When can intergenerational planning go wrong?

1st February 2024

Passing family wealth from one generation to the next seems so simple. Nothing could be further from the truth.

We know that, on average, the wealth generated by a first-generation entrepreneur has typically dwindled to less than a third of its value by the time it is passed to the third generation down the line. How does this happen?

I am going to discuss the common issues that arise by looking at three different intergenerational planning settings: the rural farming community, owner-managed family businesses and blended families.

By no means are the issues that face families in each of the scenarios different. Quite the contrary: the themes display across all the settings. In sharing them with you, I hope to help you and your family avoid so many of the pitfalls.

In the rural community

Land is now seen as green gold in England and Wales. It is trendy from a lifestyle point of view and therefore attractive beyond the core value of farming. It can be desirable to hold for tax advantages and Agricultural Property Relief from Inheritance tax on death. It is also seen as a safe haven by investors generally. It means that even farmers with relatively modestly sized holdings are now wealthy individuals.

Intergenerational planning rural land-owning families nearly always boils down to a lack of clear communication between the older land-holding generation and the younger generation.

The lack of clear communication about the plan for the future is often for very good reasons.

Parents or grandparents may be waiting to see which offspring show an interest in farming the land and are hedging their bets. This can, perhaps oddly, fuel more competition between those with an interest. If, for example, there are two sons and both want to farm, what to do?

Parents may wonder how to divide wealth between a farming son and a non-farming daughter – and what are the consequences of not treating children fairly? What legacy will that leave and will the family all still get on after the parents’ deaths? Should parents skip a generation and leave assets to the grandchildren? If so, in what proportion?

In these cases, Will disputes often arise between family members based on the law of proprietary estoppel (which transfers land rights if someone is given a clear assurance that they will acquire a right over property, they’ve acted on that assurance and it would be unreasonable to expect them to go back on the assurance).

The difficulty is that parties become extremely entrenched, and the party who is farming the land doesn’t want the farm sold. Often, there is very little documentation left by the parents about what the plan was intended to be or why. The living parties are left to fight it out with lawyers. The end result can be a family torn apart, and relationships between the younger generations damaged or destroyed.

In owner-managed businesses

Many of the issues typically faced by family-owned businesses are similar to the issues found in farming families. There can often, thankfully, be more documentation and good structures in place, together with clear shareholding and accounting. Even so, even extremely successful and profitable family businesses can still face challenges.

How does the board or the controlling shareholder deal with those who have married into the family? Does the matriarch or patriarch have too much authority and will there be a power vacuum when they die? Do the leaders have Lasting Powers of Attorneys in place to allow other members of the family to function in the event of an accident or failing health? Can the board successfully transfer assets, typically the shareholding, in the company in accordance with the wishes of the deceased set out in a Will?

In these cases, poor planning can lead to Will disputes that disrupt operations and threaten the survival of the company. These situations can be avoided with clear business strategy planning and communication at regular intervals. Regular stress-testing is valuable and there should be plans in place in case of the unexpected death of key individuals.

In blended families

More and more families can accurately be described as a “blended”, by which we mean a family formed by two people who have a child or children from previous relationships.

The case I see most often in this context is where one party does not plan for or communicate how the family’s wealth will be divided between the second spouse or partner and the children from the first relationship. This can be the case even where the second relationship has lasted 20 years or more.

The dynamic between second spouses or partners and the children of the deceased from the first relationship can be very emotionally fuelled. A lack of clarity can therefore lead to considerable anguish and conflict. To avoid this, do not leave surprises, communicate your intentions and stick to them in your lifetime.

Prevention is better than cure

As professionals, we know that very few families think they will run into problems in intergenerational planning. Sadly, we see the same issues come up time and again.

The key to leaving a harmonious legacy and ensuring family wealth remains in the hands of those who you intend is clear communication and forward planning. You can also consider gifting wealth or property in your lifetime so you can be part of the solution and oversee the transition of wealth. This approach can often be a joy, and helps avoid tricky situations after you are gone.

Whichever approach you choose, it can help to ensure you successfully pass wealth, property and opportunity down to future generations.