If you don’t plan succession in your company, you risk financial and factual damage.
Financial damage could be far-reaching: You may lose part of the family’s and your own provision for the future. Unlocking hidden reserves (like holding companies) can entail detrimental income tax effects. Undesired income tax effects may also arise if mandatory holding periods limit the leeway for succession planning.
Suitable succession planning can limit these risks. You can provide for your retirement, improve your creditworthiness (which has become a criteria in bank rating since Basel), and make the most of inheritance tax advantages (e.g. preferential treatment of company assets) etc.
The factual damage refers to relationships: Not finding a suitable successor under time pressure may present a serious problem, inciting frustration among family members as the future is not settled. Intestate succession, for instance, may drive a wedge between family members to name but one example.
If the owner has reached retirement age or, even worse, is incapacitated due to an accident or death, the preparation phase has clearly been missed and there are no advantages to be gained.
The perfect point in time to put succession provisions in place is 7 to 10 years before the owner wants to pass on his company or retire. There are three main reasons why:
- Income tax law provides for mandatory holding periods of 3-7 years (after amalgamation, demergers, change of legal form, fragmentation of assets, participations etc.)
- Allowances for gifts can be utilised every ten years, meaning that gifts can be made repeatedly as a form of early inheritance.
- Tax relief under inheritance law for company assets may entail conditions that apply for up to 7 years.
- You have no children: who should inherit your company? If you do not make arrangements, the state, your parents, grandparents or nieces and nephews may inherit. Whatever the law stipulates.
- Your children do not want the company: Even if your children do not want to follow in your footsteps, you probably consider it important to provide security for them. Holding companies, silent partnerships or a family holding would be conceivable solutions. Always depending on the individual situation.
- Your children are not able to run the company: You have more than one child, but not all of them want to or can accept their inheritance? Premature settlement of future rights of succession and subsequent equalisation, compliance with the law on compulsory portions or rights by heirs to stock up the compulsory portion may get in the way.
- The heirs can only pay the inheritance tax by entering into a forced sale: This applies to entrepreneurs with high (estimated) enterprise values. If your company is estimated to be worth millions and the succession is not in place, the inheritance tax may place too great a burden on your heirs. Instead of being in a position to continue your lifework, your heirs are forced to accept an (unfavourable) forced sale in order to just pay the tax.
If the succession plan is organised, you can shape the scenarios for all four situations ahead of time and find a solution that works for everyone.
Basically, the rule is: The younger the “giver”, the more flexible the possibilities to organise the inheritance. The older you, the entrepreneur, are, the more important it is to sort out your succession provisions.
However, I always make sure to include exit solutions to safeguard your interests at all times. In other words: you can always change the provisions if your succession plans happen to change.
Step 1: We record the legal and actual family circumstances.
Step 2: We draw up a family chart stating who has inheritance rights and who has a right to a compulsory portion.
Step 3: We prepare initial possible solutions with a breakdown of what impact this would have on the inheritance tax.
Step 4: I sketch out the initial approaches and record your personal wishes and objectives.
Step 5: We undergo more detailed work on one or more concrete solutions.
Step 6: We present you as our client with concrete solutions and detailed explanations. We also make a note of your change requests.
Step 7: If you agree, we finalise the concept.
Step 8: We commission lawyers and notaries or you implement the concept within the company. Negotiations with banks, family members etc. take place.
Step 9: I implement your succession plan according to your wishes.