Balancing Succession, Wealth, And Family Dynamics.
Carefully considering the structure of your assets to ensure they meet the needs of your family can help you avoid potential disagreements, as illustrated in the scenario below.
Ken and Trish had spent many years building up their business. It was incredibly successful, they now employed fifty staff with branches in Auckland, Tauranga and Christchurch. As well as their family home they had a holiday house in Taupo and owned the commercial warehouses in the three centres that their business was based. The relatively significant income the business generated also had allowed them to build up a substantial share portfolio.
Ken and Trish had three children. Their eldest son, Jack, was now general manager in the business and their middle daughter, Claire, worked in the HR department. Their youngest daughter, Penny, had worked in sales for the company but was now a stay-at-home mother with two small children.
Ken was now in his mid-seventies and while he had reduced his hours over time, he was looking at stepping right back so that he and Trish could enjoy more extensive travel overseas and spend more time in the Taupo holiday home.
They thought that this was a good time to go and see their lawyer to put in place some succession planning.
They knew that both Jack and Claire would be keen to continue to work in the business and take a shareholding, but they also didn’t want to cut Penny out of the opportunities that the business would provide in the future as it really was a great cash generator.
Ken and Trish were also concerned about the stability of Jack’s marriage. He and his wife had been going through a rocky patch and Ken and Trish were not convinced that the marriage would last. They wanted to make sure that whatever they put in place, Jack’s inheritance from them would be protected.
Ken and Trish had set up a trust many years ago. It owned their home, holiday home, and share portfolio, but the shares in the business and in the company that owned the commercial property were held in their personal names. They were not sure why they had assets outside of the trust but had just followed the advice of their lawyer who they had been with from the very early days of the business. That lawyer was past retirement age himself and he recommended to them that they get specialist asset structuring advice for the next stage of developing their generational wealth transfer plan.
The first thing the specialist lawyer said to them, was that it’s important to keep all their children in the loop if they could.
She said that she often saw families where the parents didn’t want to share their plans with their children, but most often if there was transparency, it would save arguments in the future. While Ken and Trish had thought they would like to retain all assets in the trust so that all three children could benefit from them, the lawyer suggested they have a good think about the differing positions of their children. One of them may have a large mortgage, and so debt reduction would be more important. One may have an interest in property investment and so having some assets available to be able to leverage off without involving the other two children could be important to that child. The lawyer said that she often saw problems when assets were held together rather than distributed out to children, but that any distributions could be done in a way which would protect any assets for their children and grandchildren.
She said that there would need to be some careful analysis with the business. Ken and Trish would need to decide if the efforts of Jack and Claire had been rewarded in the usual remuneration way or whether they would think that the increased value of the business was because of their efforts and so there should be some recognition of that in the value transferred to them on Ken and Trish’s deaths. Because of the cashflow of the business it may be that all the children retained a shareholding in the business and benefitted from the cashflow, and Jack and Claire get rewarded well for their actual work in the business.
Ken and Trish had a lot to consider, but they ultimately realised the importance of discussing their plans with their children to avoid surprises and maintain family harmony. They also concluded that setting up separate structures for each child, rather than holding everything in the family trust, would better accommodate their children’s diverse needs. That way they could reduce potential conflicts and ensure that assets were managed in a way that would honour everyone’s wishes.
If you feel you could use some specialist advice for your personal situation contact our Trusts & Wealth Protection Team.
