How to preserve wealth for future generations

With the largest ever intergenerational wealth transfer on the horizon, families need to strategically plan how to transfer their legacies

concept image of a older hand handing key to the younger next generation.

Vast amounts of wealth were created in Europe in the second half of the 20th century, accompanied by significant improvements in quality of life – a trend we are now seeing in Asia and the Middle East. But once wealth has been generated, the big question remains: how do we use and preserve it?

While wealth generation and preservation require two different skill sets, there are commonalities across both: thinking strategically and surrounding yourself with the right people.

The turbulence caused by Covid-19 has made many people realise that they should take a fresh look at their asset portfolios and lifestyles. The pandemic is also making people much more conscious of their own mortality, leading them to carry out not just medical but also financial health checks, rebase their financial position and get their affairs in order. These factors are likely to have a lasting and positive impact on wealth preservation.

Common pitfalls

Beyond diversified investment strategies to combat wealth attrition, there is one major planning consideration: intergenerational wealth transfer.

Individuals with a net worth of $5 million or more are expected to collectively transfer $15 trillion of wealth by 2030, according to research firm Wealth X. In the Middle East, it is estimated that around 16,700 millionaires will pass on wealth totalling $572 billion (Dh2.1tn) to the next generation over the next 10 years.

Even with so much at stake, we repeatedly see common errors that lead to missed opportunities and frustration.

There are those who simply start planning too late, waiting for the perfect time to maximise benefits. They typically avoid short-term risks but increase risk in the medium and long term.

There are also those who try to handle it themselves because they want full control or are unwilling to invest in expertise.

When family businesses run their course

It’s important to remember that some inheritors are expected to manage not just cash but also family businesses. For families whose primary source of wealth has been a business, it’s prudent to consider whether this is the best reserve of wealth going forward.

To preserve one’s current lifestyle, it might be necessary to extract capital from the business or sell – fully or partially – to ensure adequate cash flow. If pursuing the family business makes sense, and if the next generation is unwilling or unsuited to taking over the reins, seeking external leadership may be appropriate.

Paving the way for future generations

Preserving wealth for one or more lifetimes requires long-term, strategic thinking. With the largest ever intergenerational wealth transfer on the horizon, there has never been a greater need to plan how future generations will carry on their families’ legacies, preserving not only wealth but also values that create a positive impact.

For families whose primary source of wealth has been a family-run business, it's prudent to consider whether this business is the best reserve of wealth going forward

Philanthropy is increasingly important for families that wish to align their values with their wealth by focusing on, for instance, conservation, the environment, wealth inequality or culture. In light of the pandemic, the desire to use wealth to support those less fortunate may have become more relevant than ever.

Key steps to preserve wealth

Encourage open dialogue: Some things in life are difficult to discuss, such as death, divorce and remarriage, but they are relevant for wealth preservation.

Additionally, in cases where large-scale wealth generation has ceased, future generations may need to adjust their lifestyle as funds become diluted through inheritance. This kind of dilution is close to impossible to offset through investment strategies, so getting a realistic grip on what’s in store by involving all family members is the only way forward.

Be open to different views and values: Increasingly, we are seeing upcoming generations driven by different values. Younger family members are interested in making a positive social impact, for instance, through philanthropy or investments focused on environmental, social and corporate governance (ESG).

Wealth preservation then becomes a discussion about values and family legacy. Often, two to three generations are involved and this could lead to conflict if not handled delicately.

Professionalise your wealth management: A strong family governance framework can go a long way towards professionalising a family's approach to managing its wealth through family charters, councils or a wealth education programme.

Keep taxation top of mind: Managing one's tax situation is a cornerstone of wealth preservation – for example, understanding the intricacies of inheritance tax, particularly where multiple jurisdictions are involved.

Build family expertise to tackle complexity:

As shown in the 2020 Julius Baer Family Barometer, complexity is on the rise for global families. It has, therefore, never been more essential for families to have access to expertise.

It’s not uncommon to see family offices form organically around families, including legal, taxation, wealth planning and investment specialists, not to mention doctors and concierge services.

Roger Stutz is head of wealth planning at Swiss wealth manager Julius Baer