Non-Tax Aspects of Estate Planning – Part II
Continuing with our consideration of non-tax issues in estate planning, we turn to the reality that, notwithstanding the importance of non-tax issues, taxes are important. We will typically initiate our advice on these tax-related issues by reminding our clients that they need to think "outside the box" and leave the tax issues to the professionals. In our experience, if you let the tax issue drive the advice, you overshadow the non-tax issue at great peril to the family succession plan.
Obviously, an important initial determination that needs to be made at the outset of creating a succession plan is to decide whether or not you plan to pass the business on (to family members or a trusted employee, for example), liquidate the business, or sell the business to a third party.
Once the preliminary determination has been made in respect of the future of the business, then one needs to look at the issues from two important but separate perspectives. One from the ownership vantage point and the other from the managerial view. In family-run businesses it is especially important to separate the two perspectives and to approach the business and succession planning issues from both of these viewpoints on a separate and analytical level.
An example of the importance of separating these two aspects of decision-making is when the ownership of the business is being passes on to younger family members, yet the management is being maintained by existing non-family senior managers.
Another important factor when separating the decision-making process is the question of control. Often, there are three separate aspects of a family-run business, namely, ownership, management and thirdly, and equally important, control. An example would be where a parent has passed on the growth shares of the family business to the next generation, preserved the senior managerial employees and yet has maintained control of the family-run business by holding the voting preference shares.
Given these three important decision-making aspects of most family businesses, one needs to consider the non-tax aspects of how to best manage these three, often opposing, entities within the business plan.
Certainly, in our experience, it is extremely rare to see a family-run business being liquidated as a result of taxes owing. Rather, the family tension or the lack of management of the succession plan is unfortunately the more likely reason for a family business to be liquidated.
Part of the challenge regarding an effective state plan is getting the family history and identifying and working through emotional issues that have the potential to overwhelm the entire estate plan.
One of the most important individuals to identify as you work through the non-tax issues in an estate plan is the individual or the individuals that take on the role of chief emotional officer. In many respects, identifying this individual and using the skills that this person brings to the family unit, can be a crucial step in the management of the non-tax estate planning steps.
In our next blog, we will continue to look at the role of various family members, including the chief emotional officer.
All the best,
Ian & Suzana.