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Patricia Annino

Family business succession planning for the “lost generation”

The increased career life span of the older generation can lead to succession problems for the middle generation.

June 17, 2013
by Patricia Annino, J.D.

Perhaps no one knows better than Prince Charles does about the consequences of older generations now living longer and remaining competent far past traditional retirement age. Prince Charles may one day, at long last, become king of England. Or, thanks to Queen Elizabeth II’s longevity, the crown could eventually skip from her to Prince William. But no matter what happens in England, less princely families here in the U.S.—especially those in business together—should take note of the consequences of similar circumstances in their own lives.  

These days, in addition to the traditional risks of illness, death, or incapacity of a key family figure, the new risk to family cohesiveness is the impact of an increased life span on individual goals and life plans. Financial advisers can help clients address this new concern.

Is there a “lost generation”?

Indeed, the new longevity of the older generation, especially when it comes to that group’s working years, creates interesting questions for advisers and their clients. Is there now a “lost generation” of Baby Boomers who have worked their entire lives for a seat at the table that may never be theirs? How can advisers persuade families to talk about the problems this might create? And what are solutions to those problems?  

The increased work life span of the older generation can lead to the delayed succession of the middle generation in family businesses and in the increasingly common co-ownership of investment and commercial assets through family limited partnerships and limited liability companies. Or, with the older generation in good physical and mental health and working far longer, the middle generation may be knocked out of position entirely and never get its day in the sun. By the time the older generation decides to move along, the individual goals and life plans of the middle generation may have been passed by, and the baton may be handed off to an even younger generation instead.

Strategic planning and clear communication among all generations are needed to mitigate these risks. A first step is to initiate an upfront conversation with the family about what is going on and what it means. The longevity of the elder generation has financial consequences to the “lost generation” family member who may have been counting on the ascension to leadership to finally attain his or her financial goals through asset ownership and increased salary. If that “day in the sun” never comes, financial security may never happen.

From an overall estate planning point of view, it may make sense to “skip” the lost generation and transfer the wealth to the next generation that may have more desire to innovate and take risks. However, the financial security of the “lost generation” is a real issue that must be acknowledged, addressed, and handled so that the entire plan can move forward.

If there are insufficient resources to satisfy each generation’s financial needs and expectations, hidden conflicts and agendas can surface. The “next generation,” likely champing at the bit to take over, must understand that the middle generation and its financial expectations need to be addressed, and the senior generation also needs to understand that they must eventually pass the baton. Family members, however, won’t want to move aside for the next generation unless they know that they are set financially for the rest of their lives. This is fundamental to human nature.

Proper planning can help create financial security. “Successful succession planning can involve juggling personal financial considerations, retaining family harmony, reconciling the ambitions and expectations of particular family members and safeguarding the future of the business,” according to a summary in KPMG and Family Business Australia’s Family Business Survey 2011. One potential solution: By building a sustainable net worth outside of the business, the next generation is more likely to have the resources to buy, sustain, and grow the enterprise. Other family members who are secure outside of the business also have the additional luxury of knowing that the younger generation can take risks—and if the risks don’t pan out, their own financial security will be unaffected.

How to help the “lost generation”

The CPA as trusted adviser can assist in this new succession planning challenge by working closely with the family on a regular basis. Topics to discuss should include:

  1. Financial planning: As part of an annual review, discuss the net worth of key family members, particularly the net worth outside of the family business, and then help develop a process for evaluating each of their personal financial wealth and income goals.
  2. Communication: Each year, ask questions that bring these issues to the forefront: How long do you expect to be involved? When do you see succession happening? Is there an exit strategy?
  3. Multigenerational issues: Today, the concept of generational transfer is not really the right one—a middle-aged woman may be reentering the workforce at the same time as a 20-something man—and they each may have similar prior work experience. It is critical to understand the fluidity of traditional generational lines and the changing roles and expectations.
  4. Timing: Urge all family members to begin financial and wealth planning as early as possible. Also, help the family to understand that while the business is the main source of income and wealth for all generations, it is critical to view it as a “system.” Every action causes a reaction and can affect the plans of other key stakeholders. Life is a movie, not a snapshot. As life advances, business, planning, and financial requirements must also be adjusted.
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Patricia M. Annino, J.D., LL.M., chairs the Estate Planning practice at Prince Lobel Tye LLP. She is a Fellow of the American College of Trust and Estates Counsel (ACTEC).

The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy, and guidance for CPAs who specialize in providing estate, tax, retirement, risk management, and investment planning advice to individuals and closely held entities. All members of the AICPA are eligible to join the PFP Section. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist credential holder. Visit www.aicpa.org/PFP to learn more.