Sustaining the family legacy across generations

Given the complexities and uncertainties of today’s world, it is vital that business owners remain not just one step ahead, but two or three steps ahead, and effectively plan for all eventualities. 

This decade marks the greatest transfer of wealth in history, with excessive amounts of accumulated wealth expected to pass on mainly to the next generation. Effective wealth transfer is a science on its own – comprehensive analysis and planning can surely play an important role.

More recently, increasingly the starting base of our conversations with private clients from around the world, is the wealth philosophy of the family. What is the purpose of their wealth and what is it going to be used for? This is the cornerstone of family wealth planning, which underlies great value in the process – setting the purpose of wealth jointly as a family creates a sense of alignment, commitment and ownership.

An extended agenda for family planning

Gone are the days when business owners on the private side only needed an emergency plan in case of death. Family planning encompasses contingency planning for various scenarios/risks, working with the family to address their needs and concerns as well as their objectives holistically. 

In acting proactively, families recognize the need to set up a sustainable, solid, yet flexible, framework for succession and wealth planning, asset protection and the next generation taking over as the new leaders of the family business and/or to manage the family wealth.

Family planning is an all-encompassing title for very complex and often sensitive planning. We consider the following to be of most importance when approaching family planning:

• Family strategy: connecting with the family and hearing the unsaid; what are the objectives of the family and how can the objectives be realised?
• Asset planning and protection: In which jurisdictions are the family assets and where are the family members and business located? What are the tax and legal implications of this arrangement and how can we improve upon this in light of the family’s objectives? Is there an exit plan if required? Are existing structures appropriate? Is there a need for additional structures e.g. Trust, Foundation, Company Limited by Guarantee, a Fund? Which jurisdictions make more sense for such structures?
• The day after: What are the most critical trigger points that need day after planning, e.g. death or incapacity of the principal or senior executives, war in the home country? What plans are or need to be in place to deal with these eventualities? If there are plans in place, is there a mechanism to revisit these regularly?
• Technology: Does it enable timely, transparent and upgraded communication on the family wealth and amongst the family members and with key associates (e.g. Trustees)? Does it ensure the family’s affairs are private and confidential? Have we considered how to best tap into the benefits of technology in how our family office/family business operates in terms of digitalization, process automation etc.?
• Philanthropy, ESG and impact investing: how can the family give back and become more socially responsible in their investments, whilst creating and sustaining the family’s legacy?
• New modus operandi for a model of leadership succession planning: Integrated succession planning, where the integration and the preparation of the next generation/non-family leaders start early on, way before the patriarch passes on management control. Important questions to consider include: 

• What are key positions that need to be taken up by non-family? 

Can shareholding be open for non-family?

• When and how can children be developed to be good stewards of the family wealth? 
• Do they deeply understand how the family created its wealth and how capital moves within systems created by elders? 
• How will they know if they are good stewards, even if they decide not to take an active role in managing the family business/wealth? 
• What are key positions that need to be taken up by non-family? 

Can shareholding be open for non-family?

Considering a bit more structure

As circumstances get more complex, families realise that some structures can be really helpful when it comes to discussing sensitive issues – such as ownership (entry and exit), rights and responsibilities, conflict resolution etc. This is where family governance comes in – it can help hold things together and foster amongst others transparency and accountability. It is not an exaggeration to note that many times poor levels of trust and communication are a big part of intergenerational wealth transfer failures. 

Examining the options on governance mechanisms in a participative way that best fit the specific family, opting for simplicity and flexibility (unless required otherwise), regularly taking stock of how effective these processes are and adjusting as necessary, are some practical considerations. Best practices include a Family Constitution, a Family Council (with possible functional sub-committees e.g. Philanthropy and Remuneration Committees), Shared Purpose/Values, Shareholders’ Agreements and Board Constitution for the Family Office/private structures, family meetings/retreats, family employment/assessment policy, conflict resolution policy, ethics policy.

The role of a family office and Cyprus 

For decades now we’ve seen families in the West running a family office. Increasingly we are seeing families in other parts of the world follow this route.  In fact, a Family Office is considered to be a very effective Family Governance structure. 

Every family is unique and if you’ve seen one family office, you’ve seen one family office. Nonetheless, and despite the size of a family office, we see the key customary objectives of a family office to be: effective family planning tailored to the evolving needs/circumstances of the family, greater control over their wealth and handling family affairs. A family office can evolve into a powerful ecosystem of the appropriate governing bodies, contingency planning, succession and estate planning with one ultimate goal – to successfully carry the wealth and legacy of the family into existing and future generations.

Cyprus is increasingly a preferred jurisdiction for a second base. Many see Cyprus as a great and safe place for family members to potentially use as a personal base at some point in their lives, with excellent educational and health facilities, cosmopolitan and with a relatively well-handled pandemic. 

EU membership, English-based law, stability, strategic location, reasonable taxation and a wide treaty network, investor and business-friendly immigration rules, options on succession planning and asset protection structures (such as the Cyprus International Trust, Cyprus Funds, Cyprus CLGs), and high-quality professional services at competitive rates compared to other EU jurisdictions are some of the key corporate benefits of Cyprus. 

With close to 50 years of experience supporting family businesses / HNWIs from around the globe, we know that the business and family wealth is their legacy. Carefully assessing risks and eventualities, options from various angles to allow HNWIs to make the best decisions for their family and their enterprise, is key in supporting them to look into the future, drive growth and safeguard their legacy.

Phryni Yiakoumetti Mina is the director for private wealth services at PwC Cyprus