How to best pass on wealth and the business

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Difficult conversations around succession planning might cause patriarchs and matriarchs to push back important decision-making that can have lasting, negative impact on their family enterprise.

Whether a lack of interest from next-gens causes fear around who might take over, or, conversely, an overwhelming interest from multiple siblings and extended family in taking over the business brings up feelings of chaos or strain, the conversation must begin somewhere to protect the family’s best interest.

Here, Dentons lawyers Andrew Bourns, a partner in the business law group in Toronto, and Larry Nevsky, a partner in the national tax group in Toronto, discuss what trends they are seeing emerge as enterprising families approach a demographic succession wave, and how successful family businesses can and should make plans to protect their legacy.

What types of clients are approaching you regarding succession planning?

Andrew Bourns: In recent years, we have been approached with increasing frequency by baby boomers who are either founders of their own businesses or who have been custodians of a family business over a period of decades and who are reaching an age where they would like to step back. Our clients are realizing that in order to be able to step back from their businesses, they need to implement a succession plan.

While we are most commonly approached directly by the matriarchs and patriarchs of wealthy families at the outset of the succession planning process, the project team usually expands quite quickly once the planning process has commenced and typically grows to include the client’s family office, if they have one, as well as senior business managers, external accountants and, of course, other family members.

Implementing a succession plan can often entail fairly complex corporate restructuring of family businesses and family offices. Senior business managers and external accountants, in addition to legal professionals, are often key players in implementing the various steps of a succession plan – most of which should be put in place long before any succession actually occurs.

Larry Nevsky: I would add that sometimes, for families that are not yet clients of the firm, we also are approached by their existing professional advisors (accountants, investment advisors, life insurance agents) who want to bounce ideas off of us and gain our expertise to help their clients.

What types of concerns and issues are they approaching you with?

AB: Here are some common concerns and issues.

Children are not interested in running the family business. Sometimes, and with increasing frequency, our clients’ children and other beneficiaries are not interested in being involved in the family business on a go-forward basis. In these circumstances, part of the succession planning process inevitably includes planning around the sale of the family business. This planning can include setting a targeted time horizon for completing a sale, corporate restructuring to optimize tax treatment upon a sale, and the development and implementation of strategic business planning intended to maximize the ultimate sale price of the business upon a sale.

Conversely, all or most of the next generation are interested in taking over. On occasion we encounter the issue that all (or most) of a client’s offspring or beneficiaries would like to take over the reins of a family business and it isn’t clear how everyone’s ambitions will be accommodated. Fortunately, our experience has been that clients approach this type of scenario in a constructive and collaborative manner – although it’s essential to address these issues and manage expectations as early as possible.

When next generation members have differing objectives. One of the most difficult issues to address can be a scenario where members of the next generation have divergent goals and objectives for a family business or asset. For instance, we occasionally see situations where one or more of the children or other beneficiaries of a matriarch or patriarch would like to liquidate a family business as soon as possible, while other children or beneficiaries would like to inherit the business and continue to operate it. In these situations, we sometimes help family members establish a pre-agreed arrangement where the children or other beneficiaries who are interested in continuing to operate the business will acquire the other family member’s interest in the business – often over a period of months or years. Obviously, this can lead to extensive negotiations about valuation, management of the company during the buy-out period, etc. Even in circumstances where children or other beneficiaries are all interested in continuing to operate a family business as part of a succession plan, different expectations about how the business will be run – including expectations about profit distributions, reinvestment in growth, etc. – can become issues. We find that it is best to get these issues out on the table and to address them head-on as early as possible in the planning process.

When the family is large and multi-generational. Succession planning for large multi-generational families can be particularly involved. For instance, it’s not unusual for two or more siblings to collectively own a family business that was founded by their parents or even grandparents. In these circumstances, succession planning will invariably involve a larger group of stakeholders. This increases the potential for differing goals and objectives among the next generation, which will ultimately need to be addressed in the succession planning process.

Family law issues can arise. A common feature of succession planning involves planning aimed at ensuring that a family business or asset actually stays in the family. It is common for the more senior generation to require their beneficiaries to enter into marriage contracts with spouses to ensure that ownership of family businesses and other assets are not transferred outside of the immediate family in connection with a divorce or other family breakdown. Many of our clients find it awkward to address this issue with their partners. Importantly, from a succession planning perspective, the requirement to enter into a marriage contract is not intended to reduce the overall entitlement of a divorcing spouse – but rather it is intended to ensure that any entitlement is not satisfied by transferring ownership of a family business or asset.

LN: On the tax side, there are several issues, including how to fund a tax liability when the older generation eventually passes on, how to efficiently transition the business to the next generation (especially where there are diverging interests among the younger generations) and general estate planning. Increasingly, we are finding that certain members of the family are not living in Canada, and we need to take into consideration certain rules relating to non-residents in Canada as well as planning for the local tax laws in the jurisdiction where those family members reside.

What trends are you seeing emerging regarding challenges around succession planning?

AB: The most common trend that we are seeing around succession planning is a lack of interest among millennials in taking over family businesses. As mentioned earlier, this often means that the succession planning process is largely focused on planning and implementing the sale of one or more family businesses. Ideally, for a number of reasons, this is a process that should be initiated years in advance of any ultimate sale.

LN: In addition, we are seeing an increasing level of family members resident in other jurisdictions. This can complicate any planning that has already been established and require a revisiting of the existing plan or be a key driver in a future succession plan.

Over the past several years we are also seeing a rapid increase in people’s wealth resulting from both increased real estate and private company valuations and because of passive investments increasing in value. This increases the stakes associated with the planning and increases the frequency with which families should revisit their existing plans to ensure that the current situation is appropriately considered in the plan. It also opens opportunities for greater charitable giving and planning that can accommodate this.

What are some tips for how enterprising families can better plan for succession?

AB and LN: Some suggestions include:

• Start planning now. Too many families start succession planning too late. Many planning strategies should be implemented years in advance of any transfer of wealth or other assets between family members. Engage qualified professional advisors now.

• Address the awkward and difficult issues early. In our experience, awkward or difficult issues or disputes do not become easier to resolve with the passage of time. As difficult as it can be to grapple with difficult family issues – and as tempting as it can be to defer these conversations to a later day – it is essential for a successful succession planning process to address these issues honestly and constructively at the earliest possible date. Disputes, frustrations and resentments between family members will be amplified and much harder to address following a matriarch’s or patriarch’s death or illness.

• Assign clear roles and responsibilities to all family and team members in the planning process – particularly with large families, family members and professional advisors should be assigned clear roles and responsibilities in the succession planning process. Creating and implementing a succession plan can be a lot of work and it is important to establish early-on who is responsible for each action item.

• Keep an open mind and be flexible. Often, we find that through the course of the succession planning process, families end up with very different arrangements than they first anticipated. Keep an open mind about different potential approaches to succession planning and don’t be afraid to embrace creative solutions that work for your family.

• Death and taxes are inevitable and worse is that the taxes on death are impactful. Plan early to fund these taxes and minimize them with appropriate structuring. This ensures that surviving family members are not burdened with additional problems when they have lost a loved one and that legacies can be preserved to the greatest extent possible.

Responses have been lightly edited for clarity and length.

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