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June 18, 2024

Estate planning: how to hand on the family business to your children

  Compiled by myLIFE team myWEALTH May 9, 2023 1318

Having invested your heart and soul into the management of your company, you may now be thinking about its future and the best way to guarantee its survival once you are gone. What is the best way to involve your children and hand on your company to them in a fair way, avoiding any conflicts and irregularities at the time of succession?

Estate planning is a delicate issue for you and for your loved ones. Scrupulous planning is required if you are to avoid conflicts, and this is particularly the case when your family estate includes a company.

Whilst keeping the company within the family has its advantages (a sense of loyalty and responsibility towards the company, familiarity with its specific situation and culture, etc.), the procedure is not always easier than a sale to an external buyer. Preparing things in advance and talking openly to your loved ones is key if you are to leave a lasting legacy and ensure the best possible handover of your estate. This is particularly the case if you would like one of your children to take your place but don’t necessarily want the others involved in the future management of the company.

Discussing the future of your company with your children

Handing on a company is a delicate matter that requires robust up-front preparation. The fact that the process is taking place within the family is not a valid excuse for a less rigorous approach. It is key to prepare for the handover – this will give your children peace of mind, enable you to comply with inheritance rules, and ensure the future well-being of your company.

You may believe that your eldest son has the necessary skills to run the company, or that the abilities of your younger son and his sister perfectly match the needs of your organisation. But have you already discussed this with them in serious terms? Are your ambitions compatible with the life goals of your children? Do they really want to take over the business?

In the past, we didn’t tend to ask this question, children took over from their parents whether or not they had indicated their desire to do so. Nowadays, mindsets have changed. Most entrepreneurs understand that it is useless, and maybe even counterproductive, to force a child to take over the family business if they do not want to.

It is therefore essential that you make your children aware of how your company operates and of its values as early as possible. Answer their questions and try to assess whether they are interested in the company and its activities. Do they feel able to take over from you? To assume the role of manager? Maybe they have other goals for their professional future? These issues must be frankly discussed within the family. This is a key step in helping your children decide on their future goals. It will also help you to organise things properly and to accommodate the goals of each person involved.

Selling your company to a third party

If your children are unwilling or unable to take up the baton, you will have to consider handing over to a third party to run your company’s business in the future. We recommend discussing this in your wider family circle – maybe you have a brother or a cousin who could be interested? You could also consider a sale to one of your close staff members, your management team or even an external buyer. Whatever the situation, any handover will have to be planned a few years in advance and will require detailed preparation.

A gradual handover

Let’s say, for example, that your two sons would like to take over the business but your youngest daughter has other ambitions.

The handover to your two sons must be prepared well in advance so that they can be gradually involved. They will require training and must acquire the skills necessary for managing a business, they will have to meet the professional team, get acquainted with operating procedures, and gain access to all corporate data, etc. Once they are involved in the daily running of the company, they should also take part in strategic decisions, as soon as this is possible.

This apprenticeship should take place over a number of years to allow your future successors to carve out a place for themselves so that they are fully up and running when the time comes. This is also a way for you to step down gradually.

Separating the ownership and operational management of your company (…) will allow you to allocate roles within the company, whilst ensuring its future performance.

Allocating roles and sharing out the inheritance

Handing over the ownership and operational management of a family business between several children raises many questions: Should you hand over an equal share in the company to each of your children? Would it be better to prioritise your eldest who is more qualified, or the child who has invested the most time and energy? Should you entrust the management to one or several children, or to an outsider?

The perfect solution does not exist. It all depends on how your children get along, their compatibility with the company, their respective skills, etc. These strategic issues must be discussed as a family. But do bear in mind that an equal share will not necessarily be equitable.

For example, what if your two boys have been involved in running the family business for years, and when you die, their sister gains the same decision-making powers as them within the company. This could cause tensions and even hamper the company’s smooth operation.

It may therefore make sense to separate the ownership and operational management of your company. This will allow you to allocate roles within the company, while ensuring its future performance.

    • A family charter: we recommend that you establish a family charter or a shareholder agreement to define the responsibilities and formalise the relationships of family members. This document should detail the objectives, values and vision of the family. It should also determine how the company will operate: the role and mission of everyone involved (passive or active shareholder, management powers or otherwise), governance rules, entry and exit procedures, etc.

Some estate planning options

It is a real challenge to split your estate on a fair basis, especially if your company is the dominant asset. The aim is to guarantee your company’s future, whilst also ensuring that all family members are in agreement and that none of your children are disadvantaged. Here are a few tips on how to organise this.

Draw up a summary of your assets

Start by drawing up a summary of your assets. In principle, your estate is made up of your assets and liabilities. Make a detailed list of your possessions so that you know what you is available to hand on to your heirs. A specialised adviser can help you with this, drawing up a list of all of your assets (financial, real estate, business, etc.) and liabilities, taking account of your matrimonial regime if you are married.

Draw up a will

In Luxembourg, an estate is shared between the close family members based on the rules of inheritance law. The law defines who the beneficiaries are, and the share of the estate that they will inherit. However, it is possible to draw up a will to revise the split provided for under the law, subject to certain restrictions.

You must respect the reserved portion of your estate, i.e. the share of your estate that must be allocated to your statutorily entitled heirs.

However, you must respect the reserved portion of your estate, i.e. the share of your estate that must be allocated to your statutorily entitled heirs. In the example above, the three children must receive at least 75% of the estate (67% if there are just two children, and 50% if just one). The remaining share of the estate (called the discretionary portion) may be allocated freely to one or other of your children, to your spouse or to any other person.

If your estate includes the shares in your company and other Luxembourg real estate assets and savings, you can, for example, chose to bequeath all the shares in the company to your two sons, and other real estate assets and some money to your daughter. These bequests must be of equal value, whatever the assets. Each of your children must receive at least their reserved portion. If this is not the case, the injured party may take action to reduce the award and claim payment of financial compensation (partition with compensation) to rectify the inequality. Such action is not mandatory and any statutorily entitled heir may waive their right to this procedure at the start of inheritance proceedings (Article 1077-2 of the Luxembourg Civil Code). The remaining portion of the estate – the discretionary portion of 25% – can then be freely allocated. For more information on such issues, check out our section on inheritance issues.

Useful info: in Luxembourg, death duties are payable at between 0% and 48% on the share of the estate received. The rate payable varies depending upon the relationship with the deceased and the value of the estate. However, direct descendants do not pay tax on the portion of the estate to which they are statutorily entitled.

Make lifetime gifts

You can also prepare for handing on your estate by gifting assets to your children during your lifetime. However, when the estate is distributed, any lifetime gifts are taken into account and revalued in order to check that each child has received their reserved portion of the estate.

If you gift the shares in the company to your two sons and a sum of money to your daughter during your lifetime, the value of your business could potentially double in the period from when the gift is made and the estate distributed. If this is the case, your daughter will be entitled to claim financial compensation to rebalance the shares received in the estate (unless the rise in the value of the company is attributable to the efforts – the work and financial investments – of her two brothers).

NB: the heirs can decide to refuse to accept their inheritance (for example, if it is not to their advantage due to any outstanding compensation payable, debts, etc.). In this case, they can keep the gift as received on the day it was given.

One way to avoid any revaluation of lifetime gifts, is to make an inter vivos distribution of the estate among the entitled heirs (Article 1078 of the Luxembourg Civil Code). This works as follows: “(…) the property donated must, unless otherwise agreed, be valued on the day of the inter vivos distribution of the estate as regards appropriation and calculation of the reserved portion, provided that all of the children living or represented at the death of the ascendant have received a share of the early distribution and have expressly accepted it”. In this case, each heir receives a gift and there will be no revaluation at the time of the estate distribution to ascertain whether any of the children have received preferential treatment.

Useful info: except in the case of manual or indirect (and conditional) gifts, gifts in Luxembourg are subject to registration fees (of between 1.8% and 2.4% for a gift made to a child) and to notary fees.

What about your spouse?

If you are married, your estate will be shared between your children and your spouse, in accordance with the rules of inheritance law. However, you can decide to grant more (or fewer) rights to your spouse via your marriage contract, will or gifts.

These are just a few solutions to optimise your inheritance planning. The process may prove much more complex, depending on your personal situation, and this is particularly the case if a family company is involved. It’s always a good idea to call on the services of a qualified professional (a wealth management adviser, banker, lawyer, notary, etc.) for advice and guidance on establishing your inheritance planning. They will be able to inform you of the tax and legal consequences of your decisions and offer the most suitable solutions to uphold the interests of both your family and your company.

This article considers succession issues for Luxembourg residents whose assets are located in Luxembourg. For cross-border inheritance issues, there are other variables to take into account.

Our thanks go to Maître Dekhar, solicitor and partner at the firm SD Law, for contributing to this article.