Failing to plan for the transfer of family wealth to future generations is one of the main causes of the loss of wealth over two or three generations.
In particular, it is essential to plan for the succession to the management and control of a family business if that business is to continue to thrive over a number of generations.
Why is a governance structure needed?
As a family business devolves through generations the ownership and control of the business can be split between many individuals. This can:
- make it difficult for key decisions to be made - for example, in relation to the potential sale or expansion of the business;
- create tensions between family members - for example, between those family members who are actively involved in running the business and those who merely enjoy the economic benefits derived from the business; and
- lead to instability in the running of the business.
Properly planning for the long-term management and sharing of a family’s personal wealth helps avoid disputes and ensures the family’s values are adhered to.
Benefits of a governance structure
A well designed governance structure will:
- set the expectations of the family in respect ofthe family business and family wealth,particularly future generations, and get their ‘buy in’;
- deal with succession to the ownership of the shares (or interests) in the family business and other family owned assets;
- separate control of the family business from ownership of the economic benefits derived from the business;
- ensure decisions are taken at the right level - for example, day-to-day decisions can be made by the individuals who are running the family business or managing the family wealth, but key decisions on the strategic future of the business, how the family’s personal wealth is invested or the family’s charitable giving may require the approval of the wider family at an annual meeting;
- provide a fair and harmonious exit for family members who do not wish to be involved in the business in the long term or do not wish their portion of the family’s wealth to be managed collectively with the rest of the family wealth;
- provide the opportunity for targeted tax structuring for different family members;
- prepare the next generation to take over the family business and management of the family’s wealth;
- assist with the long term growth and stability of the family business;
- reflect the founder's/family’s philosophy;
- provide how succession to the control of the family’s wealth is to be determined;
- be flexible enough to develop and react to changes in the family and family business(es) over time; and provide a means of sharing, managing and maintaining other family assets such as financial assets, properties, yachts, planes and art work.
Possible governance structures range from simple contractual arrangements, trust, foundation and corporate structures through to more complex structures involving a number of different vehicles depending on the needs of the family and the nature of the family’s assets.
This note is a general guide based on the law as at 1 January 2012. Tailored advice on the facts should be sought.