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Family Office Succession: Selecting the Right Family Members to Lead the Next Generation

Timothy Sullivan, CPA
June 17, 2022

What is a family office?

A family office is a centralized entity by which high-net-worth individuals and families with substantial holdings oversee their wealth management. It is like a private enterprise for the affluent that offers financial and investment management solutions, coordinates family initiatives, and supports the family’s multigenerational continuity.

Many family offices focus on charitable giving, tax services, and the transfer of wealth to future generations. Other services may include insurance, budgeting, and lifestyle management, with a dedicated team of professionals to advise and manage these services.

The family office operates much like a family-owned and -operated business, but its mission is to take the family fortune forward.

Multi-generational entities require succession planning

As with any family-owned business, succession planning is crucial for preserving wealth and fostering continuity. Choosing the next leader when the older generation retires can be fraught with emotion due to multiple stakeholders and family dynamics. For example, one child may feel it is his birthright to take over. Another may feel she is the most talented or qualified. Another may have no interest at all.

Criteria for selecting the family office successor

At Scheidel, Sullivan & Lanni CPA, we are often called upon to help high-net-worth clients evaluate the next generation(s) to determine who is best suited to move the family fortune and investments forward with continued growth. We recommend families include the following evaluation criteria:

  1. Do they have the desire to lead? Will they put in the time and effort required?
  2. Do they understand the business? (The investment portfolio, the charitable endeavors, and the interests the family office has.)
  3. Are they formally educated . . . and can they apply that college education to real-world situations?
  4. Are they open to learning and paying their dues? Taking over a family office (or business) is different from their typical day job. Members must learn how to manage the office’s real estate or other investments—and understand how these operate. They must be willing to learn all aspects of the business that comprise the portfolio.

Roadblocks to a smooth family office transition

One source of conflict is that the parents are not open to the younger generation’s new ideas, and are reluctant or unwilling to entertain potential changes.

Setting up the older generation’s financial interests for the foreseeable future or long term may also present conflicts. In some cases, the parents have not planned appropriately for their retirement and are counting on the family office to provide ongoing income for life. Or the retired parents insist on pulling out more money than the heir who is now running the operation, causing friction and imbalance between members.

Among the younger generation, the most qualified successor may be the least interested. Or the “chosen one” leaves because his or her ideas are turned down by other members, leaving a gap to be filled by less-qualified individuals. Another scenario we see is that the children squander the assets, leaving the older generation without the retirement income they’d planned.

For these reasons, third-party advisors with total objectivity can help assess the operation and the people—and provide honest input to the owner about who would be the best successor, and why.

How outside advisors can help

As a neutral third party, outside advisors bridge the gap between all parties when talking about money, skills and roles, and operations. When it comes to succession planning, they help by:

  • Assessing the younger talent pool
  • Determining who is best suited to various areas of the operation
  • Encouraging difficult conversations and decisions about money and the future
  • Creating long-term plans for wealth preservation and retirement
  • Designing compensation packages among successors based on their participation
  • Providing relevant agreements and business plan

To avoid issues of entitlement, disinterest, and conflicts among younger members, our management advisory team may counsel the parents to sell the business to the children to ensure they have a financial stake in its long-term sustainability and success.

From strategic planning to succession planning, for family offices or privately held businesses, the professionals at Scheidel, Sullivan & Lanni CPA provide a broad range of advisory and accounting services that help minimize tax liability and maximize asset preservation. Contact us at [email protected] or 201-236-2226 to discuss your needs.

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At Scheidel, Sullivan & Lanni, we can assist you with corporate tax planning, financial and estate planning, and provide management advisory services to guide business planning and strategic growth. Contact us to discuss your needs and set up 2022 for success at [email protected] or 201-236-2226.

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