Business Succession Planning
Why a will is important
Giving up control and putting the future of a company into the hands of one or more successors can be challenging; emotionally and psychologically. Other aspects also have to be considered, such as fiscal effects and the legal framework. Drafting a will which fits your individual situation is an important step on your way to effective business succession planning. If there is no will, the law will determine what fraction of the estate each legal heir will be allotted. The law’s partitioning may be just. Business succession itself is rarely in accordance with the interests of the person who established the enterprise, and quite often it jeopardizes the future of the company.
The law does not consider the skills and abilities of the heirs. A significant problem in connection with intestacy rules may occur if someone inherits a company and is put in charge of it, despite no connection to the close circle of the founder’s family (e.g. relatives of a daughter-in-law or a son-in-law), or if the person is not interested in and not qualified for the management of a business. Only careful business succession planning and drafting a will can prevent these risks. Furthermore, as all heirs become joint successors of the estate, only a will can provide for the risk of the company becoming incapable of acting because a multitude of heirs joined in a community of heirs have to agree on each decision to be taken. Intestacy rules also can lead to tax problems, e.g. in connection with real property owned by an heir and rented to the company.
In short: In order to secure the continuance of your enterprise, you need to thoroughly plan its transition to the next generation, considering the fiscal effects and inheritance issues. Making a will and engaging experienced counsel is a minimum requirement for decent business succession planning.
How to Plan an Effective Business Succession
Business succession will only be successful if the entrepreneur is fully aware of said issue’s importance. Planning the succession in an early stage by taking legal advice is imperative. The result will depend on individual circumstances; there is no easy answer applicable to all possible corporate constellations and family structures.
Careful business succession planning is a prerequisite for a smooth transition to the next generation. Silent partnerships, sub-participations or similar corporate arrangements are options worth considering. To establish a family foundation or to implement a double-foundation model can also make good sense. As far as you chose a succession plan based on inheritance law, we would recommend appointing an executor. This offers the following advantage: inexperienced heirs may get their share without being vested with the authority to make important decisions. However, in connection with succeeding in the share of a personally liable partner, it should be taken into account that permanent execution is possible only if the partnership agreement explicitly allows for it. Also, as the case may be, appointing prior and subsequent heirs, may be a good solution. However, both, the prior as well as the subsequent heir, will have to pay inheritance tax.
Another vital issue to be considered in the context of business succession planning are relatives who shall not get an interest in a company but are legally entitled to inherit. Those relatives may have claims to receive so-called compulsory portions of the estate. Such claims, as a rule, are due immediately in case of inheritance and involve the danger of financially overcharging the heir, which, in turn, may jeopardize the continuance of the enterprise if the heir is forced to alienate company funds. Therefore, the testator should prevent claims to a compulsory share from coming into existence, as far as possible. There are several options available to do so: for instance the transfer of assets abroad, e.g. by acquiring real estate in countries the inheritance law of which does not provide for compulsory shares, the transfer of assets to a partnership, lifetime gifts, or the change of a matrimonial property scheme. In some cases, it may be possible to persuade relatives to renounce their rights to a compulsory share.
Special diligence is required if underage or disabled descendants are involved, or children whose finances are in a bad shape. In such cases, you may consider to establish a foundation or to appoint an executor.
Business succession needs to be carefully planned. We would be delighted to assist with your individual business succession planning. Our lawyers will develop a sustainable concept with you. We also gladly involve your tax consultants, lawyers or other advisors.
Your German Business Succession Lawyer
Your German Business Succession Attorney for all issues related to inheritance law or corporate law and business succession planning is Attorney Thomas Schwab. If you would like advice on the establishment of a foundation in connection with your succession planning, Attorney Boris Piekarek will be pleased to assist you. Please contact us by e-mail (firstname.lastname@example.org) or by phone (+49 69 76 75 77 80).