27 April 2017
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SUCCESSION AND INHERITANCE: Have you done enough to preserve your family business, create financial security for all your offspring and protect sibling relationships?

Succession - the transfer of ownership, control and leadership of a family business to the next generation - is private, emotional and almost always contentious. Even mentioning it can feel like opening a can of worms.

It is no wonder then that many families avoid discussing the topic altogether. The older generation, most of who are enjoying better health and expect to live longer than their parents, find it easier to delay retirement than confront the future or, worse, risk fuelling sibling rivalry. The younger generation, though more pragmatic than their forebears, are nevertheless susceptible to assumption, emotion and fear, leaving them equally reluctant to nail down the future.

Awkward though it may seem, failing to plan effectively for succession can be devastating. The absence of a robust and timely strategy that takes into account all the family's financial affairs and objectives can destroy the future viability of successful businesses and trigger family conflict that endures for generations.

It's time for a cautionary tale.

The Tale of Fiction Ranch

Jake and Liz Chilcott run a successful game lodge on a large ranch in the Fictitious Hills. Jake, who was born on Fiction Farm, inherited it from his father and helped transform it into a thriving wildlife reserve and popular lodge. Jake and Liz have three children. Charlie, the youngest, lives on the ranch and helps run the lodge with his girlfriend. He is passionate about local wildlife and communities and expects to be involved in the ranch's future. Suzie, the middle child, is in the early years of a seemingly unstable marriage to a British farmer with whom she lives in Ireland, together with their two children. Robert, the eldest, who has little interest in the ranch, is still trying to make his fortune on the London property market.

Jake and Liz, now in their seventies, have put off discussing the future of the ranch with their children in order to avoid awkward conversations or conflict between siblings. After all, they rarely come together as a family so when they do, they naturally want to steer clear of thorny issues and have a happy time. Besides, Jake considers himself fit and while delighted to have the enthusiasm and assistance of his youngest son, he has no intention of letting go of the reins just yet.

So for now, Jake and Liz have drawn up a will with the family solicitor leaving the ranch and lodge to all three of their children. They believe the equal distribution of assets between siblings is the fairest thing to do.

Since Fiction Farm is a much loved family home as well as a business, Jake and Liz understandably assume that their children will be united in their desire to keep it in the family. They also assume that Charlie, the only child who has shown any interest in the business, would continue to run the lodge and to draw an income from it. Anyway, there is plenty of time to sit down and discuss it and make sure everyone is happy.

In the event, Jake suffered an unexpected and fatal heart attack due to undiagnosed heart disease. Liz and her son Charlie continued to run the ranch until a few years later when Liz, who had been suffering from ill health requiring expensive care, also died.

Charlie and his wife then began to forge ahead with plans to modernise the lodge and develop tourism on the reserve while supporting local communities. But Charlie soon came under pressure from Robert who wanted to inject cash into his property business and from Suzie who had got divorced and also desperately needed cash.

Robert and Suzie were determined to sell their thirds of Fiction Farm and were within their rights to do so. Unable to buy them out - thanks in part to his mother's care bill - and unwilling to saddle the ranch with unserviceable debt, Charlie was forced to agree to a sale. Although he managed to retain a small acreage, it was not large enough to support the wildlife and tourism business he had dreamed of running with his own family. The sale of Fiction Farm was rushed and acrimonious with the result that Charlie no longer speaks to his siblings, the property was sold for less than it was worth and a family built up over generations came to an abrupt end.

The End

So what could Jake and Liz have done to prevent their fairy tale turning into a cautionary tale? The answer is quite a lot. A number of specific measures could have been put in place to protect the family home, preserve the business and keep the peace between siblings.

Consultation with a financial adviser at an early stage, as well as a family solicitor, would have resulted in a view of the family's financial affairs in the round leading to much better decisions.

For example, with the knowledge that one sibling wanted to take over and develop the family business and what, if any, cash savings or other assets were available, a good financial adviser would have recommended measures that might have allowed Charlie to hold on to the farm and business and his siblings to be happily compensated.

Working together, their lawyer and financial adviser could have developed a comprehensive plan using a combination of cash, savings plans, trusts and possibly life insurance policies to forge an acceptable agreement on the division of assets - without unnecessarily risking those assets - while Jake and Liz were still alive.

A life insurance policy held in trust or a cash savings plan derived from the income generated by the lodge, for example, could have enabled Charlie to buy out his siblings and keep the farm. It might also have helped pay for his mother's care. In addition, a health insurance policy would have covered his mother's care in full and prevented Charlie from having to raid ranch income to pay for it, leaving the business more vulnerable to a sale. Furthermore, cash in trust might have protected Suzie against the financial difficulties that led in part to the forced sale of Fiction Farm.

Of course, sometimes a sale of property and/or land is inevitable. If a sale is anticipated, it is critical to plan for this event rather than risk having to rush into it and undermine the value of the estate, leaving offspring worse off than they might otherwise have been.

Whatever the size of your business, assets and cash, succession planning is likely to be essential to achieving your objectives for the future. Don't assume that everything will work itself out or that succession planning is a matter for wealthier people and that it is nothing that a will can't take care of. Sure, it will work itself out - but perhaps not the way you intended. Succession is a real concern for ordinary and wealthy families alike. In any case, with property values soaring, you could be wealthier than you think.

Seeking legal advice and writing a will is important but if you want lasting family harmony and a viable future for your business to be included in your legacy, you would be wise to seek robust financial advice as well.

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