Family offices today face new challenges—including higher costs, dealing with multiple family generations and more onerous rules and regulations at state and federal levels, according to an expert panel. A trio of executives from Wilmington Trust, in a panel discussion this week at the venerable firm’s New York offices, shared their insights on estate planning, family wealth and family governance. Wilmington Trust, headquartered in Wilmington, Del., was founded by the DuPont family in 1903, and today is a division of M&T Bank Corp., based in Buffalo, NY.
The panelists included Thomas C. Rogerson, senior managing director and family wealth strategist at Wilmington; Carol G. Kroch, managing director of charitable trusts and head of wealth and financial planning; and Linda Bourn, managing director, family wealth at Wilmington. Roger W. Hobby, president of Wilmington’s northeast region, served as moderator.
Rogerson addressed governance issues and the decision-making process in transferring wealth from one generation to another.
“Entrepreneurs, when they have a liquidity event, often take awhile to get to a destination wealth management organization like Wilmington Trust,” he said. “Usually they get beaten up by the brokerage industry, their registered investment advisors and their nephews beforehand. Our vision is to partner with the family long-term, with a multi-generational focus on the family.”
“It happens a lot that families don’t hold the family together,” he added, “and consequently they don’t hold the wealth together.”
Rogerson cited his own family’s experience as an example of what can go awry. His great-grandfather was president of the former Boston Safe Deposit and Trust Co., which had built significant success and wealth. He started the Boston Foundation and his estate plan had been designed to leave his wealth to his family, said Rogerson.
“I’m his great-grandson and it’s gone, not because of bad judgment and estate planning and investment management, but because of family-related issues,” he said.
Rogerson referenced a study in two books co-authored by Roy Williams and Vic Preisser, Philanthropy, Heirs and Values and Preparing Heirs, that surveyed 3,500 high-net-worth family businesses and found some 3,000 of them had failed at preserving their enterprises and wealth for more than two or three generations. When asked why, 60% said the failure was due to lack of communication and trust; 25% was due to unprepared heirs, and only 3% was due to mistakes in the planning and investment area.
This matches Wilmington’s own experiences in the wealth community, where many times the first time children get together as a group to make decisions about wealth is when they are settling their parents’ estates, Rogerson said. “That’s a bad time to learn how to make decisions as a group,” he said.
Kroch discussed planning opportunities around managing wealth, including tax, estate and trust planning. She urged wealth managers and advisors to take advantage of the “incredible window of opportunity” that’s open for wealth transfer by gifts through 2012, due to the enhanced $5 million gift tax exemption and extremely low interest rates.
She noted that as part of the recent extension of the Bush tax cuts, individuals can transfer $5 million ($10 million for couples) out of their estate, free of estate, gift or generation skipping transfer tax to their children or to trusts as benefits to such children.
Previously a person could pass only $1 million free of any federal gift taxes beyond the $13,000 per person annual gift amount, which could be given to as many people as desired with tax consequences. The window closes Jan. 1, 2013, and the exemption moves back to $1 million, unless further legislation is passed, she noted.
“You shouldn’t wait until the end of 2012 to walk into your lawyer’s office and start your planning,” Kroch advised. “The time to start your planning is now.”
The reason to start now, she said, is because it requires a complex set of decisions—for example, what to give outright or in trust, and what assets to give and how much.
She also urged wealth managers and advisors to take advantage of the increased tax exemption through a variety of vehicles, such as the perpetual or dynasty trust or trusts to benefit children or a spouse. Dynasty trusts exist in half the states, she noted.
In discussing challenges faced by family offices once a business is old, Bourn noted they face complex decisions around which functions to outsource, and which to keep in house. In terms of sustainability, operating a family office, she said, can cost between $1.2 million to $3 million annually, depending on the size or how extensive the office is. In addition, they face new rules promulgated by the SEC and the Dodd-Frank Act.
The advantage of using a destination wealth management organization like Wilmington Trust, she noted, is it can act as a trustee for family offices, and take on many functions, such as accounting, estate planning and tax issues the family office would otherwise have to deal with itself.