The question of how to ensure the long-term stability of a family’s wealth and legacy should be top of mind for family offices.
But data show that most are not taking the necessary precautions. Standard Chartered Global Private Bank’s newly released research this week found that 84 percent of families believe that better succession planning could help to save their families significantly in the generational wealth transfer.
However, II’s own survey of family offices in attendance at a recent family office and wealth conference found that despite this large proportion knowing the importance of a proper plan, many are ill prepared. Seventy-one percent of respondents claimed to not have any form of written succession plan at all, and only 10 percent said succession planning had ‘kept them up at night.’
Poorly mapped out, the event can cause problems for the surviving family members, but with thoughtful preparation around the estate and taxes, entity and asset ownership, and succession, the next steps can be planned out well ahead of time to limit fallout.
And given that death, like taxes, is one of the few certainties in life, family office leaders should simulate the passing of the principal to ensure that the process goes smoothly when it comes, according to Kerri Scott, COO of Mt. Vernon Investments.
She recommended that all families carry out an exercise that she refers to as a death audit: “A simulation, from an estate tax and asset transfer perspective, for the event of the death of a patriarch or matriarch,” as she wrote in The International Family Offices Journal in May 2024, where she spelled out the necessary steps families need to take.
Scott helps to manage the Dallas based family office of self-made billionaire entrepreneur Kenny Troutt. Scott is responsible for income tax and tax strategies, as well as wealth preservation strategies like governance and succession planning across three generations of the family.
As spelled out in her 2024 article, there is a mountain of documentation to be completed after death to establish estate planning, asset transfer, and taxes. These documents tend to be put into place in a piecemeal fashion, often over a period of many years. The death audit is essentially making sure that everything is in order and there’s a concrete plan in place.
For U.S. families, the best place to start is by working with estate planning lawyers to create a mock IRS federal estate tax return, known as Form 706, which helps to kick-start the death audit process. This form can act as the template for reviewing asset ownership and any form of reporting or valuation that needs to be done. The lawyers will start by reviewing the existing estate plan and trust to ensure that any changes that need to be made are done so promptly and without the influence of emotion or time constraints.
“The most important thing is that you simulate the death while the wealth owner is still alive, because so much of the estate plan can be changed while that grantor is living,” said Scott. She says families don’t need to do this annually. The first time the audit is taken will be the most time-consuming and will highlight changes that will need to be made as well as potential problems.
“You start to match what the documents say and what the estate plan is to what the family’s desires are,” she said. “After the death audit, ideally, those two things should sit right on top of each other. Then you just let time pass, and as that gap widens that becomes your trigger to say, ‘Do we need to look at this again?’”
Another time that a death audit could be undertaken is when the family office brings in a new leader or president who will be responsible for implementing the estate plan when a family member dies, but who is not yet familiar with that plan.
Scott argued that families should maintain a checklist that contains every aspect of the family’s governance to ensure that everything is considered and help close the gap between actual documents and family intentions. And once you engage in a death audit, make sure the checklist evolves with the family’s situation.
For those families that fail to take these steps, there can be wide ramifications, Scott said.
Problems arising from post-death surprises can be fixed after the fact, but it tends to be much harder to do so. Passing assets down, for example, can be problematic if the family member has unforeseen characteristics to consider, say with mental health or substance abuse. Or if the family operates a business, there can be issues if the person taking on ownership isn’t the right person for the job. A surviving spouse who has no interest in running a business and just wants to sell, for example, might do so to the wrong party — and cause damage.
The audit must also include preparations for what happens to the family office itself and whether the structure that keeps the money together should remain in place. In the instance where there are no surviving heirs or spouse, the assets may go into a trust or be donated, but there must always be a plan.
Paying post-death estate taxes is another consideration. Ensuring the family has the liquidity to do this is important to avoid forced asset sales to raise capital. “Ask yourself, do you need to take out a life insurance plan on the death of that wealth owner, so that you now have liquidity and you’re not forced to sell the family business,” Scott said. “The IRS doesn't care: You have to pay the tax.”
She added, “There are just so many reasons to do a death audit, and there’s just so many bad things that can happen if you’re not prepared.”
Emotions are one of the key reasons that families don’t make these plans. The act of simply not wanting to admit your own mortality or that of a loved one is always difficult, but is particularly so for first generation wealth owners, Scott told me, given the control they have had over their estate fortune since its inception.
Writing an obituary, too, is likely to be far less emotionally taxing pre-death, as is planning a funeral or, in the case of figures in the public eye, ensuring media coverage is well managed and that there is an appropriate memorial for public mourning.
“These are things that have to happen in the days after death, when you’re at the emotional peak of reeling from someone’s passing,” she said. “Those two things are incompatible. A gift that you can give your family is to pre-plan for those things so that they can properly grieve and not be faced with making those kinds of plans.”
Scott’s journal article goes into much more detail about exactly how and what U.S. based families should be preparing for in the aftermath of a death. You can find the article here.
