In our last blog, we shared the cautionary tale of the uber-wealthy Vanderbilt family, whose fortune was squandered in several generations through a combination of over-spending, mismanagement, family expansion and lifestyle factors. If the descendants of one of America’s greatest industrial success stories can see their riches diminish in a few generations, then high net-worth families in Canada with far less capital are just as vulnerable to similar financial risks.
The Vanderbilt example reminds us that it’s prudent to look at wealth accumulation as the start of a long process of wealth preservation that can extend prosperity for generations—if it’s properly managed. It’s both a challenge and opportunity that involves strategic discipline and requires the support of an effective advisory team to help mitigate the impact of wealth-diminishing threats such as market risk, family conflict, tax liabilities and unforeseen liquidity events (think of a successful family business that gets derailed by industry trends or technological innovations such as artificial intelligence).
In other words, the families that succeed in building a legacy don’t rely on good fortune. They design and follow a coordinated financial plan that aligns with their unique family circumstances and goals. A pivotal aspect of this process is maintaining flexibility; the capacity to adapt to a shifting economic landscape and family dynamics. In that sense, crafting a legacy is about more than numbers on a balance sheet—it’s about the principles that shape a family’s identity.
Prioritizing tax planning and compliance
It’s no secret that tax laws in Canada are in constant flux. A key part of any wealth preservation strategy begins with effective tax planning and a focus on full Canada Revenue Agency compliance—and/or with the tax laws to whichever jurisdictions the family may be subject. That’s because maintaining properties or businesses abroad can generate complex layers of global tax liabilities.
Make it a habit to consult with qualified accounting and financial professionals who specialize in tax and wealth management. These experts can help you meet your tax obligations, while also helping to boost investment income, preserve estate value and protect capital gains. Leveraging tactics such as income splitting and prescribed rate loans (when conditions are favourable) or leveraging the Lifetime Capital Gains Exemption (LCGE) for qualified small business shares, can help minimize taxes owed.
So, too, can the use of family trusts to manage the transfer of wealth across generations. When properly structured, a discretionary family trust can fund education, support a family’s favourite philanthropic causes or investments in new ventures, while shielding assets from challenging circumstances ranging from divorce to lawsuits. Stay tuned for more on trusts in future blogs.
Remember that circumstances and goals change over time, and so should your tax plans. Whether it’s a new addition to the family, a marriage, or even a shift in your financial goals, tax and wealth generation strategies should be able to adapt to whatever life brings.
Focus on holistic planning
Developing a comprehensive strategy that unites family governance, financial, legal and estate planning considerations is crucial for fostering multi-generational wealth. By addressing every facet of wealth preservation and transfer, you ensure that no critical element is missed, which is vital for long-term success.
A liquidity event is just one example. The sale of a business, a large inheritance or an insurance payout can deliver significant wealth, but can also create costly tax liabilities and compromise reinvestment opportunities. Proactive planning and outcome modelling—managed in collaboration with qualified tax advisors and wealth managers—prior to a liquidity event can help to reduce risk.
Another aspect is developing a well-structured estate plan to ensure that your assets are distributed according to your wishes, providing peace of mind for you and your loved ones. That plan should account for potential family conflicts, because even the most closely-knit kin group can find reasons to squabble—especially when a substantial inheritance is on the line.
By establishing a family governance framework, it’s possible to treat wealth management like its own business, complete with rules, roles and family responsibilities. A family governance framework defines how decisions are made, how disputes are resolved, and how wealth is used. Regular family meetings and even preparing a formal governance charter can create alignment across generations. The challenge, as we noted in our previous blog, is that these important conversations rarely happen. And if they’re poorly facilitated, they can create more conflict than they resolve.
An intergenerational wealth education plan can complement a governance framework. Its goal is to pass wisdom around everything from investment management to business operations from one generation to the next. The plan can include basic financial literacy lessons around budgeting, cash flow management or tax compliance, while also underscoring the responsibilities of wealth stewardship, the family’s values, how capital supports the family’s goals and a rough guide to making responsible financial decisions.
A key point: Financial education should start early, ensuring your heirs are prepared to accept the responsibility that comes with inheriting wealth.
Lastly, an oft-forgotten part of wealth planning is developing a succession plan for the family business(es). It’s crucial to plan for future leadership, including key ownership and management roles. All too often, founder-led businesses fail to transition because successors were never adequately prepared or selected. If the next generation isn’t ready or willing to take over, a sale of the business or hiring of a third-party management team might be the right approach. A comprehensive shareholder agreement can outline exit strategy terms, and managerial roles, among many other considerations.
Maintain and update key documents
When it comes to compliance, legal documents such as wills, powers of attorney and estate plans are the cornerstones of wealth transfer. Wills dictate how your assets will be distributed, while powers of attorney designate who will make decisions on your behalf if you’re incapacitated.
These documents should be updated regularly, usually every five years, or after a major life event such as the sale of a family business or a marriage. Outdated wills can create serious tax problems, and they should reflect your wishes (including philanthropic preferences), business considerations and family dynamics.
Guardrails help preserve wealth
Real-life stories such as that of the Vanderbilts help to illustrate the severe consequences of poor family decision-making and wealth mismanagement across generations. The takeaway: it takes comprehensive planning and a proactive approach to make wealth multi-generational. After all, there are no guarantees that your heirs will build or grow the family business or manage family finances in a prudent manner.
That’s why it’s crucial to put safeguards in place to preserve your carefully constructed financial legacy.
Tony Sokic, Managing Partner
For assistance with your high net-worth tax, accounting and strategic financial needs, contact us today.
