Managing family businesses can be complex as it involves navigating daily operations as well as family dynamics.
Because of this, it’s important both your succession and estate plans align. While documenting your succession plan is key, it’s equally important your estate plan legally reinforces the future vision. Ensuring both documents complement each other will allow for future growth and avoid issues.
In our 2023 Family Business Survey results, 72 per cent of respondents noted succession planning was one of the top five challenges facing Australian family businesses. So, how important is it to align your succession plan with your estate plan, and what issues arise if they aren't?
The succession plan can adopt an operational lens
In some cases, the succession plan can overlook the group structure of the business. For some family businesses, the succession plan may be for one child to take over the ownership and control. However, the business is in a family trust and the estate provides a different outcome.
Example
Business: ABC Enterprises
The current owner John Smith has decided his eldest child will take over ownership and control of the business. However, ABC Enterprises is held within a family trust. According to the estate plan, the assets need to be evenly divided between all three children. Therefore, there is conflict created between the succession plan and estate plan. In this scenario, the estate plan will generally take precedence as it’s a document that is legally binding.
The succession plan often does not consider the role of the Trustee
Sometimes the succession plan can overlook the role of the Trustee. This often happens when an estate plan is not prepared at the same time as a succession plan. Therefore, who will become the Directors of the Trustee company and ultimately have control of the family trust is not considered.
Example
Business: ABC Enterprises
ABC Enterprises succession plan outlines the eldest child will take over the business. Their family trust holds majority of their assets, and the Trustee Company is responsible for managing the Trust. There is no consideration on who will take over the Trust when John Smith retires. This could lead to conflict when he chooses to retire.
The succession plan often addresses one generation at a time
In many families, people consider succession and retirement at the same time. What’s often overlooked is unexpected changes in family dynamics such as death, illness or divorce – what happens then? How do you ensure there is a sufficient plan in place to continue operations?
Example
Business: ABC Enterprises
The current owner John Smith has decided his eldest child will take over ownership and control of the business. They’ve also considered John will be retiring soon. However, there is an unexpected health battle the eldest son is currently facing, and the family have not considered a contingency plan, legal and financial safeguards as well as who will run the business should something happen to his son.
Keeping the business within the bloodline is only talked about as part of the succession plan
Often a succession plan will involve a discussion around whether the business is to remain within the bloodline or not. When it’s not discussed as part of the estate plan, many family members write a will and leave everything to their spouse. This can, in some scenarios, result in a different outcome to what was intended when discussing the succession plan.
Example
Business: ABC Enterprises
The current owner John Smith has decided his eldest child will take over ownership and control of the business. John has created a succession plan to ensure the business remains in the family bloodline. However, they did not discuss the estate plan.
John unexpectedly passes away and his eldest child is left with the business, but they have no interest in taking over and decide to sell. This result contradicts the intended wishes of John to keep the business in the family to grow for generations to come.
Family members expecting a standard will to be sufficient
A family business can be complex, comprising of various structures, Directors, Trustees and ownership of shares need to be considered. This involves a comprehensive estate plan, where a standard will generally won’t be sufficient.
Example
Business: ABC Enterprises
The current owner John Smith has decided his eldest child will take over ownership and control of the business. ABC Enterprises is made up of various subsidiaries in different industries. The business is complex with various tax structures, Directors and Trustees. Instead of creating a comprehensive estate plan that considers this complexity, he approaches his lawyer for a standard will that doesn’t consider business structure, Trustees, ownership or family governance. When he passes away the family is left to align the two.
A standard will does not cover, who will take on your different Directorship roles, who will be the Trustee. Also, when preparing a standard will, the family does not consider that John does not own the assets in a Trust. So the will does not consider the Trust. The will also does not cover superannuation benefits.
We’re here to help
Aligning your succession plan to your estate plan requires time and a disciplined approach. The legal documentation is critical to ensure what was intended for the family business actually happens. It’s critical for families to discuss the alignment of their succession plan and estate plan to ensure they are aligned and achieve the intended outcomes. Please reach out to one of our accredited family business advisors if you wish to discuss any of the above.
Learn more about how our Family business consulting services can help you
