Is succession planning a dying art?

At the same time, the health of those over 65 is improving. This means that our measure of old age is changing. Men (whose life expectancy continues to trail behind women) who were 70 in 2017 reported similar levels of limiting longstanding illnesses as men who were 57 in 1997¹. This suggests that as well as simply living longer, people are losing capacity – a crucial milestone in the context of wealth and succession planning – at a considerably older age.

These trends are set to continue². It is predicted that 20.9% of men and 27% of women born in 2045 will live to be at least 100 years old, compared to 13.6% of men and 19% of women born in 2020³.  

What does this mean for inheritance trends now?

Those expecting to inherit wealth from their parents are having to wait longer before they inherit. But the average age at which people inherit is not increasing quite as quickly as we might expect, given improvements in life expectancy. People born in the 1980s are expected to inherit on average at the age of 64, which is only 6 years later than those born in the 1960s⁴. What this may suggest is that increasing life expectancy and the increasing age at which women give birth⁵ has not yet impacted trends in inheritance. 

However, this focus on death misses the fact that as people live longer and enjoy good health for longer, heirs will increasingly receive at least some of their inheritance as lifetime gifts rather than on death. There is a simple, but crucial, difference between the two. Lifetime gifts are likely to be smaller and subject to more careful selection by the donor. This can skew power dynamics within families in situations where wealth, or its control, is retained by one generation whilst multiple subsequent generations reach adulthood.

Some would argue that this exacerbates an existing problem with inherited wealth, namely that wealth is usually received after the period of life at which it would be most useful (i.e. when an individual is raising a family or deciding what career to pursue). Rising property prices, for instance, make the purchase of a home for a young family increasingly difficult; inheritances that might help with deposits are of limited use if received many years after children have left home⁶. Others might argue that inherited wealth arrives at precisely the right time, given that it can coincide with a period of life in which health and care expenditure are increasing and earned income is tailing off. 

What if the effects of ageing could be reversed?

There is some reason to believe that we currently underestimate the improvements to both life expectancy and the length of "useful" life that those living today can expect to enjoy. Increasing amounts of funding are being dedicated to reversing age-related decline⁷. Scientist David Sinclair, for example, recently discovered that manipulating certain genes known as "Yamanaka factors" in mice suffering from age-related impairments effectively restored the damaged tissue. Reflecting on his observations, he claimed it is now possible to “safely reverse the age of a complex tissue and restore its biological function in vivo”⁸. Other commentators went further, remarking that Sinclair’s work may have laid foundations for a way to “reverse ageing and age-related diseases in humans”⁹. 

If such a breakthrough really is on the horizon, then current approaches to succession planning are based on a fundamental misunderstanding of how long people will live and be able to take decisions. Even if such a breakthrough is farther away than hoped, the steady increase in life expectancy is already putting pressure on traditional succession planning models. Many existing structures and systems are based on outdated principles.

Should we be talking about generational planning rather than succession planning?

Practitioners will anticipate the conflict that can arise when an individual refuses to relinquish control of wealth or a business until their death. This is particularly common amongst entrepreneurs who feel a strong sense of ownership over a company they have founded, and whose very identity can be inextricably linked to it. 

Sudden (and sometimes unplanned) transfers of wealth, or its control, on a person’s death can trigger bitter disputes between the family members who either stand to inherit or believe that they should. The longer those holding wealth, or the control of wealth, live the greater the number of potential beneficiaries whose interests may not align at the point of transfer. But, as moments of succession no longer synchronise with the passing of generations, the scope for inter-generational, as well as inter-family, disputes is increasing.

Of course, for many years elderly clients have supported more than one generation at a time. One of the most commonly practised inheritance tax planning techniques is for grandparents to pay for the schooling of their grandchildren. If elderly clients live longer, they will find themselves being asked to fund three (or more) generations and facing some difficult decisions in how they do so.

The more difficult question, however, will be around the shift in power dynamics. Individuals within a family will hold control over family wealth for longer. Members of the next generation may never receive the same degree of power or control over the family wealth. Instead, power and control may skip a generation or two and be passed, for example, to a grandchild who proves themselves capable and of sound judgment, a good businessperson, or is simply more favoured. 

So what does this mean in practice?

With the excitement around significant leaps in life expectancy,¹⁰ some commentators argue that we need to change how we conceive of the family unit fundamentally¹¹. That may or may not be true. Of more immediate relevance to private client practitioners is the fact that the linear model of inheritance – where wealth is transferred “down” as one generation succeeds another – is no longer appropriate. 

Many advisors will instinctively look to trust planning as a proven solution to help mitigate the chance of succession disputes between generations. In this context, trusts help structure a more gradual transfer of wealth and allow a settlor to hand control to a professional trustee whose duties include balancing the interests of beneficiaries from different family branches and different generations. Discretionary trusts, for example, are often favoured for the wide powers they give to trustees and the scope for settlors providing guidance to the trustees in the form of letters of wishes. However, they are far from a complete answer.

Elderly clients and professional trustees alike will face the difficult task of navigating a greater number of diverging interests as families and beneficial classes expand over time. In this context, wide discretionary powers may sometimes inhibit trustees, whose decisions will attract increasing scrutiny from dissatisfied beneficiaries. There is already a marked reluctance amongst trustees to make significant decisions without the court’s blessing, as evidenced by the growing number of blessing applications brought by trustees wanting to partition long-established dynastic trusts. Increasing life expectancy will only exacerbate this.

Instead, practitioners may have to consider more unusual planning models.

• Partitioning existing structures between family generations, as well as family branches, could help enfranchise a greater proportion of the family and might help de-escalate potentially contentious situations.
• Families where wealth is already divided between family branches and/or generations could pursue a co-ownership or co-investment model under which the wider family seeks to leverage increased scale and bargaining power (and possibly the family name) whilst at the same time retaining ownership over their own wealth.
• Structures could pre-determine how wealth and/or control will be shared between family members based on certain conditions (for example, time or a per stirpes approach). So, for example, trust structures could be designed to partition every thirty years on a particular basis. Although there would still be a role for trustee discretion, this approach may help to keep the number of beneficiaries in each part of the structure to a manageable level. 
• Alternatively, non-linear structures could be considered. This usually means that the benefits that each generation receives are not tied to a particular percentage entitlement to the family wealth but rather to supporting a particular standard of education or living. This approach helps to change a family’s mindset from being owners of the family wealth to being instead its custodians. Family members are encouraged to consider the opportunities that the family wealth can create rather than focus on the status of ownership. An example of such a structure is the US dynastic HEMS (Health, Education, Maintenance, and Support) power trust.

Whatever the answer, the sorts of questions that clients are asking their advisers have already started to change. Clients no longer simply ask “What should happen when I die?”.  Instead, they want to know “How do I determine who should be part of my family?” and “How do I balance the competing needs and aspirations of members of my family?”.

1 ‘Living longer: is age 70 the new age 65?’, Office for National Statistics (online), 19 November 2019 (this is also the source for the 10.8% statistic in the preceding paragraph).

In the preceding paragraph, (i) the 2011 v. 1841 statistic is attributable to ‘How has life expectancy changed over time?’, Office for National Statistics (online), 9 September 2015; and (ii) the 2021 v. 2011 statistics are attributable to ‘Voices of our ageing population: Living longer lives’, Office for National Statistics (online), 2 November 2022.

2 Although the rate at which life expectancy increases in some populations is not always constant, the example of Japan suggests that periods of slower improvements are likely to be temporary exceptions to the norm.  See ‘Changing trends in mortality: an international comparison: 2000 to 2016’, Office for National Statistics (online), 7 August 2018.

3 ‘Past and projected period and cohort life tables, 2020-based, UK: 1981 to 2070’, Office for National Statistics (online), 12 January 2022.

4 Bourquin, P., Joyce, R., and Sturrock, D., ‘Inheritances and inequality within generations’, Institute for Fiscal Studies, (online), 22 July 2020.

5 The standardised mean age of mothers at childbirth was 26.9 in 1980 compared to 30.9 in 2021; see Births in England and Wales: summary tables - Office for National Statistics (ons.gov.uk).

6 See Gardiner, L., ‘The Million Dollar Be-Question: Inheritances, gifts and their implications for inter-generational living standards’, Resolution Foundation (online), December 2017.

7 To take one example, Altos Labs, the start-up at which Nobel Laureate Shinya Yamanaka serves as senior scientific adviser and whose stated mission is to “restore cell health and resilience to reverse disease, injury, and the disabilities that can occur throughout life”, received $3 billion in first round funding: https://www.prnewswire.com/news-releases/altos-labs-launches-with-the-goal-to-transform-medicine-through-cellular-rejuvenation-programming-301463541.html?tc=eml_cleartime.

8 Lu, Y., et al., ‘Reprogramming to recover youthful epigenetic information and restore vision’, Nature, 588 (2020), 124-129.

9 Jaslow, R., ‘Vision Revision’, Harvard Medical School (online), 2 December 2020.

10 It was ever thus.  See Zenou, Theo “The long and gruesome history of people trying to live forever”, Washington Post (1 May 2022) https://www.washingtonpost.com/history/2022/05/01/immortality-gilgamesh-bezos-thiel/.

11 Ahuja, Anjana “Can we defeat death?”, Financial Times (29 October 2021) https://www.ft.com/content/60d9271c-ae0a-4d44-8b11-956cd2e484a9.