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Preserving family wealth: Educating children and preparing for their new spouse

In response to the rising divorce rate and increase in blended families, Paul and Wes Karger, of US-based TwinFocus Capital, offer their insights for educating children on how to preserve exceptional family wealth.

In response to the rising divorce rate and increase in blended families, Paul and Wes Karger, of TwinFocus Capital, offer their insights for educating children on how to preserve exceptional family wealth.

The matriarch and patriarch of a family might debate at what age they should start discussing wealth with their children. But what most parents overlook is that their own financial education needs to come first. This is especially true for families that own and operate businesses, as their finances and balance sheets are generally more complicated and the internal rates of return of owning a business are often much greater than the returns that would be realised with diversified investment holdings in capital markets.

Once parents have a firm understanding of their finances, they can set plans in motion to help educate their children on preserving family wealth. This typically involves conversations about how to pass the family business from generation to generation with minimal friction and disruption to its underlying governance. Given the rising divorce rate and increase in blended families, this education needs to extend to spouses of their children as well. Here are a few best practices to consider:

Educate early

High-net-worth families often have complicated balance sheets and asset structures. For children to understand the extent of family wealth, it is important they engage in financial planning exercises early. This may include open dialogue with their family office manager on budgeting while in college or demonstrating the power of compounding by saving money in retirement accounts as soon as they have earned income and are eligible to contribute to such programs. As heirs of a private closely held business and or portfolio of assets, it is essential kids are educated in wealth succession, transfer and spending, and have solid role models instructing them. Children develop the fundamentals for this early on, so be sure to start building the foundation when they are young.

Establish trusts with forward looking provisions

Parents can take preventative measures by crafting specific provisions within their trust agreements to ensure wealth preservation. This might include requiring children to have their spouses sign prenuptial agreements to benefit from trust distributions, whether they include special shares in the closely-held family business, or other assets. This can also include providing the trustee(s) with the necessary discretion to make such decisions for the children.

Well-designed trust instruments can also protect children from external forces, such as unwanted creditors or other third parties, such as disgruntled spouses, which might otherwise threaten the corpus of the trust that includes a family business.

Keep the family business in mind

Free cash flows from businesses are typically distributed to the owners, providing little incentive for family members to sell their shares. These distributions can be used to create a liquid investment portfolio of private or public equities to diversify the concentration risk inherent in the closely held businesses. It’s important children understand how to manage these assets, as there is a lot at stake including strategic decision-making and the management of employees.

One option is to grant children non-voting interests in the operating agreement. This allows children to enjoy the economics of the underlying business, while avoiding future governing issues, particularly if disgruntles spouses are successful in obtaining some of these shares.

Talk to significant others before you join the family

While this can be an uncomfortable conversation, it is essential that those about to join the family are aware of the magnitude of wealth and are on board with all family policies. Prenups should be discussed in any serious relationships, and children and their perspective spouses must understand that they are in a fortunate position to benefit from family wealth over time, and by the request of the benefactors, must undergo a certain level of marital, tax and estate planning. As these talks transpire, it is important that prospective spouses realise if they want access to funds, they will need to conform to what the family trust designates.

For most families, the patriarch and matriarch’s objective is for wealth to remain in the family from one generation to the next without being burdensome. This requires extensive planning, which starts with the parents, extends to the children and their spouses and trickles down to future generations. It is never going to be a walk in the park, but by keeping these best practices in mind, it might help your family extend wealth for generations.


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