Combining Strategy and Structure for Families
I got an email a few weeks ago, inviting me to an upcoming Family Office conference, and the wording of the subject line caught my eye.
Now that my thinking on the issue has gelled in my head, I’ll try to turn it into a useful blog post. Here goes.
Strategy AND Structure
Let’s begin with the email subject line, so that you’ll get the context:
“Essential structures & strategies from leading families”
The event itself was billed as a “Family Office and Investment Conference”, but the tease in the subject line had succeeded in intriguing me to believe that they might be talking about topics that are much more up my alley (i.e. family issues)
When it comes time to plan the transition of a family’s wealth from one generation to the next, a lot of effort is usually put into finding the best way to structure things.
There are many different ways to accomplish the goal of transitioning the ownership of assets from the current owners to the future ones, and the choice of which way to go will often be driven by the family’s advisors, who each have their particular favourite techniques and structures.
The family client relies on advice from these trusted experts, who are believed to know what they are doing, and strictly speaking, they usually do.
So what’s my issue with this? I’m glad you asked.
The “What” Shouldn’t Come First
A family faced with this scenario is really only going to do this once per generation, and few families are experts in knowing exactly what they want, or even knowing what’s possible.
The tactical experts who advise them are just that, “tactical”, they specialize in the “what”, and when a client shows up looking for help, the expert will almost always go back to the “tried and true”.
But what if they’re pulling an old structure off the shelf that they used before for another client whose situation was completely different?
Too few advisors will take the time necessary to explore the “why” questions with their client families, and to think in terms of the overall family strategy, in order to make sure that “what” they are proposing actually makes the most sense.
“Why” Should Precede “What”
It’s really useful for the family to have the important planning discussions amongst themselves to plan strategy before engaging the outside structure experts.
As I wrote back in March, in “We Treat Them All Equally – (That’s Good, Right?)”, these discussions are not necessarily done quickly or easily, but they sure are important and worthwhile.
You may be curious as to my selection of the image I chose to accompany this post, perhaps wondering “what’s with all the different tents”? Each of them is a structure, and they are all different, some of them markedly so.
Are We All In This Together?
In “Going Far, Go Together” I wrote about families that are planning to stay together for the long term.
What I didn’t stress at the time was the actual question that the family needs to clarify beforehand, i.e. does the next generation of the family WANT to stay tied together, and continue to work together as a shared ownership group.
Too often there is a presumption that the answer to this question is YES, and when that happens you can end up with siblings who are forced into partnership with each other.
If such a scenario is going to turn into a disaster because of the family dynamics, wouldn’t it be better to figure that out in advance, and not go down that road?
Strategy Before Structure
At the risk of harping on this too much, I’ll say it again. Before you decide on the best structures to hold the family assets for the next generation, the family needs to sort out the questions of who is on board.
It can be very tempting to choose a complex solution proposed by a tax expert who shows you to the penny how much tax you can save by going with their suggested methods, but if that solution means the next generation will be stuck in the wrong kind of tent for their trip, what was the point?
A huge tent built for the desert may not be what most of the family needs. Work out the strategy first.