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It is essential to think well ahead and plan for the transfer of a family business
Transferring a family business inherently raises certain challenges, particularly the need to maintain its continuity and profitability. There are various solutions for maintaining family harmony and the continuity of the business on which the family's wealth often depends.
Claude Medernach, Wealth Management & Philanthropy Expert, and Anne-Lise Grandjean, Tax & Estate Planner, provide some answers.
This article is an extract from a feature in Paperjam's Private Banking & Wealth Management supplement published in May 2024.
The business often represents a substantial proportion of a family's wealth. So, how do you go about planning for its transfer?
Many of the clients we work with have built up their wealth from a successful family business. In many cases, the family's prosperity depends on it. While it is relatively simple to divide liquid assets between the heirs, a family business can't be carved up so easily. Often, the main challenge is to maintain its long-term viability and profitability. However, the beneficiaries are not necessarily all involved in the management of the business, and do not necessarily have the same attachment to it.
So how do you tackle these issues?
It is essential to think well ahead and plan for the transfer of a family business. Several solutions can be explored. For example, it may be possible to split the operating company from the real estate company so that only those children who are active in the business receive shares in the operating company. But this can give rise to certain legal and tax issues. A split like this could have considerable tax implications, especially concerning unrealised capital gains on the property. If you want to exclude some of the heirs from the operation of the business, you need to ensure that there are other assets, outside the business, to compensate those children and avoid infringing on the forced heirship regime. Also, to ensure the long-term future of the business, a compromise will need to be struck between the operation of the business and the property in terms of the lease, for example by setting up a long lease.
What other solutions could be considered?
Another, more structural, solution would be to set up one or more holding companies for the group in which all the children have a say, whether or not they work in the business. The children would then all be shareholders in the holding company. This type of structure can be set up if you want to establish joint management for the shared inheritance.
Additional, more contractual solutions can also be envisaged by setting up a family governance constitution which could, for example, determine the methods for valuing the family business, the dividend distribution policy, and perhaps a shareholders' agreement. The challenge is to establish rules that will achieve the common objectives that have been set and anticipate certain problems, such as those linked to transferring shares within branches of the family, so as not to prejudice any of the other heirs.
Are there any special cases that need to be taken into account?
Yes, for example, there is a special regime for succession in a farming business. We recently considered whether these rules could apply to the transfer of a forest plantation. It turns out that this is unlikely to be the case.
There are exceptions of this kind in every jurisdiction. That's why it's important for us to be able to call on legal and tax experts, either within our own teams or through our partners in other countries, so that our clients can plan for their transfer with peace of mind.
Our specialists can help you with all your tax and wealth management issues.
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