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The author is a partner at law firm Maurice Turnor Gardner
Advising on tax and succession planning is what I do for a living, but experience has taught me that the answer to a business owner’s tax-planning question is not always the best solution for their succession-planning ambitions.
I have vivid experience of an entrepreneur who profoundly wishes he had never embraced a succession plan. For commercial and political reasons, the patriarch had to divest himself of legal control of his burgeoning business empire. He was advised to transfer the shares in his enterprises into trust, with competent, respectable trustees who would be given a clear mandate as to how to manage it.
The patriarch was not adopting a particularly unusual arrangement. The trust as a concept has been used for centuries in the UK to transfer the legal ownership, and thus benefit, of assets without transferring total control to intended beneficiaries. The economic enjoyment of the assets is separated from their legal control.
Following this well-trodden path, the patriarch transferred the shares in his enterprises to trustees carefully chosen by him. At first, the trustees operated with a light touch; as shareholders, they did not interfere too much in the overall running of the empire.
The operating businesses were clearly the responsibility of the patriarch. The next generation were then brought on board and the businesses went from strength to strength through their energy.
There was then a great falling-out. The second generation did not see life through the same prism as their father and their father could not fathom their 21st-century approach to business. The patriarch was, and remains, furious.
But because he could not retain any vestiges of control and his influence over the trustees waned, there has been a great schism in the family that is hard to watch. Many legal fees have been generated, but the trustees, on whom ultimate responsibility now lies, will not yield to yield to his directions as to how the underlying business should be run.
The patriarch bitterly regrets handing over control to trustees, even though from a tax and commercial perspective it was the right thing to do.
For the avoidance of doubt, this is not a reference to the Roy family of Succession, or the Murdoch family who have lately been battling in the courts of Nevada. This scenario is being played out in many families where there is generational change.
There is much advice devoted to the challenge of tax planning for business owners: transfer the business, set up a trust, create different share classes to manage value, to name but a few.
But while these strategies may all be technically correct, the human aspect of this dilemma is often neglected: many first-generation business owners do not want to hand over control of their empires, they certainly do not want to work with trustees and they want to keep matters simple.
They built their businesses from scratch, they nurtured them and enjoyed the experience. Why would they want to cede control, whether to other family members or trustees?
I make a distinction between first-generation business owners and those who have themselves inherited. Pride in creating and building a business through one’s own efforts generates different emotions from the responsibility of inheritance. If clients have inherited, they tend to feel the burden of custodianship — they must not be the family member who loses the inheritance.
But my observation is that many first-generation patriarchs merely pay lip service to the principle of preservation of the family business for the next generation. They will contemplate such planning, but only so long as they can control everything during their lifetime and preferably also from beyond the grave.
I have been a great advocate of the use of trusts throughout my professional career, but increasingly I wonder whether they are the solution to life’s challenges.
Of late, they have come under greater scrutiny, sullied by association with tax avoidance, money-laundering and the “hiding” of assets from spouses or creditors. In the UK, in many cases, settlors and beneficiaries are taxed punitively unless the assets in question are “tax favoured”.
Certainly, trusts have a role in the protection of the vulnerable, but is it wise to tie up family businesses in this way? As the son of one client put it to me, “By creating this web of trusts and extraordinary complexity, my father is signalling to me that he does not trust me.”
The son felt it was healthier for the family overall if the wealth was allowed to cascade down, free of the limitations imposed by trusts. Each generation should be allowed to make its own mistakes, because otherwise they do not thrive.
To those owners of businesses who feel under pressure to adopt a succession plan but would rather not, please consider that masterly inactivity is always an option. Do not feel harried into taking steps for the sake of saving tax. If your instincts are telling you this is not for you, they are probably right.
