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Julian Washington on succession planning for business families



AS ENTREPRENEURIAL WEALTH INCREASES, more business families are faced with the important task of eff ective succession planning to pass this wealth to the next generation. It is a process that can be time-consuming and emotionally challenging, and it is one that has been getting more complex as the nature of businesses and the social patterns of family life shift. Succession planning can be an intricate

aff air for any family that wants to transfer its wealth smoothly from one generation to another. With family businesses, however, there is an added element of complexity: dealing with an asset that could take various forms and be fraught with emotional sensitivities, as well as the particular commercial pressures of the business in question. Wealth through the prism of culture and mobility,

a 2012 report by RBC Wealth Management into internationally mobile wealthy individuals, conducted in partnership with the Economist Intelligence Unit, found that 17 per cent of the high-net-worth individuals surveyed had accumulated their wealth through entrepreneurial endeavour – against only 4 per cent who had inherited their wealth. For these families, there will be a clear need for

good succession planning advice as, in most cases, they are also the fi rst generation to enjoy wealth on a large scale – 70 per cent of respondents came from families that would not have been considered high-net-worth.

Considering the variables With an active family business, several factors need to be considered. The fi rst to be addressed is the immediate business plan if the current principal becomes incapacitated or dies. Where the children or heirs are not involved in the running of the business at all, a decision to sell will be the most straightforward outcome, as it provides a single pool of liquidity that can easily be divided between them.

A more complicated scenario is when the principal specifi es that (in the event of their incapacity, illness or death) the business should be kept running for the long-term benefi t of future generations. Diffi cult commercial decisions will need to be taken as to how to operate the business and who will be involved in that process. In some cases, a question may ultimately arise:

30 APRIL 2013

is it possible to honour the principal’s wishes, or is a sale inevitable?

Third is where a group of benefi ciaries have,

between them, inherited the business, and each has a diff erent approach and view on what the outcome should be. For example, one child who has long been involved in running the business may wish to continue with this role, whereas another may have no interest in continuing and prefer to take the inheritance as cash. Compounding these issues is the fact that the shape of families today is highly varied and can be complex: the pace of change of the law rarely keeps up with shifting social patterns. So it is that business families can face serious challenges in their succession planning due to the complexity of their heirs’ lives. For example, how should we deal with heirs who are in so-called common-law relationships, but not formally married? What about civil partnerships, and the issue of how they are recognised (or not) in diff erent jurisdictions? Where there are stepchildren, are they to be included as benefi ciaries, and to what degree compared to their siblings? Families that do not take good advice can face serious tax, legal and succession consequences. By contrast, well-advised families, using structures such as trusts in appropriate cases, can take all these variables in their stride.

Guiding the process For some families, succession planning sometimes seems almost too diffi cult to talk about. For both the older generation and heirs, discussing parental mortality or incapacity can be distressing. In some jurisdictions, it is also considered to be culturally inappropriate – in China, for example, death is a taboo subject. Some business owners also fear that even raising these issues may lead to acrimony among the future benefi ciaries, and they may agonise about the diffi cult decision of which of their children should succeed them. Advisors have to bear all these factors in mind when guiding their clients through this process. Of course, the review of a client’s needs and circumstances has to encompass not only aspirations for the children’s inheritance and the direction of the business, but also their tax position, legal and other implications of where benefi ciaries are located and their personal and marital status. In the right cases, discretionary


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