Effective Risk Planning

Image of a womanOn the topic of risk I just came across the Family Office Exchange white paper, “Securing the Future: Managing Threats and Opportunities Through Effective Risk Planning” (October 2009) and was impressed with how thorough this study is.

I recommend it to anyone who is advising high net worth families and/or family owned businesses. Its intent is to develop a process for managing risk to diffuse reactive, irrational decision making and puts forth the best strategies for managing downside risks while emphasizing the importance of capitalizing on new opportunities for wealth enhancement.

It is a wonderful roadmap for a proactive approach for risk management across the critical issues that families face. To quote Arie de Geus, the former head of strategic planning for Royal/Dutch/Shell, “nobody can predict the future, therefore one should not try. The only relevant discussions about the future are those where we succeed in shifting the question from “whether something will happen” to the question “ What will we do if it does happen?”

For more information about the Family Office Exchange white paper visit: https://www.familyoffice.com/knowledge-center/securing-future-managing-threats-and-opportunities-through-effective-risk-planning

My three key areas “at risk” for family business are family cohesiveness, business ownership and wealth management. Here’s a look at what they mean:


Family Cohesiveness

In the area of family cohesiveness, reputation or the family brand is at risk. Traditionally this risk was triggered by a scandal that leaked out to the press. The new way this risk is triggered is through the Internet. Videos on YouTube and comments on Facebook, Twitter and other social media networks can affect your client’s family’s reputation. They can be used in divorce litigations, custody matters and employment decisions. Once viral, it is hard to remove.

The younger generation, if not educated, is not mature enough to understand the afterlife omnipresent power of the digital era. A family risk-management policy should include education about the dangers of social media and a morally binding decision among family members to understand the consequence of social media on the reputation of the entire family.

Business Ownership

Another risk to family cohesiveness is the impact to individual goals and life plans.

Traditional risks included the illness, death or incapacity of a key family figure.

In the family business, the new risk is the increased work lifespan of the older generation, which results in the delayed succession of the middle generation. With the older generation in good health and working longer, the individual goals plans of the middle generation may be passed over.

Intentional strategic planning and clear communication among all generations as to what the expectations are for the working lifespan and when the baton should/will pass can mitigate this new risk.

Traditional risks to business ownership and the economic sustainability of the family enterprise include the death or the divorce of a shareholder when proper planning is not put in place.

The new risk is the evolution of laws governing how assets are allocated in a divorce. In some states, gifted and inherited assets are divisible in a divorce. This does not just include what the about-to-be divorcing family member owns when married; it also includes the expectancy of what that divorcing family member will receive in the future.

Those expectancies are taken into account when determining the allocation of assets between the couple about to be divorced.

A significant side effect to this is how a hostile soon-to-be ex and their attorney will value the family business assets and put that valuation into the public realm of divorce court. The goal of that hostile divorcing member is to value that business high. That valuation may do serious damage to the estate plan of the older generation.

There is also an increased risk for the allocation of alimony. Many family businesses have phantom income that is earned during the course of the marriage that shows up on the tax return and is plowed back into the family business. At issue is how that phantom income should be treated for alimony purposes.

If it was earned during the marriage, is it marital income taken into account for alimony and child support purposes even though not actually received?

When thinking about these risks, it is important to remember that the law and the court in the jurisdiction of the divorcing spouse that will control these decisions. These risks can be mitigated by a well negotiated pre-nuptial agreement or post-nuptial agreement.

Wealth Management

Traditional risks related to a family’s wealth (including financial, intellectual and social assets) include the illness or death of the key family stakeholder, economic downturn and changes in the regulatory or legal environment.

The dissipation of wealth sometimes triggers new risks. With each ensuing generation, wealth is splintered. Besides that, new risks also come from the lack of creation of new wealth during turbulent economic times, the increased complexity of legal and tax matters and the increased complexity of wealth management choices.

These risks can be mitigated when the family coordinates its advisers and monitors the integration of all professional services.

The risks are further mitigated when the family embraces and encourages financial education and financial literacy across the generations. Mentoring, shadowing, exposure to the concepts and resources along the generation continuums reduces unintended consequences.

Risk taking is an essential part of getting ahead. Be sure and invest in yourself and understand and evaluate your risks before you take them.

Patricia Annino
is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

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