Generation game

A key challenge facing families and their advisors is how to balance the various competing considerations that are fundamental to effective succession planning. Focusing too much on any one factor is likely to lead to others being neglected, with potentially disastrous effects. There is no one solution to resolving this conundrum. Where the precise balance is struck for any particular family is a very individual matter.

Indeed, to the extent there is a general overriding principle, it is that any approach needs to address the specific context, aspirations, needs of and, unfortunately, tensions within the family concerned.

So, although the eventual outcome will be different in each case, the approach used to get there and the issues that need to be tackled are more universal. This article highlights some key considerations that are likely to arise.

Are financial considerations being given too much emphasis?

Clearly, financial planning, including tax mitigation, is an essential part of any succession strategy. However, it needs to be seen as something that informs the discussion around the various available options rather than dictating them. Issues that can arise when these considerations are given too much prominence are as follows:

• Inheritance tax planning that focuses on passing assets to younger family members in a tax‑efficient way when those younger family members have no interest in owning those assets. These could be a historic family home or shares in the family business.
• Moving assets to the next generation for the purposes of tax planning while ignoring the related risk of removing the drive and ambition of younger family members by allowing them access to large sums of money at an early stage (and potentially depreciating the value of the asset).
• Financial‑planning decisions being taken for the benefit of younger generations, but without any real discussion as to what those younger family members want or aspire to and ending up with a result that is generally unsatisfactory.
• Having assets tied up in complex and unwieldy structures that create their own problems in terms of ongoing administration and compliance or complicating future planning, potentially preventing those assets from being effectively enjoyed by family members in accordance with their needs or wishes.
• Aggressive tax‑planning strategies are particularly susceptible to changes in tax law and policy. This can lead to various consequences ranging from the financial (an unexpected tax bill or the expense of further structural change) to the non‑financial, such as reputational damage.

Legal and personal relationships

While acknowledging that financial and tax considerations are essential components of any strategy but should not be determinative in and of themselves, how should advisors and families be approaching the wider issues that need to be taken into account?

The basic answer is by discussing them with and within the family. How that is effected will be a matter of judgement in each case and that is, of course, easier said than done.

Important family discussions can be difficult in any context. However, an additional tension here is that although family relationships are primarily personal, they are also legal in a variety of contexts, including trust arrangements, family businesses or administering an estate following death. This tension is exacerbated by these legal issues that come to the fore only during times of personal difficulty or stress, such as death, bankruptcy, divorce or a deep‑rooted family dispute.

It is very difficult to neatly separate these issues as ‘personal’ and ‘legal’. Almost inevitably, the personal relationships and understandings between family members bleed into their legal rights and obligations. Taking family businesses as an example, when considering the position of shareholders, a court may decide that equitable considerations supersede the strict legal position of the parties. Those equitable considerations can include a common understanding between members as to how a company should run.

Family charters

One possible solution to addressing some of these difficulties is the idea of the ‘family charter’. A family charter is not a technical legal document in the same way as a trust deed or articles of association of a company and is best thought of generically as a document that sets out a common understanding between family members on a range of issues.

The potential benefit of the family charter is not so much in the document itself, but that it can provide a useful forum to discuss issues that might otherwise be considered too sensitive to deal with. Reaching an agreed position or even just allowing family members to set out their expectations can be critical in helping to avoid disputes further down the line.

These discussions can also be helpful in terms of setting parameters for the running of the family business and distribution of profits. It may be that certain family members continue to actively run the business and receive remuneration on a pay‑as‑you‑earn basis, while the profits are distributed to both active and non‑active family members. How can those remuneration arrangements be structured so that all family members feel they are being treated fairly? At what point is it sensible to acknowledge, if at all, that the family needs to bring in senior employees from outside the business?

For investment companies, which do not benefit from the same tax advantages as trading companies, there is the added risk of tax events; most notably, the death of a shareholder. That tax event can come at a considerable cost. Planning for these eventualities ensures families are prepared for the future.¹

Family charters may be counterproductive when, either through a refusal or reluctance to engage by the family concerned, the process becomes overly formal and driven by advisors rather than the concerns of the relevant family. For a family charter to be successful, it is not enough for the family to decide that one is required and instruct advisors accordingly.

To what extent can all family members engage in this process?

Attempting to discuss these issues and formulate a general strategy for succession planning can be particularly challenging if there are gaps in the knowledge and experience of family members.

This is a common observation often framed in the context of the need to educate younger people about issues both within and without the family, including the nature and scope of the family’s wealth and assets, and issues such as philanthropy, wealth protection and economic and financial planning. Those considerations are all relevant and important, but personal decisions about when and how to take this forward with individuals need to be managed very carefully. Some people will find it easier than others to process the idea of their family’s wealth and their personal entitlement to it at a young age.

This is not just an issue for the younger members of the family, however. Older generations, particularly in families who do not have a history of managing the transition of wealth, may find it difficult to navigate the complex issues that arise. Even for those with legacy wealth, the fast pace of change may mean that their assumptions about how to proceed are not necessarily appropriate for discussions in 2021.

Conclusion

Discussions about succession planning do not just have to be (and should not just be) about tax or finances. Although those are essential issues to address, a successful succession strategy needs to take a wider variety of considerations into account. Often, the only way to progress will be through dialogue. These conversations can be an opportunity to help clients have conversations with their families before they become difficult conversations. Advisors can play a key role in formulating and cementing a plan for the future that all family members can play a part in, whatever that part may be.