From addressing cultural sensitivities to navigating complex tax landscapes, family offices must adopt strategic approaches to ensure a seamless transition of wealth and legacy.
Jordan Mimoun, director of business development at ARI Financial Group, explores the intricacies of success of planning for family offices, high net worth individuals, and their families.
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From navigating complex tax challenges to empowering the next generation, Mimoun offers invaluable insights into strategies for preserving wealth across generations.
The Growing Imperative of Succession Planning
Success planning is emerging as a crucial yet often underdeveloped component of wealth management for family offices worldwide. Despite the growing awareness of its important, many family offices fall short when it comes to creating comprehensive plans to ensure the smooth transfer of assets across generations. For director Mimoun, the reason is clear: an overemphasis on asset accumulation.
“Many family offices prioritise asset accumulation over preservation, as their clients are often in the wealth-building phase, focusing primarily on growing their portfolios,” Mimoun explains. This tendency, driven by clients’ immediate goals of wealth expansion, often leads to a lack of foresight when it comes to preparing for future transitions.
“It’s the responsibility of family offices to guide their clients toward a broader perspective—shifting the emphasis from wealth creation to wealth preservation. Succession planning plays a critical role in this transition,” he adds. By failing to incorporate long-term strategies, families risk jeopardising the sustainability of their wealth and the financial security of future generations.
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By GlobalDataCultural and Psychological Barriers to Planning
Succession planning, by its very nature, involves confronting difficult questions about mortality and legacy, topics that many individuals, and cultures find uncomfortable. This, Mimoun observes, is one of the most significant barriers family offices faces when introducing succession strategies to their clients.
“One significant barrier is the discomfort surrounding discussions about one’s eventual passing, which can make addressing succession planning a sensitive topic,” he says. Cultural norms play a pivotal role in shaping these sensitivities.
“In certain cultures, such as among our clients from Brazil, there is a tendency to avoid definitive language about mortality. Instead of saying ‘when I die,’ they might say ‘if I die,’ reflecting an underlying cultural belief,” Mimoun explains. This avoidance, rooted in deeply held traditions, requires family offices to approach such conversations with sensitivity and adaptability.
Mimoun emphasises the importance of thoughtful communication and cultural awareness: “Overcoming these barriers requires tailoring discussions to align with the client’s values while underscoring the importance of long-term planning. When clients see the tangible benefits of preserving their wealth and legacy, they are often more willing to engage in these discussions.”
Complexities of Transferring Private Assets
Private investments, particularly family-owned businesses, present unique challenges in succession planning. These assets often come with significant tax burdens, especially in the United States, where lifetime gift tax limitations can complicate wealth transfers.
“Transferring private investments, especially family-owned businesses, introduces significant challenges due to the lifetime gift tax limitation,” Mimoun explains. He illustrates this with a hypothetical scenario:
“For example, if a business is worth $50m, you can’t simply transfer it to the next generation without exceeding the lifetime gift tax exemption, which can trigger hefty tax obligations or eventually hefty estate tax obligations if there is no planning done. This makes the process far more complicated than many clients initially realise.”
Without proper planning, families may struggle to meet these obligations, leading to financial burdens for heirs. “In most cases, transferring such assets involves sophisticated strategies like structuring loans or sales rather than directly handing the business over,” he notes.
Strategies for Seamless Transitions
To mitigate these risks, Mimoun outlines a range of effective strategies:
- Use Trusts Early:
“Transferring assets into a trust before their value exceeds exemption thresholds is one of the most effective strategies,” Mimoun explains. A properly structured trust, created with the guidance of an experienced attorney, offers significant tax advantages.
- Asset Discounting:
“By applying valuation discounts, such as those for lack of marketability or minority interest, families can reduce the taxable value of their assets,” Mimoun advises.
- Leverage Life Insurance:
For Mimoun, life insurance is a cornerstone of effective succession planning. “While it may not always appear to be the cheapest option, it provides unparalleled value. It ensures heirs have the liquidity necessary to cover taxes and other obligations without forcing the sale of valuable assets.
The key to success lies in early and thoughtful planning. “Creating a comprehensive succession plan that ensures a smooth transition or trying to patch together temporary solutions that may fall short. Investing in a thoughtful and well-structured plan is always worth the effort,” he highlights.
Preparing the Next Generation for Leadership
One of the most significant shifts in succession planning is the growing involvement of younger generations in family leadership roles. Mimoun believes this trend signals a positive evolution in how families approach legacy planning.
One of the most significant shifts in succession planning is the growing involvement of younger generations in family leadership roles. Mimoun believes this trend signals a positive evolution in how families approach legacy planning.
“Younger business leaders are increasingly stepping into these roles, and with them comes a more proactive approach to planning for the future,” he observes. Factors such as increased access to information and a heightened awareness of the complexities of wealth management have contributed to this shift.
“Early and consistent involvement is one of the most important factors in preparing the next generation,” Mimoun advises. “Engaging younger family members in discussions and planning helps ensure they understand what needs to happen in the event of an untimely passing.”
Additionally, Mimoun encourages families to support the next generation in gaining external experience. “Another effective strategy is encouraging the next generation to gain experience outside of the family business before stepping into leadership roles. This allows them to acquire new skills and perspectives in areas like finance, law, or other relevant industries. When they eventually take over, they bring fresh ideas and added value to the table.”
The Role of Insurance in Succession Planning
Insurance is an essential component of ARI Financial Group’s approach to succession planning. For Mimoun, it serves as a critical tool for addressing the liquidity challenges that often arise when transferring wealth.
“There’s an inverse relationship between liquidity and net worth,” he explains. “Families with significant wealth often have a large portion of their assets tied up in illiquid investments. Insurance provides a unique and efficient way to deliver liquidity without disrupting long-term financial strategies.”
Mimoun also highlights innovative approaches like the “waterfall concept,” which involves insuring multiple generations simultaneously. “This approach is particularly advantageous for families aiming to establish a legacy of intergenerational wealth. It not only ensures that liquidity is readily available when needed but also helps mitigate the financial impact of estate taxes and other challenges, ultimately preserving and growing the family’s wealth for future generations,” he says.
Global Perspectives and Regional Nuances
ARI Financial Group’s global reach has provided Mimoun with a unique perspective on the regional differences in succession planning. He notes that legal and tax systems vary widely, shaping the strategies families must employ.
“For example, US tax laws impose global taxation, meaning assets located anywhere in the world are subject to estate or gift tax,” Mimoun explains. This contrasts with countries that lack inheritance or gift taxes, focusing instead on income tax.
Tailoring succession plans to meet the specific requirements of each jurisdiction is crucial. “Working with external advisers in order to understand these regional nuances is key to creating effective and compliant plans,” Mimoun advises.
The Future of Family Offices and Wealth
As family offices are projected to outpace hedge funds in assets by 2030, Mimoun predicts a fundamental shift in priorities. “When people invest in hedge funds, they’re typically focused on chasing returns. But when they hire a family office, it’s about something bigger – holistic planning. A critical part of that planning is succession planning. If a family office doesn’t offer strong succession planning capabilities, it creates an opening for another office to step in and take over that client relationship,” he says.
The industry’s evolution reflects changing client priorities. “Younger clients may still focus on returns, but their needs will evolve over time,” Mimoun observes.
To prepare for these transitions, family offices must build partnerships with estate attorneys, insurance experts, and other advisers. Mimoun emphasises the importance of proactive planning: “Investing in tools for scenario planning and educating clients on early succession strategies, including engaging the next generation, positions family offices as trusted advisors capable of addressing evolving needs and securing their clients’ legacy.”
Building a Legacy That Lasts
Succession planning is not just about transferring assets; it’s about preserving a family’s legacy for generations to come.
As the industry continues to evolve, one thing is clear: the most successful family offices will be those that prioritise comprehensive, forward-thinking strategies. By embracing these practices, they can ensure their clients’ legacies not only endure but thrive in an increasingly complex world.
