Succession Planning

06 Oct 2021

Getting a feel of the big picture, drawing key people into the conversation, and being open and honest will make for a smooth family dialog during a handover.

“Succession planning can be an uncomfortable topic,” says Vivian Kiang, Head of Wealth Planning, RBC Wealth Management, Asia. She outlines how one can start a multi-generational dialog while maintaining harmony with loved ones.

The COVID-19 pandemic has encouraged many people to think more proactively about their health and the importance of being prepared for the unexpected. For enterprising and global families, succession planning and family governance have always been essential to successful wealth planning. But, the recent health crisis has been a reminder of how fragile life can be. This has pushed the importance of preparing for the future to the forefront of many family discussions.

Why is there a need for a succession plan?

You could leave everything untouched and unplanned for the next generation, but they will likely have a very hard time settling the estate, and this could create **** among family members as they go through the process of dividing up the assets.

We’ve worked with some clients who believe that they should leave things untouched for the next generation to resolve after their lifetime. While this is a personal choice, it’s important to remember that estate settlement can take years and there is often no closure until it’s complete. 

For example, a client may indicate in his or her will that all assets should be divided equally between two children. In reality, the children will need to reach agreement over how to divide the assets to reach 50 per cent. The portfolio may include apartments in New York and Hong Kong—but which value is higher, and what happens if one sibling wishes to rent one out and the other wishes to sell? These can turn into disagreements that drag on for years.

A succession plan can encourage family harmony because there's less ambiguity and less chance of an unpleasant surprise. Whether it is revisiting wealth plans to ensure they meet the current business and family realities across generations, or a family that is just starting to create a succession plan, here are some tips that may help kickstart the journey.

What are, say, top three things that one can do to start a conversation with the family regarding succession?

Think ahead and plan when to start the conversation

There isn't a perfect time for families to start a conversation. It depends on the family and its needs.

It may also be situational. For example, some families may have children residing overseas and as tax considerations come into play, the topic of succession planning may need to be discussed as soon as possible in order to prepare for the future.

Families need to keep the ages of their children in mind. We suggest including the next generation in the conversation when they are in their 30s and 40s so they know what's happening and understand the structure behind the plan and how it works.

However, engaging the next generation in discussion doesn’t necessarily mean speaking about how much wealth the family has.  In Asian culture, families rarely talk about dollar amounts.  The important point is for children to understand their parents’ wishes, which is more likely if they hear them first-hand. 

Understand the full picture of family wealth

Before discussing the actual structure of a succession plan and starting a conversation with family members, we recommend coming up with a family inventory that includes all assets and liabilities in order to gain a holistic view of the family's wealth.

While an inventory is an important tool for record keeping, we often find that clients only share with their children when they are already relatively old aged. The key is that children know where to find the relevant paperwork – including the inventory of assets and debts, and an approved will – when it’s needed. 

The next step is to review the type of assets they hold. Is it through a family business, bank accounts or property? It's also important to consider the location of these assets and how they are held. Assets are subject to the tax and legal laws of the location they are based in. Additionally, the structure used to hold these assets will make a difference to how they are transferred.

Families with their own businesses also need to consider the tax implications of selling or transferring it to the next generation, as well as approvals from the board or other shareholders that may be required.

Transparent succession planning

Being honest and transparent with wealth advisors on the topic of succession planning will enable them to explore viable solutions. For example, families should share information on future plans when it comes to purchasing assets such as a business or real estate. Different jurisdictions have different ownership rules, so providing this information early may help advisors give guidance on the appropriate financial structures that may be beneficial for their situation.

Ultimately, succession planning goes beyond just passing on wealth to the next generation. Maintaining an ongoing and open dialogue can help communicate everyone's needs and considerations, ensuring everyone is aware of what decisions are being made and why. These discussions are grounded in a shared understanding that may go a long way toward helping to maintain family harmony and manage family wealth.