Thursday, 30th November 2023

The high cost of failed wealth transfer

By Kemi Ojenike
30 August 2023   |   2:41 am
Think of a hardworking founder of a highly successful enterprise. With significant labour, sacrifice, and commitment, they have achieved significant success. As they advance in years, their deepest desire is for the product of their labour...

Think of a hardworking founder of a highly successful enterprise. With significant labour, sacrifice, and commitment, they have achieved significant success. As they advance in years, their deepest desire is for the product of their labour to be transferred seamlessly to the next generations. They want their wealth to not only provide their descendants with life’s comfort but to serve as a catalyst for them to build their own success. They want the enterprise to continue thriving, creating numerous jobs, and supporting the livelihood of several families.

More importantly, they want their family to be strong, united, and at peace. This is the image of successfully transferred wealth. It’s an achievable goal, yet one that remains elusive for many.

Every now and then, we hear stories of members of a wealthy family in conflict over the control of family assets after the passing of the family head. Such stories are so dramatic that they have been the subject of films, books, and other entertainment pieces. Behind the drama is a real trail of broken relationships, enterprises grounded to a halt and lives negatively impacted.

These conflict situations are reflective of a breakdown in the transfer of wealth within that family. And while it may have resulted in court cases, rivalries, and broken relationships, the impact of failed wealth transfer is more dire than we realise.

The Institute for Preparing Heirs estimates that roughly $68 trillion will be transferred from one generation to the next by 2030. This means the control, decision-making, and utilization of significant assets will change hands.

Successful wealth transfer involves smoothly and responsibly passing financial and non-financial assets across generations, ensuring their optimal use without risking the family’s well-being. The following are signs that the wealth transfer process has not occurred seamlessly:

Family disputes: Ongoing conflicts and disputes among family members, especially over assets and fairness in the wealth transfer process indicates misalignment that can degenerate into deep discord within the family.

Lack of communication: Inadequate communication about financial matters, goals, and expectations within the family can lead to misunderstandings and conflicts during wealth transfer.

Financial mismanagement: If heirs struggle to effectively manage their resources, make poor financial decisions, or lack the necessary financial education, it may be a sign that they are not prepared for the wealth transfer process.

Absence of clear structures and plans: When the patriarch or matriarch omits to create a well-documented wealth transfer plan, the lack of preparation increases the possibility of conflict, unmet expectations, and discord when they are no longer able to steer the family ship.

The impact of poorly executed wealth transfer can be easily overlooked because they may take time to materialize. However, the consequences are no less dire. Let us explore a few:

Generational opportunity gap: When wealth is ineffectively transferred, it can create a significant opportunity gap between generations. Heirs who are not adequately prepared to manage their inheritance may struggle to build their own wealth, leading to a cycle of financial dependency, low productivity and missed opportunities for growth.

Impact on Wellbeing: Failed wealth transfer can lead to both the erosion of social bonds and significant mental health consequences for family members. Family conflicts and disputes arising from wealth transfer issues can weaken community trust and foster isolation. Additionally, the stress, guilt, and resentment stemming from these conflicts can result in anxiety, depression, and strained relationships that extend beyond the immediate family circle.

Failure in Commitments: When conflicts deepen in the process of wealth transfer, attention is usually focused on the protection of individual interests. Often, commitments to important causes will not be prioritized, and the cascading effect of this will be felt by beneficiaries of these commitments. Failed wealth transfer therefore leads to reduced philanthropic contributions, impacting nonprofit organizations and initiatives addressing societal issues.

Impact on local economies: Wealthy families often invest in local economies through businesses and community initiatives. A failed wealth transfer can reduce such investments, potentially affecting local employment opportunities and economic vitality. Inadvertently, livelihoods are disrupted, education for children stalled, and more individuals are faced with the reality of poverty.

Lost Values and Lessons: When non-financial assets are not successfully transferred, the coming generation becomes susceptible to repeating the same mistakes of the past. They lose the benefit of learning from history or building on the experiences of others before them. Even more tragic is the reality that the triumphs and successes of the patriarch and matriarch become buried in a sea of avoidable conflict .

Successful wealth transfer is more than just the transfer of assets. It is the continuation of values, dreams, and stability across generations. It begins with a clear vision and well-defined objectives. Effective legacy planning ensures a seamless transition, supported by open communication and financial education for heirs. Diversification and tax-efficient strategies are deployed to safeguard and grow financial wealth.

Professional guidance is essential, providing expertise in navigating the complexities of the process. Contingency planning and attention to the emotional dynamics within the family are equally important, ensuring unity, responsibility, and a shared vision.

The process does not end with the transfer. It is an ongoing commitment to monitoring and adapting to changing circumstances and evolving goals.
Ojenike is a Family Wealth Advisor with Meristem Family Office.

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