In our work as advisers to business families, we have found that the most successful wealth transfers are not necessarily those that are optimal in tax terms. It tends to be the families who talk in good time about their values, goals and expectations that succeed in preserving both their wealth and their family harmony in the long term.
Behind every structure is a family
Business families are right to devote a great deal of attention to determining the legal and tax structure of their assets. The articles of association of the business, partnership and/or foundation make provision for potential future disputes. These documents are therefore very important, as they formally set out who has what rights, how decisions are taken and how assets are managed or transferred.
However, such documents don’t always provide answers to questions such as:
- Who will be eligible to become a shareholder in the future?
- Are relatives by marriage allowed to take part?
- How should all children be treated: equally or fairly?
- Who is eligible to take an active role in the business?
- What role do family members without operational involvement play?
- How do we want to handle dividend payments?
- What happens in the event of death, divorce or incapacity for work?
Discussions about shares, dividends or succession often conceal deeper issues relating to recognition, involvement and fairness. Essentially, these are not legal or tax-related questions. They are questions about expectations, values, appreciation and relationships – which is why they can have a huge impact on both the family and the business.
From avoiding conflict to managing conflict
Many families put off discussions about succession, shareholding or the transfer of assets because there doesn’t appear to be any immediate need at that point. That is often where the danger lies. When important decisions are only addressed following a death, health problems or a disagreement within the family, it becomes considerably more difficult to reach a solution that everyone can agree on.
The achievement of harmony rarely takes place at the very moment a conflict escalates. Its foundations can often be laid much earlier, when families discuss their values, their expectations and the future at an early stage. Opening up sensitive matters for discussion before tensions arise enables mutual understanding to grow and makes it easier to share difficult decisions together.
This is why more and more entrepreneurial families are opting for a form of family governance: a structured approach in which expectations and agreements are discussed and set down in writing in good time. The aim here is not to avoid differences of opinion, but to create a framework within which they can continue to be discussed constructively in a way that is respectful for both the family and the business.
The family charter as an expression of the family’s vision
One of the tools that can help families here is the family charter. A family charter is not a legally enforceable agreement and does not have the same legal status as, for example, a company’s articles of association or a shareholders’ agreement. It does, however, provide an important supplementary framework alongside these formal documents.
While articles of association and shareholders’ agreements legally enshrine the shareholders’ rights and obligations, a family charter sets out the family’s shared vision, values and expectations. It helps future generations to understand the principles underpinning important decisions and thus provides a family compass for future choices.
A family charter may include, among other things, agreements on:
- the family’s mission and values;
- the business vision;
- the involvement of future generations;
- conditions for family members to join the business;
- shareholding;
- the dividend policy;
- communication between family members;
- conflict mediation;
- training and preparing the next generation.
Furthermore, a family charter doesn’t have to be a static document. Values, expectations and social contexts change; what is relevant today may no longer be so in twenty years’ time. Many families therefore choose to review their charter periodically, for example every five or ten years. This is also a valuable opportunity to sit down again with everyone concerned and discuss the future together.
Family meetings: sometimes more important than the annual general meeting
In family businesses, a great deal of attention is paid to meetings held by the management, the board of directors or the shareholders. The moments when the family itself gets together are just as important, though.
A family meeting provides a safe space to voice expectations, ask questions and discuss sensitive issues.
It covers not just financial topics, but questions such as:
- What do the family’s assets mean to us?
- What responsibilities come with being a shareholder?
- How do we want future generations to treat the business?
- What role does running the business play within our family?
What social goals do we want to support? We often find that such conversations foster greater mutual understanding between generations and make it easier for future decisions to be accepted.
Legal instruments to support the family’s vision
Once a family has developed a clear vision, legal and tax instruments can help to embed that vision for the long term.
Depending on the situation, this could include:
- gifts with specially designed conditions;
- a general inheritance agreement;
- a lasting power of attorney;
- a partnership;
- certification of shares through a trust office foundation (STAK);
- a private foundation;
- shareholder agreements;
- estate planning.
However, these instruments are means to an end, not an end in themselves.
A conversation today prevents conflict tomorrow
On International Be Kind to Humankind Day, it may therefore be helpful to reflect not only on existing conflicts, but on how future conflicts might be prevented.
For entrepreneurial families, long-term wealth planning doesn’t begin with tax matters or legal documents, but with a discussion about values, expectations and the future. Because wealth planning isn’t just about passing on wealth: it is also about passing on trust, responsibility and family harmony.
Does your family need a discussion of this kind, guidance concerning family meetings or help with setting out a shared vision in a charter? Or if agreements have already been reached, would you like to formalise them for legal and tax purposes, for example through a general inheritance agreement, succession planning or personal wealth planning for the different family members? We would be happy to guide you every step of the way.
