by Harry Fehily (Managing Partner), Commercial Litigation Department
One of the most important and sensitive considerations facing individuals is how to pass on wealth to family, loved ones and charities in the most efficient manner. Individuals are increasingly moving from the traditional passive approach to succession to a very active one.
Early and thorough succession planning can ensure you:
Put appropriate structures in place to control who manages and receives your assets;
Minimise any taxes that could accrue to ensure a greater share of your assets passes to your heirs and chosen good causes;
Ensure that your heirs are educated in financial matters and provide them with wealth management continuity and protection where required;
Minimise administrative costs to your estate;
Minimise the disruptions faced by company employees (family and outsiders) and business associates to ensure the longevity of your business.
Estate planning now reflects the fact that key succession issues require to resolved or indeed planned for during an individual’s lifetime, to provide for a smooth and efficient transfer of assets and management responsibilities
For Family Owned Businesses – A Useful Strategic Exercise
It is a proven fact that most family owned business do not survive the passing through the generations. This can arise for a number of reasons which include:-
- No clear successor;
- Diluted ownership resulting in disputes;
- Change in the business environment;
- The need for new ideas and new blood;
- Retaining key employees; and/or
- Tax liabilities eroding the value of the business and assets.
Dealing with these issues in a timely, controlled and effective manner can ensure that the business survives and can provide a living for the next generation and indeed the generation after that. Structures used to address these issues include shareholders agreements and executive pension planning.
It may seem obvious but any decision as to the transfer of personal assets to the next generation during a parent’s life time will first require them to ensure that they have enough funds to satisfy their personal needs. Preparing an effective financial forecast can give you the information to allow you to plan effectively for your retirement and decide on the appropriate time to pass surplus assets / funds to the next generation.
A family partnership is a simple structure that will allow assets to be transferred to your children now with the benefit that the future growth accrues in their names but where control of the partnership rests with the parent in their role as managing partner. The managing partner would generally decide on the investment strategy for the partnership, and the distribution policy of the partnership. This type of structure is most appropriate where the parent(s) want to gift assets to their children during their lifetime. In this way, the family partnership offers a means by which the family assets can be grown and accumulated for the children and free from inheritance tax whilst the children are young and indeed can extend beyond them reaching adulthood. It could be considered as a family trust to be managed and controlled over the respective family members’ lifetimes.
There are two main benefits to setting up a family partnership;
- It enables a parent to gift assets to a child or children to be held in a partnership structure, where control of the partnership rests with the parents in their role of managing partner
- It creates a platform, in a controlled environment, whereby the children are educated in financial matters and are introduced to trusted advisers. In this way the knowledge and experienced gained by the parents can be passed to the children.
In looking at a succession plan it is vital to start early and consider the funds that will be required for an individual’s and their partner’s needs, currently and into retirement. You should then establish the appropriate structure to hold your investments and indeed assets. Once you have done this you should then consider a suitable investment mandate that meets your requirements. Harry Fehily discussed the above mentioned topics with Davy and they stated that they are of the view that they favour a diversified portfolio that is spread across asset classes and jurisdictions. According to Davy, in this way, it is possible to build a robust portfolio capable of generating string returns with a lower degree of overall risk. This strategy should allow you to achieve above average returns while reducing the risk to your portfolio.