As a solicitor specialising in property, succession and probate over the years I have noticed that there are common factors and advices that are applicable to all family-run businesses. Here are some tips on how to implement a successful succession plan to ensure that the transition takes place as smoothly as possible.
Start planning now. Do not rush the transfer of your business or your will. The earlier planning begins the greater the number of options. Start considering it now.
The single piece of advice that I would give to any person wishing to transfer a business to the next generation is not to leave it until the last minute and rush into it. One does not wish to have succession and legal issues distract from the successful running of the actual business.
Many family-run enterprises do not have a clear heir identified or a written succession plan in place.
Make a will
Make a will or review your existing will to ensure that it reflects your current wishes. While you are deciding what to do, ensure you have a valid up to date will in place in the event of an unforeseen premature death. I cannot stress this enough.
If you do not make a will, your estate will pass according to the rules of intestacy, and your estate may pass to those you would never have intended to inherit it. There is no good reason not to make a will.
Making a will is one of the important things you can do to protect your business and your family’s future. If you do not make a Will the state dictates who is entitled to your assets. When a person dies without making a will the rules of intestacy apply governing who is entitled to receive a person’s property should they die.
Very often the application of the rules of intestacy results in the deceased person’s property being distributed in a manner that they would never have wanted. This is because the rules set out a list of people who are entitled to receive shares in the deceased’s property as well as the amount of these shares and the order in which they are entitled to receive them.
The rules are as follows:
- Where the deceased leaves a spouse/civil partner only, the entire estate passes to the surviving spouse/civil partner.
- Where the deceased leaves a spouse/civil partner and children, the spouse/civil partner inherits two-thirds of the estate and the children inherit the remaining one-third in equal shares.
- Where the deceased leaves no parent alive the estate is divided equally between the children.
- Where the deceased dies without a spouse/civil partner, children or parent, the estate is divided between his or her brothers and sisters in equal shares.
- Where the deceased dies without a spouse/civil partner, children, parent, brothers or sisters, all nephews and nieces take equally.
- Where there are no relatives the state takes the entire of the estate.
When you make a will, you also get to choose who will administer your estate. A will allows you to name the person or persons who would be the most suitable and who will ensure your wishes are carried out. If you do not make a will this is also decided by law and may fall to someone you would never choose. If you are a business owner it is advisable that at least one of your executors knows your business and preferably works in your business already.
It is particularly important if you have young children and want to provide appropriate care for them after your death that you make a will. If you have young children, then a will can establish a trust fund for their benefit and appoints guardians of your choice to look after them. If you have a child with special needs you can make arrangements in your Will for their care after your death.
Efficient tax options
Careful will drafting can have a significant impact on the level of inheritance tax which may have to be paid. It provides an opportunity to assess the position and consider what steps can be taken. The cost of making a Will can represent excellent value for money as it may decrease the tax burden and administrative difficulties that may have otherwise arisen.
If you are single or separated and living with a partner, then without a Will your partner may find him or herself without any share in your estate unless you have specifically provided for him/her in your Will.
If you have a child who has taken over the family business and your wish is to leave it to that particular child you need to make sure your will is up to date and reflects same. Otherwise, if an unexpected tragedy occurs it can leave that child in a very vulnerable situation where that business has not passed to him or her.
Often the only recourse for that child is to issue court proceedings against the estate which may lead to increased legal fees and fallouts amongst siblings and family members, and can have an adverse effect on the business.
Fairness does not mean equal shares
Giving a share in the business between children equally does not always mean being fair. Sometimes one may not want to divide a business between too many people as it increases the likelihood of disagreements and the business may have to be sold.
Fair does not always mean equal and equal does not always mean fair. If Johnny did not go to college and stayed at home to work in the family business, is it really fair to divide the business between all the children?
For family businesses, it is not merely a case of every family member being invited to join the family firm, nor is it a case that every family member should feel the company is there to support them.
However, if you do not have non-business assets, the majority, possibly all, of your wealth could be tied up in the business. When it comes to providing an inheritance for children, you may feel that the only way to treat them fairly is to bequeath an equal number of shares, whether or not they are involved or are likely to become involved, in running the business.
Perhaps non-working children can have shares and a right to be updated but no involvement in the core strategic or day-to-day decisions. Sometimes no child or heir is interested or qualified to take on the business and sometimes it is because the founder of the business has not prepared them for the challenge.
Communication is vital
Effective and clear communication is essential to any successful succession plan. Managing different personalities and expectations can be difficult but it is very important. Written policies should be set out for the transfer, acquisition and disposal of shares.
A method of valuing shares equitably should be determined and the ownership structure must be documented and assessed. The issues should be openly discussed with in-laws and children, as they are more likely to support your approach if they have been actively involved in its development.
They need to understand that, while there may be no ideal solution, there is a commitment to achieving fairness. Overall it is generally believed that those family members in the next generation who are actively involved in the business should have an ‘enhanced’ right to equity over those not actively involved.
List all business assets
Create a list of all of your assets and debts so your solicitor will have the full picture when you attend at the office to discuss the proposed succession plan. It will also be easier to divide up your assets between children once you have listed them all out on paper.
Where a person owns property jointly with another the most important question is whether that ownership is on the basis of joint tenancy or tenancy-in-common. The difference is highly significant.
A surviving joint tenant will, in the absence of exceptional circumstances, on the death of the other joint-tenant become automatically entitled to full ownership of the asset in question, regardless of the provisions of the deceased joint tenant’s will. Joint tenancy normally applies in the case of property owned by married couples.
The vast majority of such couples now place their family home, and indeed many other assets, in their joint names as joint tenants so as to ensure that on the death of one of them, the property will automatically pass to the survivor without the necessity of taking out a Grant of Probate.
This is both convenient and cost-effective. On the other hand, when one tenant-in-common dies there is no automatic right of ownership in favour of the surviving tenant-in-common. Instead, the share of the deceased tenant-in-common will pass either under the terms of his will, or to his next-of-kin in the event of intestacy.
Fair Deal Reform Bill
The government has approved the Fair Deal Reform Bill which will extend the three-year cap to businesses where a family successor continues to operate the business for six years. However, this has not yet come into force. Currently, an annual 7.5% charge based on the value of the business or a person’s share in the business for a business owner in full-time nursing home care is included as part of the fair deal calculation, which has the potential to drain the assets of a business for the next generation.
Assets that are not business assets are not capped and a five-year “look back” rule applies to same in relation to applying for State support from the Health Service Executive when entering into a nursing home. Any assets which parents have transferred in the five-year period before entering into a nursing home are included in the calculations for the assessment of assets and means of an individual.
Transfer of assets
Ensure you know how much any transfer of assets will cost you. The successor will also need time to find out how much it will cost him or her. The tax payable, if at all, depends on the circumstances of each case and a detailed discussion is needed with your solicitor and tax consultant/accountant in advance of any transfer of assets taking place.
Ensure that you will be financially secure after the succession plan has been implemented. Once you transfer property or shares you will no longer be the owner of such a valuable asset. Give yourself time to explore the options and discuss the options with your solicitor to ensure you are comfortable for the rest of your life after the succession transfer. Perhaps you do not wish to transfer the business or your shares now and would prefer to leave it pass in your will? Do you wish to pass on the majority shareholding now but still have a say? It is important to ensure that you are financially secure once assets are transferred.
Seek expert advice
Make appointments with professionals as early as possible. Speak with your accountant or tax consultant. Consult your solicitor well in advance. You will need to contact your bank in order to obtain their consent to the transfer if any business property is mortgaged and this can take a few months. Anyone who is self-employed and also their spouse if they helped out in the business should ask the Department of Social Protection about PRSI contributions and the pension.
Developing a family business succession plan is often a complex process and can take months or even years. There is a lot to be done before you put a pen to paper but hopefully the above steps will make the task seem a lot less daunting.
Karen Walsh, is a solicitor practicing in Walsh & Partners, Solicitors, 17, South Mall, Cork.