As widely reported, the coming years will likely see a significant transfer of assets and wealth across generations.
Each family's circumstances will ultimately determine the
nature and extent of these transfers, and any general comments on
this topic must be taken as such. It is important to note that no
transfers are mandatory. However, failing to plan for such
transfers can lead to tax inefficiencies and complications, such as
the freezing of a business in the event of the owner's
incapacity or death, until a court-appointed deputy or a grant of
representation is obtained.
In this first of two articles, we highlight some considerations
that clients, intermediaries, fiduciaries, and advisors may need to
address. In the second article, we will explore offshore
structuring tools that might assist in achieving the client's
goals in passing down their wealth.
Identify the assets
The starting point is to identify the assets that can be
transferred while ensuring the client retains enough to maintain
their lifestyle, with a buffer for future medical costs or other
unexpected eventualities. This exercise will likely reveal several
related issues that need consideration. For any identified assets,
it is necessary to establish whether there are any restrictions
that may limit their transfer. For example, are there
shareholders' agreements or pre-emption rights that need to be
terminated or released?
If there is borrowing secured over the assets, the relevant
lender's consent may be required before any action can be
taken. If the assets are in a structure, it is essential to
determine whether the terms of the structure allow for the desired
transfer and to consider the integrity of that structure and the
degree of control the client can have over it.
Identify the recipient(s)
The identity of the recipient(s) can also raise issues, especially
if the goal is to retain the integrity of the asset by transferring
it to a single person rather than dividing it among a wider class
of recipients. It is important to consider whether it would be
better to skip a generation. While this might have perceived
advantages, the impact of parents being passed over in favour of
their children should not be overlooked. A wide division of assets
may seem fairer and result in less immediate resentment, but it may
lead to future administrative complications and complexity.
In the event of a subsequent family dispute, the wide division of
assets may exacerbate matters, as restructuring or settlement may
be required to resolve issues. The assets previously received may
become the battlefield over which family disagreements and
resentments are played out.
The more widely assets are divided, the greater the number of
potential touchpoints with future issues such as divorce,
bankruptcy, incapacity, or disinterest. Consequently, the initial
planning and actions will likely be more complex and protracted.
Finding the perfect solution might be difficult or impossible, so
some form of compromise will likely be required. It is crucial to
identify and evaluate all relevant factors and considerations at
the outset before any action is taken. This will allow the client
to proceed with open eyes and a clear understanding of the likely
outcomes.
If the decision is made to transfer the assets to a single
recipient, but the asset involves other family members (e.g.,
shares in a company for which they work), consideration must be
given to the impact on family relations. Thought should be given to
addressing concerns and resentments that may arise from family
members having to work for a company owned by their sibling rather
than their parent.
Once the intended recipient(s) have been identified, it is
necessary to establish whether they are willing to receive the
assets and take on the associated responsibilities and obligations.
Do they have tax or ethical considerations that might impact their
willingness to receive and steward the assets? Will they accept the
level of reporting and scrutiny that comes with ownership, which
will likely increase over time?
Degree of freedom for recipients
The client must consider the degree of freedom they are comfortable
for the recipient(s) to have in administering and devolving the
assets. Although handing over a 'built from scratch' empire
might be attractive and sensible in theory, passing ultimate
control to someone else might prove challenging in practice. If an
outright transfer is too much initially, what form of partial
gifting would the client be comfortable with? Or would it be better
to establish a structure to hold the assets, allowing for some form
of oversight to be retained?
We will consider possible structuring options in our second article
on this topic. A further complication may be that the intended
recipient(s) have had little or no involvement in the day-to-day
administration and management of the assets. If so, they may need
educating on the practical administration of the assets and the
family's current attitude towards their stewardship. Involving
third parties who can provide ongoing advice and guidance may be
appropriate and helpful.
Charitable purposes
Does the client want some or all of their assets to be applied for
charitable purposes instead of passing them to their family? If so,
consideration must be given to managing the family's
expectations, which may now be frustrated, and whether it would be
helpful to seek their buy-in to this plan. For example, having them
have some say in the particular charitable endeavours furthered by
the assets.
Wider considerations
Given that multiple family members may require advice, and that
advice could differ depending on their personal circumstances,
careful consideration is needed to determine whether the same
advisor or firm can represent the whole family. It may be more
appropriate to involve independent advisors for different branches
of the family.
Lastly, appropriate tax and regulatory advice must be obtained
before any steps are taken. Although tax considerations should not
dictate the entire process, they will likely influence the
direction of the planning.
In conclusion, intergenerational wealth transfer planning requires
careful consideration of various factors, including the
identification of assets and recipients, potential complications,
and the importance of tax and regulatory advice. By addressing
these issues at the outset, clients can proceed with a clear
understanding of the likely outcomes and make informed decisions
that align with their goals and objectives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
