In some family businesses, a clear successor emerges, with others happy to pursue their own careers. But, even without a dispute about the running of the family business, it can still be difficult for families with more than one child to create an equitable and liquid inheritance. The right succession solution can create liquidity for non-successors and ensure the next generation of your family have the flexibility and freedom to explore every route to success.
As the current generation of business owners contemplate their eventual exits, there are many hurdles to clear before they can enjoy a smooth retirement. Popular culture often focuses on fraught battles for the leadership of the family business, but in many cases, such disputes never arise.
Child A may have the tenacity, passion or skillset to take over the business and this may be mutually agreed upon by their parents, siblings and key stakeholders. Their siblings, meanwhile, could take a different role in the business, forge a career outside of it or pursue their own professional ventures instead. Child B could be highly entrepreneurial and need funds for their start-up dreams, while Child C would rather put their inheritance towards property or their children’s education.
Frustratingly, mutually satisfied descendants do not necessarily make for simple succession planning, especially if you want to financially set your independent children up for success. If the family business is far and away your most valuable asset, or you want to preserve other illiquid assets, inheritance planning can get a little complicated.
Creating an equitable estate
For families that are asset-rich and relatively cash poor, it can be tricky to leave an equitable inheritance to the children that won’t be involved with the business. Your multi-million-euro company may not be accompanied by millions in savings, or assets that can be easily liquidated into cash. In these cases, how is creating an equitable inheritance that gives non-successors the liquidity to pursue their own goals achieved?
Realistically, for families with a low-seven or high six-figure worth, their business could be the most valuable asset in the family. Even if this is not the case, other assets may be highly illiquid or have sentimental value, meaning there is little desire to liquidate them to access inheritance funds. And in the midst of grief, finding a buyer for a niche asset is the last thing your family will want to do.
Even if you have plenty of liquid capital that is equitable to a stake in or sole ownership of the family business, inheritance tax (IHT) considerations mean leaving a cash legacy is rarely a financially efficient choice. In countries like France, South Korea and Japan, IHT can consume between 40-55% of the estate, cash and assets an individual was due to inherit. Opting for a VUL insurance policy can create the additional liquidity you need to balance your estate and mitigate inheritance tax concerns.
A robust liquidity and succession plan
Even if you are not concerned about the transition of ownership within your business, there are other issues to address. A survey of wealth advisors in Asia found that 86% of HNW families1 rank wealth preservation and maintaining family harmony as their highest priorities. Prioritising business succession planning2 will ensure these outcomes are achieved in a number of ways.
51% of current business owners plan to leave their business in the next five years3, but only 28% say their plan is to transfer ownership to a family member. Yet 81%4 of the baby boomer generation say they intend to leave an inheritance to their children – presumably, one that is fair and as equal as possible.
A strong succession plan can ensure every member of the family understand the family business will be able to succeed in the hands of the next generation. At the same time, the right strategy will ensure that, regardless of their future involvement in the business, each child receives the inheritance their parents want them to enjoy.
Ensuring you have the right cover
For ultra-high net worth (UHNW) families, it is not simply a case of ensuring an insurance policy is in place. Many will own high-value illiquid items, such as thoroughbred horses, works of art, vineyards or even private airplanes, which are likely to exceed the typical limit of cover. It’s also likely they’ll require specialist appraisals to determine their value. As such, obtaining sufficient coverage can be tricky for the wealthiest families.
Unfortunately, research indicates that Singapore’s 184,000 millionaires do not have the right level of insurance for their assets5. If this is also the case with a life insurance policy that fails to create sufficient liquidity, a descendant could receive an unfairly small share of the family inheritance. In some instances, they may sell a prized family heirloom that liquidity planning was supposed to protect, causing unnecessary conflict.
Making prudent decisions about your inheritance plan, and ensuring that an equitable result is achieved, can only be done with the right advisors and solutions. 52% of HNWIs say they value specialist insurance expertise6 that is geared towards capital and asset-rich people like themselves. A solution like Swiss Life Generations will allow you to discuss your succession planning needs with professionals who understand and want to facilitate the next generation of your families’ self-determined lives.
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