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12 June 2015

Keeping family wealth in the family requires thought and planning.

What do Abraham Lincoln, Pablo Picasso, Jimi Hendrix and Stieg Larsson have in common? They all died intestate. Despite hard-working careers, none had put in place measures to protect their accumulated wealth and ensure it was passed on to those they cared about.

Their stories highlight the often-disastrous impact of not having a carefully prepared Will. Not only can it mean that accumulated family wealth is dissipated, but it can also cause irreparable family rifts and cause those who should have been beneficiaries to miss out.

Picasso left a fortune in artwork, homes, gold, cash and bonds, but no Will. The battle to settle his estate took six years and cost $30 million. The fight over Jimi Hendrix’s estate continued for more than 30 years after his death, and the royalties that kept pouring in caused further complications. Perhaps the most tragic case is that of Stieg Larsson, author of The Girl with the Dragon Tattoo. He had lived with his partner, Eva Gabrielsson, for 32 years. Having failed to make arrangements to provide for her during his lifetime, Swedish law dictated that his estate should be divided between his estranged father and brother. Similar rules apply in the UK, where unmarried couples have no rights to inherit if their partner dies intestate.

More than a Will

A Will* alone may not be enough to protect assets for future generations; detailed succession planning is also essential. That includes planning how you want your assets to be used, determining who you want to benefit from them – and putting in place structures to protect your wealth and ensure these goals can be achieved.

Most of us would like the wealth we have created to benefit future generations of the family, not just immediate children; with funds for education, perhaps, a deposit for a first home, or capital to establish a new business. No matter how wealthy you are, these goals are not guaranteed without careful planning.

“The Chinese say that the first generation works hard to build family wealth,” observes Alexandra Loydon, Head of Private Client Services for St. James’s Place, “the second generation reaps the benefit and the third generation squanders it.” Nowadays, she adds, increased materialism has speeded up the process, and wealth is often dissipated by the second generation.

Spending is not the only risk. Tax, divorce, and unwise decisions by vulnerable beneficiaries can all have a big impact. Inheritance Tax, levied at 40% over the nil-rate tax band threshold (currently £325,000), is a major threat to any legacy for loved ones. But the divorce of beneficiaries can be more damaging, and may mean one spouse losing half their wealth. You can protect inherited wealth from divorce settlements, but it needs careful planning and expert advice. Without them, divorce can significantly deplete family wealth and may force the sale of assets that have been in the family for generations. Subsequent marriages and divorces can also introduce new members to the family – such as step-children and step-grandchildren – who may also need to be provided for.

Large losses

Another threat is large losses if a family business falls on hard times, for example, or because the next generation has mismanaged an inheritance. So it is essential to build a flexible plan for the future, to ensure that assets are preserved and protected until the next generation is old enough and wise enough to manage the family estate themselves.

“Wealth should provide reassurance, not cause worry,” says Loydon. With careful planning and the right Will, you can not only minimise taxation but also ensure the protection and any growth of funds to benefit a family for decades to come. Trusts* still play a major role in succession planning, though they must be properly structured. There may also be other simpler planning methods available.

“Every day I work with families whose needs are different,” Loydon says. “But one thing most families share is the desire to do the best for themselves and their successors. There is no one right answer, but the impact of taking no action can be devastating. Take advice, start a plan and leave a legacy. Don’t let your family wealth line the pockets of those you have not chosen.”

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

*Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place. Wills and Trusts are not regulated by the Financial Conduct Authority.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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