Smart succession planning – minimising conflict and protecting family businesses

Succession planning is complex at the best of times. Even if your family situation is relatively straightforward, you may well need to manage the relationships between individuals as you examine how best to provide for them in the future. Having a family business further complicates the decision-making process, especially if some heirs work within the business and others do not. What should be at the forefront of your mind when carrying out succession planning?

The first point to consider is the individuals concerned and their personal and financial situations. Most people assume the natural course is to divide their estate equally between children, perhaps with different arrangements for other family members.

However, the type of assets you give them may be governed by their age and personal circumstances. For example, children who may rely on an inheritance to buy a home or meet other living costs would almost certainly prefer a cash legacy, while those who already have established wealth may prefer to receive specific heirlooms, investments or a share in a business.

Compulsory inheritance rules

You need to consider the people who are your dependents and ensure that those who need it are properly provided for. In some civil law countries, including Luxembourg, this principle is embedded in compulsory inheritance rules. The basic rule stipulates that at least 50% of a person’s estate should go to their children if there is one child, 67% if there are two, and 75% if there are three or more.

This restricts the flexibility available to the testator and may make it difficult to provide for dependent spouses, so it is important to devise solutions and explain them to the family ahead of time. These rules may be challenged in cases where children designated as heirs by the succession law live outside Luxembourg or part of the estate is located outside the country.

Luxembourg inheritance tax rates differ according to whether the transfer is between parent and child, to the testator’s siblings or other relatives.

Inheritance tax considerations should also be factored into the decision-making process. Luxembourg inheritance tax rates differ according to whether the transfer is between parent and child, to the testator’s siblings, or other relatives. While the proportion can be significantly reduced for close relatives, non-connected heirs will pay an inheritance tax at a rate of 15%. To this should be added increases to the basic rates if the net taxable value of the portion received by the beneficiary exceeds €10,000 (from 1/10 to 22/10 increases).

The amount will also vary according to the size of the estate, given that large estates (€1.75m or more) are subject to the top rate of inheritance tax. This may make it worthwhile to hand over assets as gifts during the donor’s lifetime to reduce the ultimate inheritance tax bill. Assets given away before death are not generally subject to inheritance tax, although there are mechanisms designed to bar people from giving away real estate in the year before death with the explicit purpose of avoiding the taxation of their assets.

What about the family business?

Succession planning is one of the most sensitive issues for a family company, and has become an increasingly important focus for business owners as a result of the Covid-19 pandemic, according to the 2023 PwC Family Business Survey. However, although 75% of family businesses worldwide have a shareholders’ agreement, in only 64% of cases was succession enshrined in the founder’s will. In 2021, only 34% reported having a robust, documented and communicated succession plan in place, albeit up from 15% three years earlier.

Decision-making regarding family businesses can be complex, and inter-generational teamwork is important; business owners shouldn’t assume that they understand what other people want. Having open, honest – even if sometimes difficult – conversations with other family members can help put the required structures in place, perhaps over a period of time.

Once founders depart the business, families often choose to separate its management and ownership, which can make inheritance decisions easier. If some family members are working in the business, they will need to be properly incentivised and might resent non-active members having the same ownership rights, something that succession planning should take into account. Non-working members of the family might receive non-voting shares, or smaller stakes, perhaps compensated with a larger share of other assets such as property.

Getting the structure right

In general, it is easier to match operational responsibilities and an equity stake within a share-based corporate structure than a partnership. Equity holdings can be transferred progressively over time, which is particularly useful if potential heirs are young or still in full-time education.

If the company’s founders decide to hand over ownership before their death, they need to consider whether they need a continuing income from the business, and shareholdings need to be structured accordingly. They can cede control to other family members while retaining preferential rights to dividends, or perhaps to retain ownership of the property used by the business.

Such decisions will also be influenced by tax considerations, bearing in mind that capital gains tax rates on the sale of a company, or part of it (for instance, on the sale of a stake to generate investment income) are generally lower than personal income tax.

Ensuring fairness with complex estates

Inevitably, where large, complex estates are concerned, heirs may receive completely different types of assets, whose relative value might change over time. A painting might hold or increase its value better than a portfolio of shares, or vice versa, but that may not be apparent at the time of transfer.

It is worth discussing your legacies and the reasons for your decisions on the distribution of assets ahead of time.

This can raise problems of fairness, and it might be necessary to adjust your will from time to time to balance the value of legacies if they get significantly out of step. It is also worth discussing your legacies and the reasons for your decisions on the distribution of assets ahead of time.

In large families, it is often difficult to please everyone all the time. But at least if you explain your reasoning, your heirs will have clarity over how you have chosen to distribute your wealth, and if there are well-founded complaints, these can be addressed. This might prevent lengthy and unpleasant wrangling between family members – and very possibly a lot of lawyers’ fees – later on.