What are the right transition choices when your business is part of the family?

While it makes perfect sense under any circumstances to take stock of your business and wealth position, there are even stronger incentives to do so now.

As Tom Evennett, EY Private Tax, UKI, highlights, “When you take into account properties and assets held, investment portfolios, trusts and foundations and so on, your personal holdings may present a complicated picture. And that’s before you factor in the family business value creation and preservation, which can add another critical dimension.”

It is highly likely that your holdings will have been affected in some way by the pandemic. Your investment's value and risk profile may have changed, or your business may have faced profound disruption. It’s only by understanding the full picture that you can start to devise a plan, which could possibly include looking for new opportunities as well.

As Marianne Kayan, EY Private Tax, Americas, notes, “There are many reasons why families don’t have a proper transition plan in place. As the head of the family, you may fear that you are somehow relinquishing control and, having built up a business, don’t want to hand it over. Similarly, you may think it only makes sense once you are ready to retire. While this is, perhaps, understandable, a lack of planning can put you in a vulnerable position.”

By developing and implementing a wealth transfer plan, you can ensure that a range of short, medium and longer-term objectives are addressed. This may involve assigning both family members and advisors to create, deploy and execute the plan. It will need to consider a range of factors that we address in the following sections.

The global tax landscape has become increasingly complex and important for families of all profiles. Tax policies are often central in government, social, and economic considerations, impacting business-owning families and their business interests. These strategic tax considerations only amplify for multi-jurisdictional families with business and personal interests in multiple locations.

The tax landscape of the locations where you and your family live and conduct business plays a significant role in a well thought out wealth transition plan. There are the traditional tax concerns – inheritance taxes, business taxes, transfer taxes, individual taxes, country tax schemes – all of which you must consider.

“Wealthy families are becoming more international and will need to consider the associated complexities, or there could be a risk of underestimating the implications,” explains Dr. Christian Steger with EY Private Tax, Germany. “Issues around dual residency, exit tax and general tax compliance in multiple jurisdictions definitely need to be taken into consideration early and regularly.”

Many countries are making changes to their tax regimes in response to the COVID-19 pandemic. Now more than ever it is critical to ensure personal and business tax positions are central to any strong succession plan.

Family is complex and an important part of your wealth transition plan is defining actually who you consider “family” in the context of your planning. On a simple level, this can boil down to who the beneficiaries will be and the practicalities of estate or inheritance planning, such as ensuring a proper will is in place and the establishment of appropriate trusts and foundations. That being said, as much as there are financial implications, there are also non-financial matters that you want to address.

Generational ambitions and priorities may well differ significantly. Often the next generation may be more international in its outlook, perhaps living or being educated in more than one country. They may prioritize social or environmental priorities in different ways. It’s also possible that they may have family structures or lifestyles that differ meaningfully from the prior generation.

“When it comes to participating in the family business or any philanthropic endeavors, it’s really important to consider family capital,” explains Heather Greatrex, EY Private Tax, Australia. “This concept is discussed by Dr. Lee Hausner in her book The Legacy Family [co-written with Douglas K. Freeman] and involves human capital, intellectual capital, social capital and financial capital. In other words, what skills do the next generation of family have that they can bring to the table?”

It is no longer a given that children will enter the family business – indeed, it might not even make sound business sense for them to do so. Likewise, you may no longer dictate the role of the next generation in family affairs. As such, leading families are asking themselves questions such as:

• Would the next generation like to be actively involved in the business or managing family affairs, and would they have a preference?
• Do family members have expectations or their own personal ambitions?
• Do they share the same vision of the future?
• Are children qualified, prepared and willing to assume a future leadership position?

Talking to and, critically, listening to the next generation is really important right now because their attitudes and priorities may have changed in light of the pandemic. Finding out where they stand now can be important in avoiding future conflict.

One of the challenges you may face during family wealth and business succession is whether the next generation are actually ready to assume the roles and responsibilities that they are or will be taking on.

“Studies show that many succession failures were caused by inadequately prepared heirs,” explains Todd Angkatavanich, EY Private Tax, Americas. “Not only might the next generation have insufficient business acumen, they also might have limited understanding about the management of wealth generally.”

As a result, education is critical to ensuring a smooth transition. This is something that can be put in place very early on – whether that is learning leadership skills, the fundamentals of running a business, or the basics of how investment markets operate. In the current climate, crisis management may well be something you want to build in for your future leaders.

As much as it is crucial for a business to have proper policies and procedures in place, the same can be said for family governance. The larger and more diverse your family is – including geographic diversity – the bigger the need for proper protocols. Understanding where family governance fits within the three buckets of the overall governance structure is necessary to ensure you have a process to manage communications and both shared and divergent interests with family members.

1. Family governance — includes oversight of the family’s shared vision and values, who is part of family, and formal structures such as a family council or family assembly.
2. Wealth governance — can be thought of as who controls distributions of the wealth, such as trustees of a trust, managers of an investment entity or executives of a foundation.
3. Business governance — includes oversight of investments, business and investment companies, formal boards and advisory boards, and selection of executive management.

The required governance structures can cover a broad range of areas. It is important that the governance systems work in parallel with each other and that boundaries are set between the business and the family to avoid possible confusion and subsequent conflict.

A starting place for family governance is the creation of a family council, which can make decisions on behalf of the family as a whole, oversee family voting on key family governance issues as well as managing and resolving family disagreements. Families with business concerns need to consider how to integrate the family governance with existing corporate and wealth governance structures.

“Having these structures in place helps improve governance and family cohesion,” explains Jean-Marie Hainaut, with EY Private Tax, Switzerland. “It gives you a point of reference to say this is what was decided as a family. It makes dialog so much easier.”

Conflicts can arise from a lack of education, a lack of communication and a lack of clear vision. “When you consider that a high percentage of successions fail because of a breakdown in trust and communication within the family unit, the importance of proper governance for family, business and wealth can’t be overstated,” says Bobby Stover, EY Private Tax, Americas.

A succession plan is a living thing. Tax and business rules will continue to shift, family relationships will change, and birth, death, marriage and other life events will alter the dynamics of the family. And, as we have experienced in the COVID-19 pandemic, and previously in the 2008 financial crisis, global events can come from nowhere and have an impact on your best laid plans.

Being proactive is the best way to manage your family’s transition planning. In our experience, families that formalize and agree responsibilities for succession, and who renew and revisit generational and wealth transition planning on a regular basis fare the best. Establishing a process to review your plan regularly – ideally annually – is critical.