A lack of tailored succession planning can cause otherwise healthy family businesses or lucrative assets to rapidly drop in value. Failing to nominate an active, suitable successor will make it harder for a family’s business to maintain its value, or even survive, through the difficult handover times. When coupled with the repayment of debts and liabilities or expenses to replace a key person, the impacts of a poorly planned succession can quickly become significant. Succession planning is a crucial step in protecting wealth for future generations.
A lack of succession planning is never positive, but it can be particularly negative if significant assets are passed down during turbulent markets. Even in periods of high growth, a family’s wealth can quickly be eroded if the wealth transfer to the next generation is managed poorly. Should assets fall into the hands of multiple heirs with very different ambitions, they can end up stagnating due to familial stalemate. When economic uncertainty is added to the mix, the results can have a huge impact on a family’s ability to maintain its current lifestyle and pass on assets to the next generation.
Succession planning is about more than setting out a process for the transfer of assets. When done effectively and with the right wealth planning tools, it not only provides peace of mind but helps heirs understand and prepare for their new role. Taking the time to lay this strong foundation is always important – particularly if a family business, properties or valuables collected are involved.
Protecting wealth in difficult times
The idea of wealth protection is likely to be high on the list of priorities of wealthy families across the world. Preparing a succession and the handover of a business to the next generation can be a fraught and challenging process. Families want a fair transfer of wealth to all heirs while business owners are looking to retain leadership control, avoid loss in turnover and keep the business financially stable. If illiquid assets are part of the legacy, the division of assets also needs to prevent an untimely or unwanted sale. When you add an unexpected death or a poorly planned succession to this already volatile mix, it not only creates high levels of stress – but loss of wealth too.
Succession planning often involves sensitive discussions and family dynamics can come under threat if people feel unfairly treated or if the next generation may not have the same vision, leading to disagreements about the future of a business.
But when flexible succession plans are in place, decisions do not need to be final. Owners can make plans that suit family dynamics today while protecting the future of the business.
A life insurance-based solution offers a great flexibility. Beneficiary clauses can be adapted over time so that the succession plan can be reviewed and amended if required.
The fragility of unprotected wealth
The current market environment underlines the need for effective succession and wealth planning for individuals looking to ensure the continued prosperity of their family. Wealth erosion can happen quickly without proper protections in place. There are significant risks when sudden deaths occur or when a family business or illiquid assets are transferred to multiple heirs.
Without a succession plan in place, there is a risk that wealth-eroding events could quickly escalate and cause more damage than they otherwise would. For example, if a business has not been correctly prepared for a transfer to the next generation, there could be a significant loss of wealth when the time comes to settle in the new owners, possibly pay out the heirs of deceased business partners, or cover liabilities.
A lack of succession planning also increases uncertainty, which can be damaging for both the business and the family. But if there is a succession plan in place, it needs to be flexible enough to allow for a review if required and avoid paralysed decision-making.
A sound liquidity solution can provide the security and freedom that both family and business need. On the one hand it can provide the family with capital to pay debts without having to sell the business, giving them the flexibility to make decisions about its future. On the other hand, it provides the business with an injection of liquidity to ensure stability for creditors and to manage cash flow in times of change, helping to protect the business in times of succession.
Laying a strong foundation for intergenerational wealth
Proper succession planning is the only way to shield your family’s wealth from erosion in the difficult times of a succession period. Integrating liquidity-generating life insurance solutions offers several invaluable benefits.
Ensuring sufficient liquidity is available during succession offers peace of mind to the heirs or successors. It means that a family or business’s position and legacy are well protected, and prepared for a smooth transition when the time for change occurs. It also significantly reduces the stress and uncertainty typically associated with such major changes by helping heirs grasp their future responsibilities. It gives them and the rest of the family security and peace of mind.
A well-crafted succession plan lays a robust foundation for the next generation. It equips them with the tools necessary to not only preserve but also enhance the family's wealth, even in the face of adverse global circumstances. It’s a protective shield, safeguarding the family's wealth and ensuring its continued freedom of choice and prosperity for generations to come.
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