Succession Tips and Traps

By Randall Krebs, Director, Harbour International Trust Company, Bermuda. (29/08/2017)

Stating the Obvious

How families prepare for the transfer of wealth to the next generation impacts whether family wealth will last beyond a single generation. Will the family’s fortune be lost as the family is torn apart in a war over control or distribution of the family assets? Will the next generation squander the fortune? Alternatively, will the current generation successfully transfer both its wealth and expertise/knowledge/values, thereby increasing the probability that future generations will protect and preserve wealth, drive economic growth and give back to their communities?

In 2005, Williams and Preisser conducted a study of 3,250 families who had transferred wealth.   The study provided clear statistical evidence that the old adage ‘shirtsleeves to shirtsleeves in three generations’ is true. The study showed that 70 per cent of family wealth disappeared by the end of the second generation and 90 per cent was gone by the end of the third generation. More importantly the study identified some common characteristics of those families that were unsuccessful in transferring wealth:

60 per cent failed to establish an environment of trust and communication in the family, which resulted in a failure to engage in post-transition planning and a failure to prepare the next generation.

25 per cent failed to engage in succession planning.

15 per cent of the failures were due to tax, legal or other causes.

By comparison, the 30 per cent of families that had successfully transferred wealth had prepared their children and grandchildren to inherit. They utilized a structured/planned approach that educated the next generations to give them the skills they would require to manage and grow the family’s wealth, and they had instilled in their children the family’s mission and social responsibilities.

‘Do what I say, not what I do’

Many would say that the study’s results are obvious, the solution is simple. Unfortunately families are finding it difficult to put into practice the behaviour that will help to ensure family harmony and a continuation of the family’s legacy. Royal Bank of Canada’s 2017 Wealth Transfer Report shows that very little has changed in the 12 years since the 2005 study.

The RBC Report surveyed 3,105 wealthy individuals from Canada, the United Kingdom and the United States. It showed that the current generation knows the importance of preparing the next generation for the transfer of wealth. It showed that the current generation had every intention of preparing full succession plans that involved education of their heirs. Unfortunately, it also showed that there was a remarkable gap between intention and action – the result being a general failure to prepare the next generation. 

Some key findings of the survey:

• Only 26 per cent of all respondents have a full strategy in place to transfer their wealth to the next generation.

• The per cent is actually lower for first generation wealth where only 15 per cent have prepared a full wealth transfer strategy.

•  Only 35 per cent of the next generation are prepared to receive the wealth.

•  The average age that education starts for the next generation is 27.

• The average age of inheritance is 28 years.

‘A wise father gives his children his tools before he dies; a very wise father shows them how to use them.’

In the next decade UHNWIs will transfer US$3.9trn to the next generation. It would be irresponsible for advisors to ignoring the staggering 70% failure rate. The studies show that this is a problem that families cannot solve on their own.

In recent years, Bermuda’s private client industry has seen a greater interest in family governance, family constitutions and family offices – the tools that can be used to fix the problem. The process of creating a family governance system and family constitution promotes an environment of trust and communication, which the studies have shown are key to the successful transfer of wealth between generations.

Family offices can be amore effective tool to ensure a successful transition. A current example is the new seventh Duke of Westminster, 25-year-old Hugh Grosvenor. He will not only inherit the £9 billion family fortune, but also the family office, ‘Grosvenor Estate’, established by his father in 2000.  Grosvenor Estate, through its key operating entities, includes over 1,200 people from different professional disciplines (property, land management, accounting and finance, IT, human resources and marketing) and very different cultures (Europe, the Americas and Asia). 

The family office is typically an enduring structure that will manage the family’s investments/assets, be the management consultant to the family, reconciling conflicts, coordinating professional advice and managing the development and implementation of strategies to addressing changes in the family or environment. It also commonly provides administration, facilitates family communication and provides financial education for the next generation.  The intention is that the family office will continue to provide support to the next generations.

In the simplest form a dedicated family office will be headed by a senior executive, well known to and respected by the family, typically an individual with an accounting or legal qualification. An investment analyst would be engaged, together with support staff consisting of a bookkeeper and personal assistant/secretary. Larger offices will generally have greater investment depth, and may have specialists in other areas related to the family’s assets or investments (e.g. real estate).

Alternatively the family may look at less expensive options such as multi-family offices, the family office unit of a trust company or private bank, or a virtual family office.

Location of the Family Office

When selecting a jurisdiction for the family office, important considerations include accessibility to the family, stability and good local professional infrastructure. Tax, regulatory and reporting considerations may also be important (e.g. Financial Services Act, Investment Management Regulatory Organization Rules, CRS/FATCA).  Where the family’s holding structures include trusts and companies in IFCs, consideration needs to be given to whether locating the family office in a high tax jurisdiction will subject the asset holding structures to higher tax rates.

Some of the traditional locations include London, Geneva/Zurich, or Monaco, but Bermuda is also a jurisdiction that ‘ticks the boxes’.

Accessible to the family

Bermuda is located in the North Atlantic, with easy access to major financial centres like London, New York, Miami and Toronto. Flight times are less than two hours to New York, Boston, Philadelphia, Baltimore, Washington and Charlotte. Three hours or less to Toronto, Miami, Atlanta and Chicago. Travelers to the United States will clear US customs in Bermuda, reducing total travel time by avoiding the long lines, especially in New York and Miami.

Bermuda is a particularly attractive base for multi-national families whose children may be attending schools in the United States and Canada. Since it is close to, but not in the United States, it may prove to be an ideal location for families concerned about the Trump administration’s plans to tighten immigration policies.


Bermuda is the oldest self-governing British Overseas Territory, with a political system that provides stability and consistency. Its parliament held its first session in 1620, making it the third oldest continuous parliament in the world. It uses English common law and principles of equity, with recourse to the UK Judicial Committee of the Privy Council. Bermuda continually updates its legislation to introduce sensible, progressive and innovative solutions for private client applications. For example, it was a pioneer of private trust companies that have become the cornerstone for many family office structures.

Good local professional infrastructure

Bermuda is well known as one of the world’s premier jurisdictions for insurance, re-insurance and captive insurance, in addition to having strong private client and funds capabilities. This produces a world-class infrastructure of local lawyers, accountants, actuaries, fund administrators, financial advisors, underwriters, brokers and trustees. 

Sensible tax system

Bermuda is a tax-neutral jurisdiction; it does not have income, capital gains, wealth or corporate taxes. Its consumption-based tax system is designed to support its own infrastructure and consists of payroll tax, import duties, social insurance, and custom duties.

Blue-chip reputation

Bermuda is respected worldwide for its strong record on compliance and tax-transparency. The island adheres to the highest international standards of anti-money laundering and anti-terrorist financing, and it has never had banking secrecy laws. The island is globally recognized for its regulator’s top-quality supervisory system.

Relocating Family Members or Key Executives

Family members or key executives who wish to relocate to Bermuda will find it very welcoming. Bermuda is one of the most luxurious and popular destinations in the world. Recent amendments to the immigration policy have made it easier for high-net-worth individuals to relocate to Bermuda. Anyone over the age of 18, of good character and conduct, and with sustainable means or annual income, can obtain either permission to reside on an annual basis or a residential certificate giving the right to reside in Bermuda indefinitely.

Bermuda has the fourth highest gross domestic product per capita in the world. It is an extremely safe and secure jurisdiction – where terrorism, kidnapping, violence, crime, natural and man-made disasters are rare or non-existent. It has excellent education, sophisticated telecommunications, access to world-class healthcare, numerous cultural and sporting attractions, and sub-tropical physical beauty. Bermuda’s attractions cater to every taste and preference with top-rated restaurants, world-famous beaches, championship golf courses, modern super-yacht marinas and boating services, a UNESCO heritage site, art galleries, watersports, and the world’s northernmost coral reefs. Bermuda’s lifestyle is enviable by any standard.


“ You go to heaven if you want to — I’d rather stay right here in Bermuda” - Mark Twain