held by billionaires has grown to $5.4 trillion—up from $700 billion in 1995. The self-made billionaires have increased to include 66% of the total number of billionaires in the nation—up from 43% in 1995.
Some describe this as a second Gilded Age—claiming that the first occurred in the timespan that led up to World War I—with industrial giants like John D. Rockefeller and Andrew Carnegie were leading their large business empires. The difference? That era was built on manufacturing and today, approximately 30% of the self-made billionaires are involved in the financial services sector.
Handling the Family Business
Roughly 60% of the self-made billionaires desire to keep the businesses they built in their family. About 30% choose to sell off a portion of the business, and only about 10% sell the entire business. Despite the overwhelming desire to keep businesses family owned, only about 36% of U.S. billionaires are successful in doing so while over 50% of European and Asian billionaires can do so.
It’s critical that financial advisors begin the conversation with their high net worth clients early on in the relationship—it’s important to decide whether or not they want to sell the business, and if they do—how? Financial advisors must ask their high net worth clients how they’d like to establish their legacy.
The wide range of opportunities for your high net worth clients isn’t widely known—like bringing in a small investor to help create liquidity in the business. It’s also important to consider the industry that your client is involved in—for example, technology companies are more inclined to experience rapid change.
Preserving the Family Legacy
Having conversations with your high net worth clients about them selling the family business will eventually gravitate towards your client’s legacy—what is it, exactly, that they’d like to leave behind for the next generations?
This typically leads to more conversations about philanthropy and establishing family offices. It’s also leading to many conversations about impact investing—a hot topic recently among the wealthy. This rising interest stems from ultra-wealthy clients and the desire for measurable accountability.
Threats to a Client’s Legacy
There are additional threats to an ultra-wealthy client’s legacy—beyond the wealth distributed through generations. The first noted ‘Gilded Age’ ended in two World Wars, with a large economic depression sandwiched in the middle. This also happened to be the era where the national income tax was adopted.
There are three noted threats to the legacy of an ultra-wealthy client:
Potential changes in tax code.
International/Geopolitical tensions are high in some regions
Unforeseen business risks