Bank Of America's Study On Ultra-High-Net-Worth Family Businesses Shows Inadequate Succession

A new study sponsored by U.S. Trust, Bank of America Private Wealth Management finds that the majority of owners of ultra high net worth (UHNW) family businesses are leaving their professional and personal interests vulnerable through inadequate business succession, asset

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A new study sponsored by U.S. Trust, Bank of America Private Wealth Management finds that the majority of owners of ultra-high-net-worth (UHNW) family businesses are leaving their professional and personal interests vulnerable through inadequate business succession, asset protection and estate planning.

While these families are highly successful in building and managing their businesses, they are often less successful when it comes to transitioning their companies from one generation to the next, with only 15% of family-owned companies lasting past the second generation. Conducted by Prince & Associates, Inc. and Campden Research, the study surveyed 242 second- to third-generation business owners with interests valued at a minimum of $300 million, and mean value approaching $730 million.

These findings are part of a new study entitled Protecting the Family Fortune, one of the most comprehensive reports to examine the complex issues and behavioral traits informing succession and estate planning, and asset- protection strategies related to ultra-high-net-worth family businesses. The research uncovers the wealth planning areas these families need to address and provides the beginning steps for families and their advisors to consider when implementing sophisticated planning strategies.

“Owners of ultra-high-net-worth family businesses often have a team of advisors focusing on an array of needs such as wealth management, tax strategies and succession planning, without addressing the bigger picture. Given the near-term and long-term complexities with managing a successful family business, it is crucial that these families think about the wealth tied to their business and their personal fortune in a holistic, strategic manner,” says Chris Zander, managing director and head of the Multi-Family Office (MFO) Group, U.S. Trust.

The study identified two distinct groups based upon behavioral data: Business-focused and Family-focused. The Business-focused segment prioritises the needs of the business above those of family members. In contrast, the Family-focused segment uses the business as a mechanism for the family to prosper, and to address family issues. The study found that 38% of owners were identified as Business-focused, giving little consideration to family financial concerns when making business decisions.

“Business-focused owners of ultra-high-net-worth businesses tend to be more successful. This segment tends to own businesses with much greater net worth, as well as create and implement succession and estate plans in greater numbers than their Family-focused counterparts. While direct causality cannot be determined, the study revealed that far greater financial resources are controlled in circumstances where business decisions take precedence over family concerns,” says Russ Alan Prince, president, Prince & Associates, Inc.

The study revealed that while a large majority of owners of UHNW family businesses have wealth transfer plans in place, most of these plans – both professional and personal – have lapsed.

— While over three quarters (76%) of owners have succession plans, only

38 percent implement them, inadequately addressing issues of

succession

— Most individuals with succession plans in place are not focusing on

tax-mitigation issues (73%), even though nearly all participants(93%)

report a desire to lower the tax burden associated with transferring

the business

“Most family business owners do have basic succession, trust and estate plans; however, too often, they are sitting on shelves gathering dust. Not only do these families need to act on implementing and updating their wealth planning strategies, they need more sophisticated strategies to better protect their wealth,” says Mindy Rosenthal, managing director of Campden’s North American Business and co-author of the research.

A significant portion of owners of UHNW family businesses desire to maintain control of the business and are concerned with protecting their wealth, yet fail to create asset protection plans, which provide wealth structuring strategies that maximize tax efficiencies and mitigate risk.

— Almost nine out of 10 (89%) business owners were “very” or “extremely concerned” about protecting the family’s wealth

— However, nearly three quarters (73%) of them do not have asset

protection plans in place”Most owners of ultra-high-net-worth family businesses don’t implement strategies for asset protection in large part because no one has educated them about such options,” notes Rosenthal.

The treatment of estate planning mirrors that of succession planning, with the majority of owners creating estate plans without updating them often enough to keep them viable.

— Over three quarters (78%) of owners have personal estate plans;

however, 89 percent have not updated them after a life-changing event

such as marriage, birth or death rendering the plan obsolete

— More than half (54%) of participants lacking estate plans reported

difficulty dealing with their own mortality, and one quarter (25%)

cited a lack of time as reasons for not creating a plan

“The professional and personal financial concerns of this unique subset of business owners are more vulnerable to life events and legal proceedings, and must be addressed if they want to protect the financial security of the next generation,” adds Zander.

The study surveyed 242 second- to third-generation wealthy business owners with business interests valued at a minimum of $300 million and mean value approaching $730 million. The objective of the study was to examine the success rate of family-run businesses in the transition phase from one generation to the next and uncover wealth planning issues that urgently need to be addressed.

All of the businesses in the study are controlled by a single family owning at least 60% of the business. All owners are senior officers within their respective family businesses with a seat on the board of directors and a personal equity share of 10% or more. All owners are considered wealthy for the purpose of this study, with a personal net worth of at least $5 million outside the equity stake in the business.

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