Protecting The Family Businesses And Wealth
January 28, 2013 Leave a comment
For business families succession planning is important to ensure the continuity and growth of business and protection of the economic interests of all family members.Family business owners are concerned about the interests of their spouses post their demise, disputes among siblings over the wealth and the leakage of the family’s wealth as a result of litigious divorces or family fights.Then there are concerns about ring fencing assets from litigation and confiscation.Sheltering from taxes is another common concern.
Both the objectives of ensuring the continuity and growth of business and protecting the economic interests of all family members could be conflicting at times.Protection of the economic interests of all the family members often results in the distribution of wealth because it may involve each family member directly holding shares of the company.This may prove detrimental to the interests of the business for various reasons.One of them is that all the family members may not be inclined to run the business.Another reason is that one of the family members owning a significant stake may dispose off his/her holding to an external party,thus leading to loss of control over the company.Since all the family members are not inclined to run the business on a day-to-day basis,it would be essential to split the management and operating roles from the ownership,which entails a fresh challenge.The business owner might want to give exactly equal number of shares to everyone,but those who work in the business may feel they are entitled to more.Likewise,those who don;t work in the business may feel the same way about their own shares.After all,they may reason, they’re not drawing salaries,so they should get a bigger share of dividends and profit-sharing.
To avoid disputes over property and to achieve tax efficiency,conditions are attached to the assets,their distribution and utilisation. This is done by creating a trust as a vehicle of succession planning.Trusts are now being used for creating separate vehicles for various family members to engage in carrying out investments in stocks,mutual funds and insurance policies for family members.There are various types of trusts and they can be chosen and executed depending on the objectives the settler wants to achieve.Sometimes the choice of trust structure is also influenced by regulations that govern the asset class being settled into a trust.These differ depending on whether the assets held by the trust include listed company shares or a private company,land and property,cash,etc.A trust is not a legal person but merely a legal obligation,wherein the assets are held in the name of the trustee for benefit of the beneficiary.A trust is a pass-through entity and its taxability is determined by the way in which the trust is organised.These are fiscally transparent entities whereby the obligation to pay tax is on the trustee (as a representative assessee).Though the income generated through the trust is taxable in the hands of the trustee,the burden of tax is effectively borne by beneficiaries to the trust.A trust in its own capacity can borrow money,own and dispose assets and it can hold offshore assets.A trust can also be an effective tool for separation of economic and controlling interests.But other issues such as tax,stamp duty,the proposed General Anti Avoidance Rules,liquidity,legal issues etc., need to be assessed ahead of succession planning by way of trusts.Finally,succession planning isn’t something a person can do once and forget.A family business owner has to continually revisit the succession plan,review it and update it to reflect the changes in business,the economy,and his/her own health as well as the abilities and passions of the people he/she plans to pass the business on to.