Succession planning – Life moves with Trust

Suraj Malik, Director – M&A Tax, PwC India  

Reflecting on ownership or leadership succession provokes an extreme emotional reaction for business and asset owners, as this is a reminder of age and mortality, which innately clouds the human mind with fear, feeling of loss of control or influence. A stress free mind calls for a simple and robust succession plan to protect the assets and facilitate a seamless transition for the benefit of the business and next generation. Individuals who have dealt with succession issues structurally and with professional help have ensured survival and sustainability of businesses and wealth through generations.

Success is the key component in the term “succession,” and this itself is indicative of the importance of succession in any plan to succeed. Popular English dictionary defines “succession” as a number of similar events or people that happen or exist after each other, which in simple terms signifies order and sequence.

In the context of an organisation, sequencing is extremely important for every activity or function and this naturally encompasses the ownership and leadership on the top. For any enterprise, and typically, for family run businesses, reflecting on ownership or leadership succession often provokes an extreme emotional reaction, as they are reminders of age and mortality, which innately clouds the human mind with fear, feeling of loss of control or influence. Combined with this are concerns of possible successors having the right abilities or preparedness, and the need to preserve family wealth, identity and legacy. Family businesses often have intimate histories and complex structures with characteristic issues such as emotional ties between family members, hesitation on communication, generation gap, mistrust, etc.

Based on the experience of working with multiple business and asset owners and their families, the Succession Planning exercise is essentially a strategy to not only to deal with a unique subject, which is inevitable and inescapable [Death!] but also for other uncertainties, such as disability, divorce and debt claims and family specific requirements. The goal is to protect the assets and facilitate a seamless transition for the benefit of the business and next generation.

For decades, “trust” has been the mainstay of succession, which was initially orally laid upon and expected usually from the eldest surviving member and at times it was documented by identifying a trusted person to be the executor of a written Will.

While having a documented Will that is properly executed is vital, it is a common misconception that a Will fulfils all the succession-planning needs of an individual. As a Will comes into play only after the lifetime of the individual, its genuineness or validity is frequently challenged by dissatisfied members. Wills are unable to provide for conflict management and segregation of ownership v. control in a proper manner. Moreover, the assets of the individual remain exposed and unprotected from any liabilities and obligations of the individual. In more tangible terms, transmission under Wills does involve probate process, costs and potential tax leakage owing to inheritance tax or estate duty (which India is likely to re-introduce soon).

These shortcomings of a Will have promoted the popularity of Trusts globally. Trusts fortify the custody and guardianship in a more structured and customised manner. Trusts facilitate tackling sensitive family issues and delivering benefits as desired by an individual, with an inbuilt mechanism to deal with disputes or conflicts. A properly drafted trust deed has a good balance between owner’s desires, professional management, responsible business decisions, distribution to beneficiaries and healthy family dynamics.

A well-planned succession design is long-term commitment to preserve and protect family and business legacy. However, it is easier said than done, and thus, we see that families are often not geared to handle transition and related conflicts. Empirical evidence suggests that more than 80% of family businesses do not survive the third generation of ownership. Repeatedly, we have witnessed feuds that needlessly snowball and severely affect the business and goodwill, not to mention that the dispute often results in no one actually benefitting from the assets.

The blueprint for a trust deed for succession needs to factor contingencies and must be a systematic process tied to the desires of the owner. It is imperative for the owner to have a progressive mindset, considering the future requirements of the business and the needs of the family members. A transition process managed by professionals brings an unbiased perspective and best practices that help customise succession plans to individual family needs with tailored solutions for diversity on asset size, family size and asset location. Often, there is a disconnect between what the incumbent plans in private and what the next generation is expecting, which results in confusion, conflicts and lingering disputes.

Now, with the globalisation of businesses, families have also become multinational, it is important to plan for tax consequences and compliance issues in the hands of beneficiaries, which become more complex where they are residents or citizens in multiple jurisdictions, and accordingly, the wealth and business of family is located in multiple jurisdictions.

To sum up, succession planning under a Trust structure results in consolidation of ownership and control under a Trust with a properly documented vision that ensures commitment from next generation family members. At times, this requires professionals to implement the Trust objectives, leading to better governance and more rigorous decision making process in areas such as finance, wealth management, personal expenses, etc. A Trust lays out specific protocol governing decision making and in case of any difference of opinion or deadlock the process to manage the conflict. Families that have dealt with succession planning issues structurally and with professional help have typically ensured survival and sustainability of their businesses and wealth through generations.