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Most high net-worth families have multiple advisers covering everything from tax and investments to property and law. Traditum’s experts, who help families to coordinate their advisers, suggest some of the questions you might want to ask them.
1) Do we have a multi-generational strategy which is understood by all members of the family?
George Lyall says: With people living for longer, the typical family now consists of three or four generations. The clients we see often have children, grandchildren and elderly parents, all of whom will need to be considered for the purposes of estate planning – and that’s before they even start to think about the generations to come!
Each time wealth is passed from one generation to another, a 40% inheritance tax is incurred. Therefore, in some cases, it makes sense to skip a generation, for example passing from grandparents directly to grandchildren. Whatever strategy you decide on, it is important that you engage with the family, and ensure they understand the rationale.
2) How do we ring-fence assets in the case of a divorce or bankruptcy in the family?
Trevor Sherlock says: In any family, there are difficult or unexpected circumstances so be flexible and consider ways to ring-fence assets if necessary. For example, if one of your children has the potential risk of a marital breakdown, you may be reluctant to leave them money directly.
Instead, it may be better to put it into a trust set up for their benefit and that of their children and administered by carefully selected trustees. Provided it is set up correctly, a divorce court is unlikely to consider a trust as part of the couple’s assets and order it to be divided between the two parties.
3) Are our assets overseas correctly dealt with and how do the different rule interact?
Trevor Sherlock says: If you own property, investments or other assets abroad it’s important that the plans you make work in both jurisdictions as rules may differ. For example, the principle of ‘forced heirship’ which applies in Scotland and parts of continental Europe dictates that certain relatives including surviving spouses, civil partners and children have to receive a certain portion of your estate.
You need to take advice in both countries and be aware of how the different sets of rules interact. Many people don’t realise that a foreign will can completely negate their UK will. Make sure you get joined-up advice from both your legal and tax advisers.
4) Do we need a family charter – and if so, how do set one up?
David Mitchell says: A family charter, also known as a family constitution, sets the scene, outlining the family’s values, aspirations and responsibilities, especially in relation to the family business. Typically, it will specify how those involved in the business are rewarded, how decisions are made, and disputes resolved, but it can also cover wider issues such as the family’s approach to philanthropy, causes close to the family’s heart and what they hope to achieve via significant donations.
A family charter is essentially an agreement between family members that sets out clear rules and by doing so, can help prevent misunderstandings and conflict. If you don’t already have a charter, consider setting one up. Once complete, ensure your wills and other documents are aligned with it.
5) Do we have enough money available to do the things we really want or need?
David Mitchell says: Some families – in particular those who may have sold a business or inherited wealth – invest too much too quickly and then find they can’t access enough money to do the things they want to do later, such as taking a trip around the world or buying a dream home, or to cover family requirements such as funding children’s education or a wedding.
Always ensure that you have sufficient liquidity to cover your needs and protect yourself from any financial shock, otherwise, you may end up having to liquidate assets at a loss. Make sure your advisers understand your objectives and balance short-term needs with longer-term investment goals.
A detailed cash flow model will help you understand how realistic your financial goals are and your level of risk and volatility. When was the last cash flow analysis undertaken? Does it take account of risks such as inflation, and does it need updating?
6) Can you help me give money to charity in the most tax-efficient way?
George Lyall says: Families have the choice of entities to deliver on a philanthropic agenda. The traditional route is to set up an independent Charitable Trust (CT), but the minimum amount required is £5 million with set-up costs of at least £5,000; a set of accounts is required, and they are regulated by the Charities Commission. Trustees must be appointed with fiduciary responsibilities which not everyone wants to take on.
A Charitable Incorporated Organisation (CIO) is another route and more common with no registration requirements with Companies House. A CIO brings protection from personal liability.
They could also establish a Community Foundation via an existing fund or set up a specific fund in the family’s name which provides more control and input to where the funds are being distributed.
Another option is matched funding or partnerships. We are seeing more charities seeking partnerships with other philanthropists and charitable trusts are welcoming this approach. It doubles the funding, achieving stronger outputs and impact and reduces administration costs for both parties.
7) How do we prepare our children to manage the family wealth?
Trevor Sherlock: It’s difficult to decide when to involve children in the family finances but it’s important you have a plan to provide them with financial education and help them understand the practicalities and the privilege of managing the family’s wealth.
We encourage young family members to observe board meetings, off-site events, listen to investment advice, interact with advisers, and additionally, hear from their parents regarding the business’s five-year plan.
A family charitable trust can act as a training ground for the family business too; an opportunity to get under the bonnet and see what makes the family tick. They can also volunteer with the charities the trust supports.
Rather than become a Trustee with duties and responsibilities, which they may not be ready for, we encourage the next generation to take on ‘Ambassador’ roles. This provides a safe environment, enabling them to support the Trust’s objectives, undertake projects and embrace philanthropy from an early stage.
8) Do all our advisers know each other and act in a joined-up way?
Trevor Sherlock says: In our experience, a typical high net-worth family has between nine and 16 advisers across a range of disciplines from investment, private banking and taxation to private client, legal and property advice. Therefore, it’s important that they all understand your aspirations and are working to the same ends. It’s good practice to give them the same message at the same time, occasionally getting your advisers around the table to explain the family’s plan. That gives them the opportunity to ask questions and discuss it as a group and helps ensure they are taking a coordinated approach aligned with your goals.