Wealth management for families

SUMMARY

Preserving wealth for the benefit of future generations presents many challenges. But some families have passed on wealth for multiple generations by following key disciplines.


Generational wealth: Ensuring your legacy lives on

What would you like to happen to the wealth that you have worked so hard to create?

For almost every ultra-high-net-worth (UHNW) individual, the answer lies in securing an enduring legacy for their families, present and future.

This involves both preserving and growing wealth, then passing it efficiently to successors, whether as lifetime transfers or thereafter. Assets transferred in this way form what is known as “generational wealth.”

Over time, though, these sorts of enduring legacies have been the exception rather than the rule. Notoriously, even great wealth has typically failed to survive for three generations beyond its creation.

There are many reasons for this unfortunate outcome. Mismanaged investments, unnecessarily heavy tax liabilities, imprudent borrowing, divorce, litigation and unprepared beneficiaries are among the factors that can cause wealth to dissipate rather than endure.

Such outcomes are not inevitable, however. Citi Private Bank has worked with families who have avoided the “three generations curse.” We observe that these families tend to have common characteristics. They communicate well and trust each other. They have shared values and a long-term vision. And they take a systematic approach to preserving and growing their wealth. Put simply, they leave nothing to chance.

So, what are some of the main elements of their approach and how might you put them into practice? 

 

Why wealth planning is critical

The quest for generational wealth demands generational thinking and actions. 

Wealth planning – establishing strategies and structures that seek to preserve wealth and ease its transition to the next generation – is at the heart of this.

The process begins with setting out precise goals.

These will include identifying who is to benefit from your wealth, when, and in what ways. The plan will also consider your current situation: assets, liabilities, cash flows, risks and more. Based on these critical elements, a plan can be customized for you.

This plan can encompass your entire wealth, including business holdings, investment portfolios, homes, art and other treasured collections.

Appropriate structures – such as trusts – can be set up to hold these assets. And specialists can help administer them according to your wishes.

Of course, no plan is foolproof. In our experience, though, individuals who have followed comprehensive wealth plans have been much likelier to pass on their wealth to their desired beneficiaries confidentially, tax efficiently, and smoothly. 

By contrast, there have been many prominent cases where UHNW individuals have undertaken little or no wealth planning. Large tax bills upon transfer, conflict among beneficiaries, multi-year lawsuits, and highly unwelcome publicity have typically followed. 

Given such consequences, why do some UHNW individuals fail to plan? Rather than a single reason, inertia, lack of time, unawareness, and reluctance to face delicate issues can all play a part.

However, we believe the lesson from leading families is clear: having a thorough and dynamic wealth plan is essential to securing generational wealth.

 

The case for long-term investment portfolios

Many of the clients we serve originally created their wealth through a single, successful business.

However, few of those who have maintained wealth over multiple generations have done so by relying on such a company. Instead, they have typically built core investment portfolios.

A core portfolio is designed to hold most of a family’s wealth aside from business holdings, homes, yachts and art. It aims to preserve and grow wealth over time ahead of the rate of inflation. Potentially, it can help also help meet current income needs, as well as diversifying business and other risks.

A thoughtful core portfolio is not just any collection of investments.

Instead, it can, according to objectives, be comprised of a carefully selected mix of asset classes from around the world: equities, fixed income and cash. For suitable and qualified investors, it may also include private equity, real estate and hedge funds. The resulting mix is kept fully invested for the long term.

Despite the compelling case for building fully invested, globally diversified core portfolios, some wealthy investors take a very different approach.

A common behavior is holding a large amount of a portfolio in cash. While this can feel comforting – especially when equity markets are falling – it has proved costly. Cash-heavy portfolios have generally underperformed fully invested portfolios over time.

Ultimately, we believe that fully invested, multi-asset class core portfolios offer the potential to augment generational wealth in the long term.  

 

Preparing successors to become worthy wealth owners

Significant inheritances come with great responsibilities. These may include controlling a family business, contributing to family philanthropic activities, and preserving family wealth such that it can be passed on to yet further generations.

Readiness for such responsibilities rarely occurs naturally, however. And without care, children of wealthy families can develop a sense of entitlement and unhealthy habits such as spendthrift behavior.

For these reasons, prominent families create a framework for preparing their successors. This starts with talking to children about family wealth while they are still young, imparting family values, helping to nurture good judgement and self-awareness, and reinforcing a sense of obligation to family business employees, community and society.

Naturally, the necessary conversations, education and planning demand consideration, while some families may find them awkward. For this reason, many work with their family office and external consultants to design and implement a formal program. 

 

What is wealth management for the family?

Preserving generational wealth is a long and continuous journey. However, it should not be a solo mission. Instead, most families who succeed in it work closely with a private bank and others to pursue their goals. 

Family wealth management questions

Few families start planning to transfer wealth to future generations until a change is imminent, such as when the family leader’s health deteriorates. Rushed actions can give way to less effective strategies and suboptimal outcomes. From our experience working with wealthy families around the world, we identify several best practices from those who have successfully executed wealth transfers.

Having created or inherited significant wealth, be it tens of millions or tens of billions, parents inevitably face the issue of discussing and preparing their children or grandchildren for the responsibilities it entails. We believe a comprehensive framework for engaging children around matters related to family wealth, regardless of age or maturity, is based upon two foundational precepts.

A private bank or private wealth manager can provide high levels of personalized service and access to sophisticated opportunities that may not be readily available elsewhere.

Every institution has its own eligibility criteria for their services. Citi Global Wealth is a single, integrated platform serving clients across the wealth continuum, from the affluent segment to ultra-high net worth clients. Citigold is tailored for clients with more than $200,000 in investible assets and Citigold Private Client is for clients with more than $1 million. Citi Private Bank has a minimum investment level of $5 million USD and a net worth requirement of $10 million USD.

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Based on the information provided, we believe that a Citigold relationship may be most appropriate for your needs.

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