WEDDING AND SUCCESSION PLANNING
The Impact Of Marriage On Inheritance
Rights Of Hindus
Rights Of Hindus
A wedding is after all a momentous
occasion in a person’s life, and planning is key. It might be safe to say,
however, that the thought of how marriage will impact one’s inheritance rights
and succession planning in anticipation are usually not top of the list.
occasion in a person’s life, and planning is key. It might be safe to say,
however, that the thought of how marriage will impact one’s inheritance rights
and succession planning in anticipation are usually not top of the list.
We discuss this important but rarely
discussed topic the effect of marriage on inheritance rights and
planning in anticipation of marriage. As this is a vast topic and issues vary
depending on the facts of each case.
discussed topic the effect of marriage on inheritance rights and
planning in anticipation of marriage. As this is a vast topic and issues vary
depending on the facts of each case.
Marriage Between Hindus
Impact On Married Person – If a Hindu marries another Hindu, there is
no impact on the right of that person or his/her progeny to inherit from their
relatives. Moreover, a Hindu woman continues to remain a coparcener
in her father’s Hindu Undivided Family, although she does not become a
coparcener in her father-in-law or husband’s HUF. In case the husband dies
intestate (without a Will), she will be entitled to a portion of his personal
assets but not his HUF.
no impact on the right of that person or his/her progeny to inherit from their
relatives. Moreover, a Hindu woman continues to remain a coparcener
in her father’s Hindu Undivided Family, although she does not become a
coparcener in her father-in-law or husband’s HUF. In case the husband dies
intestate (without a Will), she will be entitled to a portion of his personal
assets but not his HUF.
Impact On Succession To A Person’s Estate – There will, however, be an
impact on succession to such a person’s estate should he or she pass away. For
example, if an unmarried Hindu man dies intestate, then his entire estate is
inherited by his mother as his Class I heir, but after his marriage, his wife
and mother receive an equal share (after his children are born, they also get
equal shares).
impact on succession to such a person’s estate should he or she pass away. For
example, if an unmarried Hindu man dies intestate, then his entire estate is
inherited by his mother as his Class I heir, but after his marriage, his wife
and mother receive an equal share (after his children are born, they also get
equal shares).
If an unmarried Hindu woman dies
intestate, then her entire estate is inherited by her parents equally. However,
post marriage, her parents lose their inheritance rights.
intestate, then her entire estate is inherited by her parents equally. However,
post marriage, her parents lose their inheritance rights.
After marriage, a Hindu woman’s estate is
first inherited by her husband (till they have children), and after the husband
passes away, by the heirs of the husband. This would be the position even with
respect to the property/properties that she may have inherited from a
grandparent or property received on partition of her father’s HUF.
first inherited by her husband (till they have children), and after the husband
passes away, by the heirs of the husband. This would be the position even with
respect to the property/properties that she may have inherited from a
grandparent or property received on partition of her father’s HUF.
Inter-Religious Marriages
Marriage between a Hindu and a person
belonging to another religion may be validly solemnised in two ways. Under the
procedure laid down by the Special Marriage Act, 1954, without religious
conversion of either of the parties; or Under personal law of a religion by
religious conversion of one of the parties to such religion, if required.
belonging to another religion may be validly solemnised in two ways. Under the
procedure laid down by the Special Marriage Act, 1954, without religious
conversion of either of the parties; or Under personal law of a religion by
religious conversion of one of the parties to such religion, if required.
Inter-Religious Marriages Under Special
Marriage Act
Marriage Act
Impact on married person: If a Hindu is a coparcener in an
HUF, then the solemnisation of his marriage with a person of another faith
(except a person professing the Buddhist, Sikh or Jain religion) under the Special Marriage Act (i.e.
before the Marriage Officer) will sever his status as coparcener of such an
HUF. In effect, the person’s share in the family properties becomes defined at
once and vests separately. He or she cannot later claim any right of
survivorship in family properties. This is particularly relevant if a
significant portion of the family’s estate, particularly the family home or
business, is held by an HUF.
HUF, then the solemnisation of his marriage with a person of another faith
(except a person professing the Buddhist, Sikh or Jain religion) under the Special Marriage Act (i.e.
before the Marriage Officer) will sever his status as coparcener of such an
HUF. In effect, the person’s share in the family properties becomes defined at
once and vests separately. He or she cannot later claim any right of
survivorship in family properties. This is particularly relevant if a
significant portion of the family’s estate, particularly the family home or
business, is held by an HUF.
However, he or she will continue to be able to inherit property
(personal, not held by an HUF) from his or her family through intestate
succession.
(personal, not held by an HUF) from his or her family through intestate
succession.
Impact On Succession To Person’s Estate: Succession to such a person’s
property if the person passes away intestate, will be governed by the Indian
Succession Act, 1925 and not the Hindu Succession Act, 1956. The same principle
applies even to intestate succession to the property of the children of such
persons. This principle does not apply, however, if a Hindu has married a
person who professes Buddhist, Sikh or Jain religion.
property if the person passes away intestate, will be governed by the Indian
Succession Act, 1925 and not the Hindu Succession Act, 1956. The same principle
applies even to intestate succession to the property of the children of such
persons. This principle does not apply, however, if a Hindu has married a
person who professes Buddhist, Sikh or Jain religion.
If a Hindu male passes away intestate,
then his mother would be entitled to his entire estate under the Hindu
Succession Act.
then his mother would be entitled to his entire estate under the Hindu
Succession Act.
However, if he passes away after having
solemnised his marriage under the SMA, then (if he does not have children), his
property will be divided between his widow and father under the Indian
Succession Act and the mother loses her inheritance rights.
solemnised his marriage under the SMA, then (if he does not have children), his
property will be divided between his widow and father under the Indian
Succession Act and the mother loses her inheritance rights.
Inter-Religious Marriages By Conversion
Impact on married person – If instead of solemnising the marriage under the SMA, a Hindu converts
to another religion (Islam or Christianity, in most cases), then the impact on
inheritance rights varies from that occurring on solemnisation of marriage
under the SMA.
Impact on married person – If instead of solemnising the marriage under the SMA, a Hindu converts
to another religion (Islam or Christianity, in most cases), then the impact on
inheritance rights varies from that occurring on solemnisation of marriage
under the SMA.
Hindu Converts To Another Religion Before
Marriage – If a
Hindu converts to another religion before marriage, there will not be any
implication on his or her ability to inherit from his or her Hindu relatives.
This position has been confirmed by Indian courts on the ground that
renunciation of a particular religion and converting to another is a matter of
choice, and it cannot cease relationships that exist by birth.
Marriage – If a
Hindu converts to another religion before marriage, there will not be any
implication on his or her ability to inherit from his or her Hindu relatives.
This position has been confirmed by Indian courts on the ground that
renunciation of a particular religion and converting to another is a matter of
choice, and it cannot cease relationships that exist by birth.
However, the conversion of a coparcener
creates a deemed partition of an HUF under Hindu law and therefore the
converted person’s right of survivorship in the HUF does not survive.
creates a deemed partition of an HUF under Hindu law and therefore the
converted person’s right of survivorship in the HUF does not survive.
Impact on descendants of married person : Although the convert himself/herself
is not prejudiced, children born to the convert after his/her conversion and
their descendants will not be able to inherit property of their Hindu relatives
under Hindu law on intestate succession. That said, this prohibition is removed
if the children of the convert or their descendants revert to Hinduism before
the succession opens.
is not prejudiced, children born to the convert after his/her conversion and
their descendants will not be able to inherit property of their Hindu relatives
under Hindu law on intestate succession. That said, this prohibition is removed
if the children of the convert or their descendants revert to Hinduism before
the succession opens.
Example, if a Hindu woman converts to
Christianity, she will be able to inherit property from her father if the
father passes away intestate; subsequently, after her demise, her children will
be able to inherit this property from her.
Christianity, she will be able to inherit property from her father if the
father passes away intestate; subsequently, after her demise, her children will
be able to inherit this property from her.
However, if the Hindu woman dies before
her father, her children will not be able to inherit the property from her
father (their grandfather) if he passes away intestate, unless they have
converted to Hinduism before their grandfather’s demise.
her father, her children will not be able to inherit the property from her
father (their grandfather) if he passes away intestate, unless they have
converted to Hinduism before their grandfather’s demise.
If The Person Converts To Christianity
Impact On Succession To A Person’s Estate : There is also an impact on
succession to the estate of the convert themselves. If the person converts to
Christianity, he/she may bequeath their entire estate by Will – as they would
have been able to do as Hindus, but if they pass away without a Will, then
their property will devolve as per the Indian Succession Act and not Hindu law.
succession to the estate of the convert themselves. If the person converts to
Christianity, he/she may bequeath their entire estate by Will – as they would
have been able to do as Hindus, but if they pass away without a Will, then
their property will devolve as per the Indian Succession Act and not Hindu law.
If The Person Converts To Islam
The impact on succession is greater if the
conversion is to Islam. Firstly, under the forced heirship rules of Sharia law,
a person’s ability to bequeath his estate by Will is limited (only one-third of
the property may be bequeathed without the consent of all heirs). This is
unlike the position for Hindus, who may bequeath their entire estate by Will to
any person of choice.
conversion is to Islam. Firstly, under the forced heirship rules of Sharia law,
a person’s ability to bequeath his estate by Will is limited (only one-third of
the property may be bequeathed without the consent of all heirs). This is
unlike the position for Hindus, who may bequeath their entire estate by Will to
any person of choice.
Thus, if a Hindu has executed a Will of
his/her estate before marriage, then there could be an impact on the bequests
under the Will, depending on the Islamic sect of the convert.
his/her estate before marriage, then there could be an impact on the bequests
under the Will, depending on the Islamic sect of the convert.
Secondly, if the person passes away
intestate, there would also be an impact on the heirs who will inherit from
him/her as succession will be as per Sharia law rather than Hindu law. In this
regard, Indian courts[4] have held that as per Muslim law, a Hindu cannot be a
successor to a Muslim’s estate; therefore, the convert’s birth family, being
Hindus, would not be entitled to inherit from the estate of the convert if he
or she passes away intestate.
intestate, there would also be an impact on the heirs who will inherit from
him/her as succession will be as per Sharia law rather than Hindu law. In this
regard, Indian courts[4] have held that as per Muslim law, a Hindu cannot be a
successor to a Muslim’s estate; therefore, the convert’s birth family, being
Hindus, would not be entitled to inherit from the estate of the convert if he
or she passes away intestate.
Muslims & Will – In case of Muslims, the
law applicable is shariat. Under shariat, a Muslim can make a Will for maximum
of one third of his estate. The same can be bequeathed to any person whether he
is or is not a legal heir of the Muslim i.e. who may be a complete stranger.
This rule also defers in case of Hanafi and Shia Law.
law applicable is shariat. Under shariat, a Muslim can make a Will for maximum
of one third of his estate. The same can be bequeathed to any person whether he
is or is not a legal heir of the Muslim i.e. who may be a complete stranger.
This rule also defers in case of Hanafi and Shia Law.
In order to bequeath the 1/3rd estate to a legal heir consent is required from
the other legal heirs. Under Shia Law the consent can be obtained either before
or after the death of the Testator. Under Hanafi Law the consent has to be
obtained only after the death of the Testator.
In the event, the bequest is in excess of
1/3rd then the same would be invalid unless the other legal heirs give their
free consent after the death of the Testator. In the event, the legal heirs do
not consent to the bequest of more than 1/3rd estate then such a Will would be
valid only with respect to the 1/3rd estate. For the balance, his estate will
succeed as per Shariat.
1/3rd then the same would be invalid unless the other legal heirs give their
free consent after the death of the Testator. In the event, the legal heirs do
not consent to the bequest of more than 1/3rd estate then such a Will would be
valid only with respect to the 1/3rd estate. For the balance, his estate will
succeed as per Shariat.
Within India, if a Muslim has married
under Special Marriages Act & not as per Muslim customs; he is
permitted to make a Will.
under Special Marriages Act & not as per Muslim customs; he is
permitted to make a Will.
Succession Planning In Anticipation
The impact is not only on the person’s
ability to inherit from his or her relatives and vice-versa, but also the
children’s ability to inherit from such person and their Hindu relatives.
Hence, it is advisable that each family undertakes the exercise of putting in
place estate and succession plans or revisiting them upon the marriage of a
close family member.
ability to inherit from his or her relatives and vice-versa, but also the
children’s ability to inherit from such person and their Hindu relatives.
Hence, it is advisable that each family undertakes the exercise of putting in
place estate and succession plans or revisiting them upon the marriage of a
close family member.
This exercise could involve preparing or
updating Wills prepared prior to the marriage to ensure that a person who might
otherwise be disinherited continues to receive their share of inheritance.
Lifetime gifts of a property may also be considered, bearing in mind taxation
and stamp duty implications.
updating Wills prepared prior to the marriage to ensure that a person who might
otherwise be disinherited continues to receive their share of inheritance.
Lifetime gifts of a property may also be considered, bearing in mind taxation
and stamp duty implications.
Alternatively, a private trust which
provides the twin benefits of consolidation and long-term holding of wealth –
may be established to hold property for the benefit of the married person and
their future children.
provides the twin benefits of consolidation and long-term holding of wealth –
may be established to hold property for the benefit of the married person and
their future children.
Further, if a person is likely to cease being
a coparcener of an HUF, the family may consider partitioning the HUF prior to
the marriage and distributing the property representing his or her share to the
person.
a coparcener of an HUF, the family may consider partitioning the HUF prior to
the marriage and distributing the property representing his or her share to the
person.
Succession Planning in Business
When most people start their small
business, the last thing on their mind is thinking about what will happen to
their business Many people in our industry reach burn-out, retirement, etc. and
literally just walk away from their business.
business, the last thing on their mind is thinking about what will happen to
their business Many people in our industry reach burn-out, retirement, etc. and
literally just walk away from their business.
It is a tragedy after all of the hours of
work, blood, sweat and tears that these entrepreneurs have invested in their
companies.
work, blood, sweat and tears that these entrepreneurs have invested in their
companies.
With a little planning, this is something
that is easily avoidable through a strategy called “succession planning.” In
simple terms, this means “who is going to take over your business after you’re
done?”
that is easily avoidable through a strategy called “succession planning.” In
simple terms, this means “who is going to take over your business after you’re
done?”
Many organizations have little or no
succession planning in place and if they do, it is shrouded in secrecy with
very few “in the know”. Although many say they value succession planning, the
management literature suggests that up to 67% don’t utilize the process.
Organizations without succession plans don’t realize that ultimately it will
cost them more to replace key leaders and deal with constant turnover of talent
than if they had taken the time to develop a succession plan.
succession planning in place and if they do, it is shrouded in secrecy with
very few “in the know”. Although many say they value succession planning, the
management literature suggests that up to 67% don’t utilize the process.
Organizations without succession plans don’t realize that ultimately it will
cost them more to replace key leaders and deal with constant turnover of talent
than if they had taken the time to develop a succession plan.
Managing the succession of talent is an
important strategic process that helps to minimize gaps in leadership and
enable companies to develop and retain their best employees. Succession Planning
needs to be a priority for every organization that wants to be successful in an
ever-changing business environment.
important strategic process that helps to minimize gaps in leadership and
enable companies to develop and retain their best employees. Succession Planning
needs to be a priority for every organization that wants to be successful in an
ever-changing business environment.
What Is Succession Planning in Business – Succession Planning is a deliberate and
systematic effort by an organization to ensure leadership continuity in
key/critical positions. It is a key proactive management practice that
identifies, develops, and retains a pipeline of leaders for the critical
organization positions in an attempt to drive operational success. It also
helps to enhance the organization’s opportunity to retain and develop
intellectual and knowledge capital for the future. Most practitioners would go
as far as to say that Succession Planning reduces risk and is vital to the
long-term survival of any business. Yet some organizations choose NOT to do
succession planning for Many reasons are given for not doing it but most ring
hollow.
systematic effort by an organization to ensure leadership continuity in
key/critical positions. It is a key proactive management practice that
identifies, develops, and retains a pipeline of leaders for the critical
organization positions in an attempt to drive operational success. It also
helps to enhance the organization’s opportunity to retain and develop
intellectual and knowledge capital for the future. Most practitioners would go
as far as to say that Succession Planning reduces risk and is vital to the
long-term survival of any business. Yet some organizations choose NOT to do
succession planning for Many reasons are given for not doing it but most ring
hollow.
What It Isn’t – Sometimes, knowing what something isn’t
may be more helpful than knowing what it is. In this case, Succession Planning
isn’t just something that is done when the CEO or another Key Leader is exiting
the organization and a mad scramble takes place to find an internal candidate.
It is not just done to meet some type of Board of Directors requirement. And it
shouldn’t be treated as some type of top secret intelligence report with only a
select few knowing the details. It isn’t an assumption that the next in line in
a given department or corporate structure is the successor. Yet, we have all
worked at organizations that do all of this. Again, why take such unnecessary
risk?
may be more helpful than knowing what it is. In this case, Succession Planning
isn’t just something that is done when the CEO or another Key Leader is exiting
the organization and a mad scramble takes place to find an internal candidate.
It is not just done to meet some type of Board of Directors requirement. And it
shouldn’t be treated as some type of top secret intelligence report with only a
select few knowing the details. It isn’t an assumption that the next in line in
a given department or corporate structure is the successor. Yet, we have all
worked at organizations that do all of this. Again, why take such unnecessary
risk?
When to Create a Business Succession Plan – Every business needs a succession plan to
ensure that operations continue, and clients don’t experience a disruption in
service. If you don’t already have a succession plan in place for your small
business, this is something you should put together as soon as possible.
ensure that operations continue, and clients don’t experience a disruption in
service. If you don’t already have a succession plan in place for your small
business, this is something you should put together as soon as possible.
While you may not plan to leave your
business, unplanned exits do happen. In general, the closer a business owner
gets to retirement age, the more urgent the need for a plan. Business owners
should write a succession plan when a transfer of ownership is in sight,
including when they intend to list their business for sale, retire, or transfer
ownership of the business. This will ensure the business operates smoothly
throughout the transition.
business, unplanned exits do happen. In general, the closer a business owner
gets to retirement age, the more urgent the need for a plan. Business owners
should write a succession plan when a transfer of ownership is in sight,
including when they intend to list their business for sale, retire, or transfer
ownership of the business. This will ensure the business operates smoothly
throughout the transition.
Why Plan for Succession In Business – For a business, working without a
succession plan can invite disruption, uncertainty, and conflict, and endangers
future competitiveness. For companies that are family owned or controlled, the
issue of succession also introduces deeply emotional personal issues and may
widen the circle of stakeholders to include non-employee family members. The
long term survival of those businesses, and the preservation of the wealth they
have built, will depend upon a clear and early focus on strategic succession
planning.
succession plan can invite disruption, uncertainty, and conflict, and endangers
future competitiveness. For companies that are family owned or controlled, the
issue of succession also introduces deeply emotional personal issues and may
widen the circle of stakeholders to include non-employee family members. The
long term survival of those businesses, and the preservation of the wealth they
have built, will depend upon a clear and early focus on strategic succession
planning.
Succession Planning is important because
at the heart of the Talent Management process is identifying key roles and
mapping out ways to ensure the organization has the right people with the right
skills, capabilities, and experiences, in the right place at the right time.
at the heart of the Talent Management process is identifying key roles and
mapping out ways to ensure the organization has the right people with the right
skills, capabilities, and experiences, in the right place at the right time.
The number of people in leadership roles
who plan to retire in the next few years is higher than the number of people
entering the workforce.
who plan to retire in the next few years is higher than the number of people
entering the workforce.
Organizations need to prepare for this
phenomenon to happen and prepare the next generation of leaders to move up. The
loss of organizational memory (tribal knowledge) is not to be underestimated.
phenomenon to happen and prepare the next generation of leaders to move up. The
loss of organizational memory (tribal knowledge) is not to be underestimated.
Why Business Succession Is Not So Simple – Succession planning is a complex process
that draws upon many business disciplines. Many privately held businesses
display solid professionalism and enviable profits in their daily operations,
yet fail to properly plan for and complete the transition to the next
generation of leaders. Even the most sophisticated and knowledgeable business
professionals can get caught in a web of complicated issues.
that draws upon many business disciplines. Many privately held businesses
display solid professionalism and enviable profits in their daily operations,
yet fail to properly plan for and complete the transition to the next
generation of leaders. Even the most sophisticated and knowledgeable business
professionals can get caught in a web of complicated issues.
In fact, many business owners do not carry
out a managed transition to a successor leadership team. In the case of
family-owned businesses, only 30 percent survive into the second generation, 12
percent survive into the third, and only about 3 percent operate into the
fourth generation and beyond.
out a managed transition to a successor leadership team. In the case of
family-owned businesses, only 30 percent survive into the second generation, 12
percent survive into the third, and only about 3 percent operate into the
fourth generation and beyond.
An owner-manager usually has a personal
vision to retire and sell the business “someday,” but he or she may not have
adequately considered what it will take to make that vision a reality. Even
leaders who profess they’ll never retire have to acknowledge that no one
remains at the helm forever.
vision to retire and sell the business “someday,” but he or she may not have
adequately considered what it will take to make that vision a reality. Even
leaders who profess they’ll never retire have to acknowledge that no one
remains at the helm forever.
An unprepared new management group, or
even a poorly managed transition to competent management, can trigger
significant loss in value. If leaders want their businesses’ intrinsic value to
remain intact for the benefit of their successors, they should begin the
planning process sooner rather than later.
even a poorly managed transition to competent management, can trigger
significant loss in value. If leaders want their businesses’ intrinsic value to
remain intact for the benefit of their successors, they should begin the
planning process sooner rather than later.
In some cases, a careful planning process
may reveal that selling the business instead of maintaining successor ownership
really is the answer for their situation. Not all succession plans are created
equal.
may reveal that selling the business instead of maintaining successor ownership
really is the answer for their situation. Not all succession plans are created
equal.
Succession Planning is also important
because executive search is expensive. Having the foresight to develop the top
talent you currently have, actively recruiting top talent, and making sure they
have the proper experiences to prepare them for the future is an important
strategy. The complexity involved at the most senior leadership levels is
significant. Preparing top talent to take on these roles and challenges is
essential to organizational success.
because executive search is expensive. Having the foresight to develop the top
talent you currently have, actively recruiting top talent, and making sure they
have the proper experiences to prepare them for the future is an important
strategy. The complexity involved at the most senior leadership levels is
significant. Preparing top talent to take on these roles and challenges is
essential to organizational success.
a) Anticipated demographic changes and
scarcity of true talent.
scarcity of true talent.
b) Need for a tool to identify skill
gaps and training needs.
gaps and training needs.
c) The criticality of knowledge
retention in a knowledge economy.
retention in a knowledge economy.
d) The effects of retention and morale
from investing in employees.
from investing in employees.
Points To Remember In Succession Planning
Process:
Process:
a) How long do I see myself actively
working in my business
working in my business
b) Do I want to always be involved to some
extent in my business. Maybe continue owning the company and have someone else
run/manage it?
extent in my business. Maybe continue owning the company and have someone else
run/manage it?
c) Do I want to sell it. If so,
what do I need to work on in order to make my business attractive to potential
buyers or investors?
what do I need to work on in order to make my business attractive to potential
buyers or investors?
d) Do I have anyone on my team who could
take over my business. If so, what is my plan to “groom” them to be
prepared to take over? If not, what is my plan to find someone who
will take over the business?
take over my business. If so, what is my plan to “groom” them to be
prepared to take over? If not, what is my plan to find someone who
will take over the business?
Business Succession planning is a
multidisciplinary process – When you engage in succession planning, you’re not just focusing
on the future, because it’s impossible to plan for the future without a deep
understanding of the present. Leaders have to know the current reality of their
businesses how they operate, where the value lies, what their needs are, who
their most vital customers are and why in order to prepare for new leadership
and new structures that can provide continuity in the ways that matter.
multidisciplinary process – When you engage in succession planning, you’re not just focusing
on the future, because it’s impossible to plan for the future without a deep
understanding of the present. Leaders have to know the current reality of their
businesses how they operate, where the value lies, what their needs are, who
their most vital customers are and why in order to prepare for new leadership
and new structures that can provide continuity in the ways that matter.
One most cover the following crucial
components:
components:
Family
a) Goal articulation
b) Family information and communication
c) Estate and gift planning
d) Life insurance analysis
e) Investment advisory services
f) Family offices
Shareholder
a) Shareholder agreement
b) Disability planning
c) Compensation planning
d) Stock transfer technique
Business
a) Business strategy assessment
b) Management talent assessment
c) Corporate structuring
d) Current business valuation
e) Retirement planning
Business Succession Planning &
Privately Held Business
Privately Held Business
The owners of privately held businesses
face complex planning issues. For some, the first order of business is the
long-term success of business operations, which encompasses a host of distinct
issues. For others, the priority is the preservation of family wealth through
estate, gift tax, retirement, insurance and investment planning an equally
complex challenge that may not always align perfectly with the aim of
perpetuating the business.
face complex planning issues. For some, the first order of business is the
long-term success of business operations, which encompasses a host of distinct
issues. For others, the priority is the preservation of family wealth through
estate, gift tax, retirement, insurance and investment planning an equally
complex challenge that may not always align perfectly with the aim of
perpetuating the business.
These issues should be part of a long-term
strategic plan that accounts for the needs of the business as well as the needs
of the business owner.
strategic plan that accounts for the needs of the business as well as the needs
of the business owner.
Strategic succession planning becomes even
more complicated when family issues such as legacy, birthright, communication,
personalities, and interpersonal dynamics are added to the mix.
more complicated when family issues such as legacy, birthright, communication,
personalities, and interpersonal dynamics are added to the mix.
Even an apparently simple succession
scenario can become more complex when family interests mingle with business
concerns. Even without any explicit disagreement among those involved, the
goals of the business to generate profits, exploit market
opportunities, reward efficiency, develop organizational capacity, and build shareholder
value can come into direct conflict with the recognized goals of the family.
scenario can become more complex when family interests mingle with business
concerns. Even without any explicit disagreement among those involved, the
goals of the business to generate profits, exploit market
opportunities, reward efficiency, develop organizational capacity, and build shareholder
value can come into direct conflict with the recognized goals of the family.
Business Ownership Transfer & Ways
To Transfer
To Transfer
Business succession planning is a series
of logistical and financial decisions about who will take over your business
upon retirement, death, or disability. To write a succession plan, the first
step is to identify the ideal successor to take over the business, then
determine the best selling arrangement. This usually involves a buy-sell
agreement, secured with a life insurance policy or loan.
of logistical and financial decisions about who will take over your business
upon retirement, death, or disability. To write a succession plan, the first
step is to identify the ideal successor to take over the business, then
determine the best selling arrangement. This usually involves a buy-sell
agreement, secured with a life insurance policy or loan.
Ways to transfer ownership
1. Selling Your Business to a Co-owner – If you founded your business with a
partner or partners, you may be considering your co-owners as potential
successors. Many partnerships draft a mutual agreement that, in the event of
one owner’s untimely death or disability, the remaining owners will agree to
purchase their business interests from their next of kin. This type of
agreement can help ease the burden of an unexpected transition for the business
and family members alike. A spouse might be interested in keeping
their shares but may not have the time investment or experience to help it
blossom. A buy-sell agreement ensures they’re given fair compensation, and
allows the remaining co-owners to maintain control of the business.
partner or partners, you may be considering your co-owners as potential
successors. Many partnerships draft a mutual agreement that, in the event of
one owner’s untimely death or disability, the remaining owners will agree to
purchase their business interests from their next of kin. This type of
agreement can help ease the burden of an unexpected transition for the business
and family members alike. A spouse might be interested in keeping
their shares but may not have the time investment or experience to help it
blossom. A buy-sell agreement ensures they’re given fair compensation, and
allows the remaining co-owners to maintain control of the business.
Precaution – A buy-sell agreement with a co-owner
requires a lot of cash kept on-hand. Your co-owner should be prepared to
buy-out your shares, theoretically, at any moment. Many businesses
will fund this plan with life insurance. Term life insurance is relatively
inexpensive and can offset a lot of costs in the event of an owner’s death.
requires a lot of cash kept on-hand. Your co-owner should be prepared to
buy-out your shares, theoretically, at any moment. Many businesses
will fund this plan with life insurance. Term life insurance is relatively
inexpensive and can offset a lot of costs in the event of an owner’s death.
Permanent life insurance is a bit more
expensive with the added benefit of a payout in the event of retirement or
disability. If you choose to draft a buy-sell agreement with your co-owner,
you’ll want to make sure a life insurance policy is stipulated in the
agreement. The company can also purchase key person insurance that pays out in
the event a key member of the business dies or becomes disabled.
expensive with the added benefit of a payout in the event of retirement or
disability. If you choose to draft a buy-sell agreement with your co-owner,
you’ll want to make sure a life insurance policy is stipulated in the
agreement. The company can also purchase key person insurance that pays out in
the event a key member of the business dies or becomes disabled.
2. Passing Your Business Onto an Heir – Choosing an heir as your successor is a
popular option for business owners, especially those with children or family
members working in their organization. Passing your business on to an heir is
not without its complications. Some steps you can take to pass your business
onto an heir smoothly are,
popular option for business owners, especially those with children or family
members working in their organization. Passing your business on to an heir is
not without its complications. Some steps you can take to pass your business
onto an heir smoothly are,
a) Determine who will take over – This is an easy decision if you
already have a single-family member involved in the business but gets more
complicated when multiple family members are interested in taking over.
already have a single-family member involved in the business but gets more
complicated when multiple family members are interested in taking over.
b) Provide
clear instructions – Include instructions on who will take over and
how other heirs will be compensated.
clear instructions – Include instructions on who will take over and
how other heirs will be compensated.
c) Consider a buy-sell agreement – Many succession plans include a
buy-sell agreement that allows heirs that are not active in the business to
sell their shares to those who are.
buy-sell agreement that allows heirs that are not active in the business to
sell their shares to those who are.
d) Determine future leadership structure : In businesses where many heirs are
involved, and only one will take over, you can simplify future discussions by
providing clear instructions on how the structure should look moving forward.
If a future leadership structure is not implemented, and the business passes on
to more than one heir, the resulting power struggle may negatively impact the
business.
involved, and only one will take over, you can simplify future discussions by
providing clear instructions on how the structure should look moving forward.
If a future leadership structure is not implemented, and the business passes on
to more than one heir, the resulting power struggle may negatively impact the
business.
Precaution – Making business decisions within a family
can get messy. Emotions can run high, especially after an untimely death or
disability. Further, second-generation businesses rarely survive the
transition, as they’re often sold by the inheriting family member, or fail
outright.
can get messy. Emotions can run high, especially after an untimely death or
disability. Further, second-generation businesses rarely survive the
transition, as they’re often sold by the inheriting family member, or fail
outright.
If your successor is skilled and business
savvy, passing Your Business then inheritance is the best idea. If
not, you may consider selling your business to a co-owner, key employee, or outside
buyer instead.
savvy, passing Your Business then inheritance is the best idea. If
not, you may consider selling your business to a co-owner, key employee, or outside
buyer instead.
3. Selling Your Business to a Key Employee
– When you don’t
have a co-owner or family member to entrust with your business, a key employee
might be the right successor. Consider employees who are experienced,
business-savvy, and respected by your staff, which can ease the transition. If
you’re concerned about maintaining quality after your departure, a key employee
is generally more reliable than an outside buyer.
– When you don’t
have a co-owner or family member to entrust with your business, a key employee
might be the right successor. Consider employees who are experienced,
business-savvy, and respected by your staff, which can ease the transition. If
you’re concerned about maintaining quality after your departure, a key employee
is generally more reliable than an outside buyer.
Your employee will agree to purchase your
business at a predetermined retirement date, or in the event of death,
disability, or other circumstance that renders you unable to manage the
business.
business at a predetermined retirement date, or in the event of death,
disability, or other circumstance that renders you unable to manage the
business.
Precaution – A common drawback to key employee
succession is money. Most employees aren’t in the financial position to buy the
business they work for. Even if they are, having enough liquid cash on hand is
another challenge. One solution is seller financing, in which your employee
pays you (or your family) back over time. There’s typically a down payment of
10% or higher, then monthly or quarterly payments with interest until the
purchase is paid for in full.
succession is money. Most employees aren’t in the financial position to buy the
business they work for. Even if they are, having enough liquid cash on hand is
another challenge. One solution is seller financing, in which your employee
pays you (or your family) back over time. There’s typically a down payment of
10% or higher, then monthly or quarterly payments with interest until the
purchase is paid for in full.
4. Selling Your Business to an Outside
Party – When
there isn’t an obvious successor to take over, business owners may look to the
community. Is there another entrepreneur, or even a competitor, that would
purchase your business? To ensure that the business is sold for the proper
amount, you will want to calculate the business value properly, and that the
valuation is updated frequently.
Party – When
there isn’t an obvious successor to take over, business owners may look to the
community. Is there another entrepreneur, or even a competitor, that would
purchase your business? To ensure that the business is sold for the proper
amount, you will want to calculate the business value properly, and that the
valuation is updated frequently.
You should prepare your business for sale
well in advance; hire and train a great general manager, formalize your
operating procedures, and get all your finances in check. Make your business as
stable and turnkey as possible, so it’s more attractive and valuable to outside
buyers.
well in advance; hire and train a great general manager, formalize your
operating procedures, and get all your finances in check. Make your business as
stable and turnkey as possible, so it’s more attractive and valuable to outside
buyers.
Precaution – The main drawback to an outside sale
succession plan is the unexpected: You can’t predict exactly what a new owner
will have in store. The business’s mission could pivot; staff could change;
customer relationships could dwindle. Also, as with the other types of
arrangements, you’ll need to draft a buy-sell agreement. Depending on the
buyer’s capacity, you may also need to work with them to secure an acquisition
loan.
succession plan is the unexpected: You can’t predict exactly what a new owner
will have in store. The business’s mission could pivot; staff could change;
customer relationships could dwindle. Also, as with the other types of
arrangements, you’ll need to draft a buy-sell agreement. Depending on the
buyer’s capacity, you may also need to work with them to secure an acquisition
loan.
5. Selling Your Shares Back to the Company
– An “entity
purchase plan” or a “stock redemption plan” is an arrangement where the
business purchases life insurance on each of the co-owners. When one owner
dies, the business uses the life insurance proceeds to purchase the business
interest from the deceased owner’s estate, thus giving each surviving owners a
larger share of the business.
– An “entity
purchase plan” or a “stock redemption plan” is an arrangement where the
business purchases life insurance on each of the co-owners. When one owner
dies, the business uses the life insurance proceeds to purchase the business
interest from the deceased owner’s estate, thus giving each surviving owners a
larger share of the business.
Precaution – In most circumstances, a cross-purchase is
more financially viable. When co-owners purchase shares directly, they get a
“step-up in basis,” which means the stock’s basis is revalued at its current
price. With an entity purchase, the original basis remains, and your co-owners
will be liable for potentially higher capital gains.
more financially viable. When co-owners purchase shares directly, they get a
“step-up in basis,” which means the stock’s basis is revalued at its current
price. With an entity purchase, the original basis remains, and your co-owners
will be liable for potentially higher capital gains.
Benefit of Business Succession planning – There
are many benefits for companies and owners who plan properly and strategically
for an orderly transition of management and ownership:
are many benefits for companies and owners who plan properly and strategically
for an orderly transition of management and ownership:
a) Survival and growth of the business or
its assets under the current structure or after sale or restructuring.
its assets under the current structure or after sale or restructuring.
b) Preservation of harmony when the
business is family owned.
business is family owned.
c) Reduction or elimination of estate and
income taxes.
income taxes.
d) Facilitation of retirement for the
current leadership generation.
current leadership generation.
e) Ability to retain control of the
process instead of having someone else make decisions.
process instead of having someone else make decisions.
Ideas That May Help You
1. Transfer knowledge and experience from
the top. This aids in educating and developing future leaders.
the top. This aids in educating and developing future leaders.
2. Build relationships across generations.
Skills, talents and values from a diverse group strengthens overall leadership.
Skills, talents and values from a diverse group strengthens overall leadership.
3. Strengthen leadership peer
relationships. Helps leaders break down “silos” and learn from each other.
relationships. Helps leaders break down “silos” and learn from each other.
4. Develop succession plans. Don’t wait
until the need for a leader is obvious.
until the need for a leader is obvious.
5. ID and nurture high-potential
employees. This group can be the most likely to leave.
employees. This group can be the most likely to leave.
6. Provide needed cross-departmental learning and exposure. This develops understanding of the organizational system.
7. Offer executive coaching. Look for
fresh ideas from outside experts.
fresh ideas from outside experts.
8. Include more leaders in succession
planning. Foster strategic thinking early in the career path.
planning. Foster strategic thinking early in the career path.
9. Provide mentoring support for new
managers. Helps to acclimate them to their new roles.
managers. Helps to acclimate them to their new roles.
10. Assess talent. Give leaders insights
to help them increase their effectiveness.
to help them increase their effectiveness.
Conclusion – Succession
Planning will likely be influenced by work/life concerns. Organizations will
need to find ways to help high-potentials balance their work responsibilities
and their personal lives. Organizations must understand the impact that
generational influences have on employees’ views of career development.
————————————————————–
BN – 19122019