How to prepare the heir to manage the wealth through a personal fund

Children often choose alternative ways, realizing themselves in areas far from the family business. And then the acute question arises: how to transfer not just assets, but the ability to properly dispose of them?

Why big fortunes rarely reach great-grandchildren

By 2030, a quarter of the Russian population will be over 60 years old, and the average life expectancy for men is now 67-68 years old. Such demographic realities confront business owners with the fact that the window of opportunity for consciously preparing successors is narrowing significantly. If the connection between the intellectual maturation of children and the transfer of financial capital is not built in advance, even the most impressive family heritage risks repeating the sad statistics.

About 70% of family businesses go bust or sell before being passed on to the second generation, while only 10% reach the third generation. And the point is not that the heirs are incompetent, but that the transfer of business is a long process and training.

According to the latest research, 72% of the heads of family businesses are their founders, and only 11% of companies have inherited their current owners. This means that most businesses are still waiting for the first transition from founder to successor.

Why the Will Doesn't Work

According to the will, you can transfer property, but not management skills or understanding of responsibility, and even more - the desire to continue the family business. This is the difference between the successor and the heir. The lack of prior training and step-by-step entry into the rights leads to the fact that after a generation, the state begins to spread to unjustified spending, unsuccessful investments, conflicts between relatives.

To prevent this, we need a structure that simultaneously protects assets from the inexperience of the heirs and gradually cultivates them to treat capital as a long-term liability, preparing them for the role of successor.

Personal funds

One of the most universal tools that allow a comprehensive approach to the issue of continuity is personal funds. Unlike a will or gift, a personal foundation is a legal structure that shares three important functions:

ownership of assets; asset management; income generation.

In addition, the personal foundation creates a platform for the “growth” of the successor during the life of the founder.

Imagine that the founder suddenly dies, and the heir has not yet reached the age of majority. In ordinary inheritance, capital falls under the management of guardians who can squander it. In fact, the trust itself becomes a guardian.

Key advantages

Fund documents establish in advance who exactly manages the assets, for example, a professional management company or a trustee of the founder.

The Fund determines how the child’s needs (housing, education, treatment) are financed and who controls these payments.

Payments from the personal fund go only on formal grounds fixed in the documents of the fund. No family member can rewrite the foundation’s documents.

A personal fund relieves the pressure of expectations from a parent. Capital does not belong to him, but to the structure itself, and the heir takes the role of the beneficiary – a person who has the right to income, but does not bear the burden of full responsibility until he proves his readiness.

The principle of “first dividends, then power.” The documents of the fund may provide for a phased entry into rights: for example, access to basic payments from the age of 25, full control over assets from the age of 30+.

The fund allows the transfer of values, not just assets.

Stages of involvement of the heir in capital management

Documents of the personal fund may provide for a phased program of involvement of the successor in the management of family capital. Consider the basic scenario, which already works in Russian and foreign practice.

Stage 1. Education and the first KPIs (18-25 years) – the foundation pays an “educational scholarship” – not automatically, but when clear conditions are met. This may include admission to a specialized university, internship in a large third-party company, the implementation of agreed KPI (exams, etc.). Stage 2. The first investment (25-30 years) – at this stage, the heir gets the right to enter the supervisory authority responsible for controlling the management of a small part of the fund’s assets (for example, 5-10% of the portfolio). Stage 3. Full access (30+ years) – if the previous stages are successful, the successor is a supervisory authority responsible for controlling all assets.

What to do if the heir chooses his path

Often, children do not plan to continue the work of their parents, but want to keep the financial support of the family. In this case, the personal fund saves not only capital, but also family relationships. The foundation hires a professional manager, and the heir receives passive income, such as 5-7% of the capital per year or a grant for his own business.

As a result, the heir does not conflict with the parent over different visions of the future, but uses capital as a springboard for his project, whether it is an art gallery, a science lab or a startup in a completely different industry.

Basic recommendations to owners of capital

Begin training your heirs as early as possible. A personal fund can be established when the child has not yet reached the age of majority, and as he grows up, the structure will already work. Carefully study the documents of the Fund. The better the documents, the less disputes in the future. Choose a professional manager. Reputational management is not an expense, but an investment in family peace and a guarantee that the structure will work for many years.

It does not matter which scenario is implemented – the education of a motivated successor who gradually takes control, or the support of heirs who have chosen their own path. The Fund separates capital and control, protects against external threats (creditors, division of property during divorce, unscrupulous guardians) and internal conflicts (struggles between heirs, pressure of a living parent).