Why take a holistic approach to private wealth and succession planning?
What is succession planning?
In brief, succession planning is the process of protecting and passing assets from one generation to the next in a tax efficient manner.
The two keystones to successful succession planning are your will and Lasting Powers of Attorney, but effective succession planning also involves tax advice and can also involve trusts and family businesses.
Many people in the UK do not have a will, despite it being a well-known fact that in England you can leave your assets to whomever you choose. The mainstream press coverage of disputed wills reports this fact at regular intervals, but 7 out of 10 people do not get around to committing that choice to paper in the form of a will.
Simply, if you do not do any succession planning you risk your assets not passing to those you would like to benefit and paying a greater proportion in tax. No succession planning or poor succession planning can also lead to friction in families and the breakdown of family relationships.
Why take a holistic approach to private wealth?
If you have ever moved house, it's very likely you will have been surprised at just how much has accumulated in each room over the years. Similarly, in the course of settling down and getting on with life, people will usually find themselves owning property of some kind, involved in businesses or running them, perhaps starting a family, or moving country. All these factors interlink, and just as it would be counterintuitive to move house by packing only one type of item at a time, so would arranging business affairs, wills and healthcare decisions one after the other in isolation.
Succession planning for both families and businesses is a form of risk management: what would happen to a family-managed business without the head of the family? What family dynamics would a large inheritance to a young child exacerbate? Additionally, wealth is rarely static. We live in a global society and more people now have assets in multiple jurisdictions.
A holistic approach allows for the fact that people will have different priorities at different times. The circumstances of a family will change as family members progress through life. Equally, the legal and tax landscape will also change. The danger for lawyers, who can easily end up viewing client needs through the lens of their own legal specialism, is missing the risks and opportunities that appear when taking in the bigger picture.
Wealth takes many forms. It can be land, residential property or commercial property, interests in a partnership, shares in a company, or chattels such as art, fine wine or classic cars. These days it can also be in digital assets or private equity. Often it is a combination of different elements, each with its own practical concerns. Rather than dealing with a change of ownership for commercial reasons, succession planning looks at the changes needed to provide continuity for the next generation.
Succession planning also has an eye to the inheritance tax position. Generally, everyone is aware this arises following a death, but there are also inheritance tax consequences for lifetime gifts that can change the position on the death of the donor. Two key inheritance tax reliefs – agricultural property relief and business property relief – give substantial relief from inheritance tax, and planning for them requires a holistic approach and a realistic assessment of the position 'on the ground'.
For example, would a family company benefit from different shareholder arrangements to help bring the next generation into key decisions? Alternatively, is it a good time to restructure a family farming partnership so that adult children can begin to branch out into new methods? Both decisions would have tax consequences, particularly around capital gains tax and potentially business property relief.
Why is succession planning important for families with business assets?
Taking the example of a family farm: it is very usual for adult children to be added as partners to a partnership agreement, but otherwise for things to continue much as they ever have. The older generation of farmers continue to hold the legal title to the land. Accounts are produced each year without substantive review. The parents made their wills when their youngest child was born and have not revisited them, having been busy raising a family on a farm.
The succession issue here is that without linking up the provisions of the farming partnership agreement, the legal titles to the farmland and the partnership accounts, business relief may not be available. Farming businesses and landowners generally tend to be asset rich but cash poor. By not maximising business relief this can result in a hefty inheritance tax liability which could require land to be sold and the farm fragmented in order to pay the tax.
Effective succession planning works to ensure that the assets will pass to the correct people. In this instance, steps can be taken to put an updated partnership agreement in place, and to update land ownership provisions. New wills and lasting powers of attorney can be completed, which revises the position completely. Though it can seem remote, estate planning is a lifetime process.
The reality of succession planning is very far from the idea of making a will that goes into a safe only to be dusted off and read in 30 years' time. The planning process takes account of modern asset classes, the dynamics between family members, the complexities of international families and overlapping jurisdictions. Crucially, it can help people navigate painful times as a family, preserving assets built up over generations for the future.