“The Succession Project” was commissioned by Saffery Champness to confirm our understanding of how modern generations are approaching the is...

“The Succession Project” was commissioned by Saffery Champness to confirm our understanding of how modern generations are approaching the issue of passing wealth from one generation to the next. We were particularly keen to assess the extent and type of family pressures, explore differences between the generations, both between and within families, and identify trends in the UK market of attitudes and behaviour towards inheritance. This study was conducted entirely in the UK market, to identify how succession practices are changing, both in concept and implementation. After consideration of the existing literature and undertaking appropriate quantitative research, Spada Ltd, our market research consultants, interviewed more than forty wealthy individuals, from landed estate owners to new money entrepreneurs, as well as some of the country’s leading professional advisers. The overall conclusions were then validated by a specially constituted editorial board of eminent advisers. It seemed an appropriate time to look at this subject, as there is more wealth to be passed on than ever before. Over the last twenty-five years there has been an enormous rise in self-made wealth with many of these new money entrepreneurs having very different cultural and family values from those whose wealth was inherited through several generations. This is illustrated by last year’s Sunday Times Rich List. Over three quarters of the 1000 entries are self-made millionaires whereas in 1989, when the Rich List was started, over half the entries were due to inherited wealth. The way wealth is passed on has helped to shape the UK economy, the countryside and the society in which we live. Also the attitudes of today’s modern generation are somewhat different to their parent’s generation. Another material impact on succession planning that has occurred during recent years is the unfortunate increase in the frequency of martial breakdowns. This has sent a shiver of fear through wealthy individuals and families, who see the possibility of an inheritance being dissipated through the failure of a child’s marriage. The report highlighted many important issues including the morality and benefits of an inheritance. Other aspects included exploring some of the popular myths surrounding the subject, the obstacles to succession, communication issues and the role of the adviser. As part of the qualitative research undertaken for the report interviewees were asked to consider the morality and benefits of an inheritance. According to these individuals the principal moral case is the freedom to pass on assets, which they saw as a fundamental human right. They saw this right as benefiting the recipient as well as, in many cases, society as a whole and that the positives easily outweighed the negatives. The research looked at the issue of whether an inheritance was a benefit or burden to the recipient and concluded generally it was a good thing and a privilege, gave them the advantage of financial security and a greater freedom of choice in choosing their career or pursing their interests. Indeed, several of the entrepreneurs interviewed said that inherited wealth had aided their own success in business. However, when the impact on the wider family was considered, the research highlighted several examples where families had been divided, or in some cases torn apart, as a result of an inheritance. In many cases this was as a result of a poorly communicated decision. Many donors felt they had a duty to pass on their wealth to their children and the longer the history the greater the sense of duty. In general, those who have themselves benefited from inheritance felt a strong sense of obligation to preserve their inheritance and pass it on. Donors feel that the right to pass on your wealth includes total choice of recipient. In other societies equal heirship between siblings is also considered a basic human right, but amongst the contributors to this study there was no support for any forced heirship provisions that restricted the donor’s right to decide. The research also considered the beneficiary’s right to fairness often taken by the child to mean literal equality. Whilst the majority of interviewees believed in the notion of fairness, few thought this meant actual equality. However, in circumstances where a child is to inherit the bulk of the assets, an explanation should be made, as frequently children will see inequality as a lack of love and the bestowal of wealth as a powerful confirmation of a parent’s trust and approval. According to the research respondents, the major influence on the choice of a beneficiary is the nature of the assets owned. The study showed that for practical reasons, in the context of a landed estate, primogeniture is still the dominant influence. However, there is an increasing desire to balance this with the ability to be as fair as possible to all the children. The report highlighted a number of key differences between those passing on a landed estate and those passing on a company. In the case of the latter: · There is little presumption in favour of the eldest child as a successor. The ability of the successor is vital to the success of the business. · Businesses can be far more easily divided into different shareholdings and even if one child is the appointed successor, the economic interest can be fairly divided. · Succession to management can more easily be separated from succession of ownership. · A business is less likely to include a family home whereas a landed estate may well do. The report looked at a number of the myths surrounding succession and inheritance. Some of these were confirmed, but often with caveats: · Primogeniture is the default option of the landed classes – true today? The research found that although considerably less entrenched than in previous generations, a small minority did regard the equal treatment of their children as more important than the preservation of the estate and are willing to see it sold if necessary. · Will family members get a job in the family company? Yes, but only if they prove their competence and commitment. · Does the reading of the Will still occur? Yes, but it is a rare event today and unlike a number of years ago many beneficiaries are aware of the extent of their inheritance long before the donor’s death. · Does everybody want to avoid inheritance tax? The report confirmed that even amongst those who do not particularly want to leave large sums to their children and those who are most conscious of their duty to the wider community, nobody sees inheritance tax as a means of meeting an obligation to society. However, it was found that some myths are untrue. These included: · Successful entrepreneurs want to create a dynasty. Despite the statement ‘All old money was once new money!’ most interviewees seemed remarkably relaxed about whether or not their businesses continued in the family. Many thought it more important for their children to inherit their entrepreneurial spirit. · The traditional assumption that one’s heirs and successors will be part of a conventional family is no longer valid. The respondents in this survey felt that donors routinely have to contend with the complications caused by divorce, second or third marriages, non-marital unions, and same sex relationships. These factors were felt to test the issue of fairness to the limit. · That children of wealthy families need, or are entitled to, a private income is no longer a generally held view. The modern assumption is that individuals will make their own way in life. However, many parents do want to give a helping hand in the early stages and to give them every advantage they can. A common view was “ I made this money. It’s the fruits of my effort. I am not going to leave it all to my children. They need to go out and make their own money. I’m looking forward to spending mine in my retirement”. · The research suggested that the assumption that “old money” is less commercially aware than “new” was far less valid than it may have been in the past. Many landed families are more commercial in the management of their estates and better informed than “new money” entrepreneurs. The latter often support their estates from their other business activities. · Today’s successors to landed estates are typically well travelled and have mixed in multi-cultural, multi-ethnic environments and tend not to share the prejudices often associated with the upper classes. This dispels the myth that “old money” is more socially conservative than “new”. · Inherited wealth creates freedom for the heir. This is not a belief shared by most successors who feel that their inheritance is a responsibility and a tie, as much as an asset and a privilege. One landowner interviewed remarked “In theory, I own the land, but in practice the land owns me!” They tend to see themselves as custodians rather than owners. What most characterises them is the extraordinary sense of tradition to carry on the duty, and duty to carry on the tradition. The research identified numerous obstacles to the succession planning process. These included: · A parent’s preoccupation with their child’s reaction and feelings, including the way in which their own intentions may be perceived. · Concerns the successor may be too radical in their management of the asset. · Inertia. · Passing too much too soon. · Uncertainty of future fiscal policy and retroactive legislation. · Concerns about children’s marriages and the resulting complications and possible asset loss. · The donor not wanting to relinquish control. Communication was highlighted by the respondents as one of the most important aspects to successful succession and inheritance planning. The research found varying degrees of communication from none at all to complete open forum. The report highlights that a lack of communication often will result in great bitterness and resentment that can go on long after the donor has passed away. In the past, the issue of succession was considered an intensely private subject for many families and it would have been inappropriate for children to ask about such matters. However, the report reveals the current trend is towards a more open society. Sometimes the children may force the issue by proactive questioning. The adviser’s input is, according to the NOP results, of significant importance as 65 per cent of those polled would look to that individual rather than a friend or relative as the main counsel when planning how to pass on their wealth. Whilst there was a recognised need for the professional adviser to be proactive, they also need to be careful not to subject the client to undue pressure. The adviser needs to be aware of the thin dividing line between technical and personal advice. It is all too easy for them to be drawn into expressing opinions on individual legacies, but they must judge when to question or challenge the instructions and when to implement. Clients want the benefit of experience but the adviser needs to exercise great caution and not influence decision-making. As a firm that regularly provides clients with help and guidance on the subject of succession and inheritance planning, we were pleased to note that the majority of the report findings did confirm our views. However, there were a number of interesting new areas that came to light, which we will be exploring with our clients.