My finances, my projects, my life
January 28, 2023

Smart succession planning – minimising conflict and protecting family businesses

  Compiled by myLIFE team myWEALTH January 24, 2023 3

Succession planning is complex at the best of times. Even if your family situation is straightforward, you will need to navigate the relationships between individuals and examine how best to provide for them in the future. Having a family business further complicates the decision-making process, especially if some heirs are working within the business and others not. What should be at the forefront of your mind when conducting succession planning?

The first point to consider is the individuals concerned and their personal and financial situation. Most people will 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 well be governed by their age and personal situation. For example, those who may be relying on an inheritance to buy a home or pay other living costs would almost certainly prefer a cash legacy, while those who already have established wealth may prefer to receive specific heirlooms or investments.

Compulsory inheritance rules

You will need to look at the people who are reliant on you and ensure they are properly provided for. In some countries, including Luxembourg, this is embedded in the compulsory inheritance rules. Basic rules stipulate 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% in the case of three or more. This limits the flexibility available and could 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 when the children, designated as heirs by the succession law, live outside of Luxembourg or some estate is located outside Luxembourg.

Luxembourg inheritance tax rates differ depending on whether the transfer is between parent and child, to siblings or other relatives.

Inheritance tax considerations should also be factored into the decision-making process. Luxembourg inheritance tax rates differ depending on whether the transfer is between parent and child, to siblings or other relatives. While the proportion can be significantly reduced for other groups, non-connected heirs will pay 15% of inheritance tax. To this should be added the increases to the base rates if the net taxable value of the portion collected by the beneficiary exceeds EUR 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 a PwC Family Business Survey. However, only around 30% of family businesses worldwide reported having a formal succession plan in place in 2021, up from 15% in 2018.

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

Once founders depart the scene, families often choose to separate management and ownership of the business, 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 stake, something that succession planning should take into account. Non-working members of the family might receive non-voting shares, or smaller stakes, possibly compensated with a larger part of other assets such as the family home.

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 the potential heirs are young or still in full-time education.

If the founders of the company decide to hand over ownership before their death, they will need to consider whether they need a continuing income from the business and shareholdings need to be structured accordingly. It is possible to then cede control to family members while retaining preferential rights to dividends, or alternatively 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 income tax.

Ensuring fairness with complex estates

Inevitably, where large, complex estates are concerned, heirs may well end up receiving completely different types of assets, and in such cases it is possible that their relative value may change over time. A painting might hold its value better than a portfolio of shares – or vice versa.

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 may 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.