Here's an important fact before you start reading the article. According to the 2022 UBS Investor Watch, globally, around 70% of the wealthy families lose their wealth by the second generation and 90% by the third generation. This is a reminder that creating wealth is only half the battle won.
Indian business families face additional complexities like planning long-lasting financial strategies and consistently adapting it to the latest tax regulations and other compliances. Along with all these, family dynamics are changing as traditional joint family structures give way to more individual opinions.
Hence, protecting your wealth is as important as creating it. In this article, we will dissect some proven tactics to safeguard your wealth across generations effectively.
Unify the Family Vision
Multi-generational wealth is looking at the biggest picture. It is about the wealth that is going to be passed to your grandchildren. Business families who build wealth across generations don’t burn it in expensive vacations or luxury vehicles. Even if they do it, they do it smartly.
To make this possible, it is important to have everyone on the same page. Before protecting your wealth for generations to come, think about the vision and how to convey it effectively to your family. The first step to having a unified family vision is passing the financial knowledge to each generation. It includes:
- Introduce financial literacy early in childhood through age-appropriate lessons.
- Make money management a regular topic of conversation within the family.
- Include younger family members in key investment discussions and decisions.
- Promote entrepreneurial thinking and a sense of financial responsibility from a young age.
Financial literacy is diverse, and with a massive portfolio of wealth, it becomes more complex. Hence, it should be tailored to different age groups and evolve as the family members mature. This step is crucial to safeguard the wealth after your passing.
Build Robust Governance
In any family, members are not accustomed to meeting each other to discuss their wealth, particularly. It is an unspoken territory rarely mentioned on special occasions or informal family gatherings.
However, with multi-generational wealth, it is crucial to have such meetings. Here’s where family governance comes in. It is a structured process where all the members of the family are involved in decision-making. Let’s understand how to move forward with it:
- Involve the younger generation early through regular family meetings for open communication and shared values.
- With regular family meetings, policies and protocols are developed that everyone has agreed upon. This is called a “family constitution”.
- A family constitution is useful for making decisions effectively. These practices help in smooth transitions across generations.
Keeping Decisions Separate for Different Entities
Creating separate processes for business operations, investments, and philanthropy helps business families move beyond informal, patriarch-driven decisions to structured governance. Let’s understand it with an example:
| Business and Investment Decisions | Philanthropic Decisions |
|---|---|
| The business board handles operational decisions like expansion or hiring, while a separate investment committee manages the family's diversified portfolio, including real estate, equities, and alternative investments. | CSR mandates or family foundations need their committee to align charitable giving with family values and social impact goals, preventing business cash flow concerns from influencing donation decisions. |
This separation is important as business decisions are often entangled with investment choices (using business cash for real estate or philanthropic commitments) without proper evaluation.
Optimise Ownership Structures
Securing the wealth in private trusts is an age-old, proven strategy. Here's a detailed overview:
| Strategy | Purpose | Key Features | When to Use |
|---|---|---|---|
| Private Family Trusts | Wealth transfer & asset protection |
| For dependent care or preserving wealth across generations |
| Ring-Fencing via Private Trusts | Separate personal & business assets |
| When business risk is high or sector is volatile |
| Types of Trusts | Tailored legal structures |
| Pick based on control, tax, and risk comfort |
| Holding Companies & LLPs | Ownership & succession planning |
| When transferring businesses or gifting strategically |
Calibrate the Long-Term Portfolio
For a long-term portfolio, having assets in real estate makes it stronger. Let’s understand it in depth:
Real-asset ballast
Another strategy that business families rely on is real estate. Trophy properties and strategic land banks help in developing a strong base to safeguard your wealth.
- Trophy properties are the top 2% of the properties in each category. These are luxury properties, heritage properties that wealthy families invest in for stability and prestige.
- On the other hand, purchasing large parcels of undeveloped land in areas likely to grow in value over time. It can be buying prime agricultural land, commercial properties in tier-1 cities, or even strategic plots near upcoming metro lines or airports.
These assets preserve your wealth and have the potential for significant long-term appreciation.
Fortify Risk Management
Diversification of Assets and Investments
Businesses diversify their assets across industries and countries as a financial safety net, as it softens the blow if one investment doesn’t work for them. It can be:
- Equity Markets: Direct stocks, mutual funds, and SIPs across large-cap, mid-cap, and small-cap segments.
- Fixed Income: Corporate bonds, government securities, PPF, NSC, and tax-saving fixed deposits.
- Real Estate: Residential properties in tier-1 cities, commercial real estate, and REITs
- Alternative Investments: Private equity, fractional real estate, and P2P lending.
- Commodities: Gold, silver, and commodity-linked mutual funds.
- International Markets: US markets, crypto investments, and alternate assets through LRS (Liberalized Remittance Scheme).
- Offshore Structures: International trusts and global diversification strategies.
- Emerging Market Exposure: Through international mutual funds and ETFs.
This way, families can protect their wealth if one investment plan fails. Diversification is a mix of different investments and assets that work together to handle the unpredictable ups and downs of the financial world.
Investing in Umbrella Insurance
An umbrella insurance is a financial layer of protection that extends beyond the standard policies, such as automobile and home insurance. It protects businesses from massive claims or lawsuits beyond the coverage amount provided by their major policies.
Besides that, umbrella Insurance covers liabilities arising due to the exclusions that may be present under a standard policy. Examples of such exclusions are defamation, slander, or false imprisonment. Shriram Wealth protection solutions help you choose the right policies that cover all your assets comprehensively.
Stress Testing Your Estate Plan
If a family has taken loans against a property, business, or investments, they need to check annually: 'What if property values drop 30%? What if our business income falls 50%? Can we still repay our loans?' Stress testing helps you see if your current solutions are likely to deliver the results you want.
In simple terms, it's like doing an annual financial health check by asking practical questions. This helps families avoid situations where they are forced to sell valuable assets at bad times or face legal troubles with lenders.
Tax and Regulatory Resilience
When moving money across borders, wealthy Indian families have to navigate complex international tax rules to avoid double taxation and legal issues. Here are the compliances and agreements that you must know about:
DTAA (Double Taxation Avoidance Agreement):
This agreement prevents paying taxes twice on the same income. For example, US investments are taxed based on DTAA rates, not full rates in both countries.
FEMA Compliance:
This compliance governs how much money can be sent abroad (currently $250,000 per person per year under LRS) and requires proper documentation.
Maintain Liquidity:
Keep 10-15% of wealth in liquid assets (cash, bonds, easily sellable investments) to handle sudden tax obligations.
Current Tax Reality and Policy Risk:
Currently, there is no inheritance tax in India. However, capital gains tax applies to selling inherited assets, and income tax on earnings from inherited properties. Inheritance tax was abolished in 1985, but there are always discussions about its return. In 2024, Sam Pitroda had proposed a 15% inheritance tax on the super-rich. It was quickly refuted by the opposition and the Prime Minister.
There is a consistent political debate about reintroducing the inheritance tax. Hence, families must maintain liquidity (cash reserves) to handle potential policy changes, as the government could reintroduce such taxes targeting ultra-wealthy families to fund social programs.
Design Inter-Generational Liquidity Ladders
While planning for several generations that are about to come ahead of you, one must consider important life events like education, marriage, and retirement.
Setting aside dedicated funds for these milestones ensures smoother financial transitions across generations. It also helps in planning how much liquid reserves are required to fund these events in the future.
Along with this, keeping credit lines open for opportunities and emergencies is also crucial. Without it, families may be forced to sell core assets, disrupting long-term plans.
Empower the Next Generation
The next generation is busy building their life. Managing generational wealth might not be in the picture for them in the next 5 to 10 years. Without preparation, it is challenging to manage generational wealth. It will eventually lead to potential financial mismanagement, missed opportunities for growth, and family disputes.
One of the best ways to engage the next generation and train them is to have an interactive and practical approach:
- Young individuals learn more by trying out new things rather than listening or reading about it.
- Wealthy business families have the privilege to empower the next generation by giving them access to a small amount of wealth for investment, operations, and philanthropy. It also allows the next generation to test what they are good at.
- Many elders in wealthy business families believe that giving access to excess wealth to the younger generation will spoil them. However, there are successful examples of parents giving teenagers the ability to buy and sell shares under the supervision of their family stockbroker or investment leader.
- Another way for the next generation to understand wealth better is to give some control over philanthropy as well. With younger generation getting access to a yearly budget for charity, they can explore a cause and make a case on it. It leads to stimulating family conversations and takes the pressure away from parents as they have already allocated the money to charity.
The most successful business families are the ones that are flexible and adapt with the generations. It is crucial to let the younger generations speak and bring in new ideas to the table. Having a traditional system and not welcoming new ideas will lead the business to extinction.
Along with practical experiments, curated financial literacy sessions with financial experts will help them understand the basics of how to manage wealth and safeguard it in the future.
Conclusion
Building multi-generational wealth is more than smart investments. It demands a comprehensive plan to address family dynamics, governance structures, and evolving regulations.
The complexity of modern wealth management, like international tax compliance, sophisticated trust structures, and regulatory changes, makes expert guidance crucial. At Shriram Wealth, our Family Office services go beyond traditional investment advisory to provide comprehensive solutions tailored to each family's unique goals and values. We help implement these proven tactics while ensuring regulatory compliance and optimal wealth transfer strategies.
