RHTLaw Taylor Wessing’s Managing Partner, Tan Chong Huat and RHTLaw Taylor Wessing’s Private Wealth Practice’s Partner and Deputy Head, Benjamin Szeto, discuss their take in an article in The Business Times and sgsme.sg titled “Keeping the family business together“.
The article was first published in The Business Times and sgsme.sg on 1 May 2018.
Keeping the family business together
Publication: The Business Times and sgsme.sg
Section/Page: SME /Online and News /Online
Date: 1 May 2018
Written by: Tan Chong Huat and Benjamin Szeto
Distributing assets, using trusts and passing the baton before one passes on, are some ways to fend off family feuds.
ASIA has seen its fair share of family feuds. We witnessed sibling rivalry in the Samsung dispute when the founding patriarch passed on. In India, the Ambani brothers publicly clashed after the demise of their father, the founder of Reliance Industries group.
Of late, we see familial rows making headlines closer to home. The sons of the founder of Swee Kee Chicken Rice Restaurant went to court.
The heirs of the founder of the Genting Group are now embroiled in a more complicated tussle, reportedly involving certain beneficiaries being excluded from a trust and a will.
What are some of the practical steps that may be taken to avoid or mitigate the impact of such spats arising in high-net-worth families?
It is unsurprising that many domestic disputes erupt after the patriarch (or matriarch) dies. Often, at the centre of these rows lie their wills, or lack of one. Allegations of foul play are common. As the departed cannot clarify their intent from the grave, such disputes may only be resolved by the courts.
One simple way of avoiding squabbles over being left out or receiving less is for the elder to distribute the bulk of his assets while still alive and of sound mind.
He can retain an amount to ensure that his interim needs can be met.
He would be able to clarify his actions and intent, mediate any disagreement, and take any remedial action needed. Remedial action may include making supplementary distributions from his remaining undistributed assets.
Another advantage of this approach is that the elder can take into account the existing needs of the beneficiaries. Wills, on the other hand, often take effect many years after they have been executed, by which time the financial situations of beneficiaries may have changed drastically.
For individuals with collections of art or collectibles, the collector may simply sell it entirely and immediately distribute the sales proceeds in a manner he deems most appropriate. But this approach may not yield optimum profit.
Some collectors may wish to preserve their collection as a whole. Early action is key to avoid arguments over whether or which pieces should be sold.
Although complete collections may be bequeathed to single beneficiary under a will, there is no guarantee that he will not subsequently liquidate pieces, especially when an impecunious heir requires cash.
A means to ensure longevity of a collection is to set up a trust, which stipulates relevant provisions and adds income-producing assets, while the owner is still alive. Where other trust assets (like bonds) generate sufficient revenue to upkeep (which include costs like insurance) the collection, the trustees could preserve the unity of the collection for many generations. The trust can also engage in philanthropy.
Trusts can also be used to minimise occurrences of family disharmony. Such structures are apt when there are extensive and substantial assets. To avoid discord, settlors should consider the following practical measures:
There is no “right” way to structure a trust. Much would depend on the assets in question, a settlor’s objective and, most importantly, family dynamics. Seek legal advice.
Founders should consider handing over the reins of family businesses to successors during their lifetimes. They can assume the role of chairman and relinquish day-to-day running to the next generation. The patriarch continues to exert influence, there is continuity, and new leaders can be groomed. Critically, founders can deal with any quarrels that may arise.
Business owners could also contemplate carving up, before their demise, their enterprises into distinct entities to be owned and managed by various heirs. Such a pre-emptive move could avoid the sort of fallout witnessed in the Ambani saga. Not only will it help avoid personality clashes, but differing goals, ambitions and capabilities may also be accommodated.
If it is not viable to carve up the business that would be inherited by the next generation, the patriarch should have a contingency plan. A universal life policy may be used to finance one family member to acquire the interests of the others. Equally essential is an agreement or option that pre-determines what the buyer must pay to the others for their stakes in the business. These actions would side-step protracted arguments over valuation and ensure that funds would be available for any buy-out.
Honest, proactive action
While internecine in-fighting cannot be avoided, early steps can be taken by heads of families to minimise such occurrences and their impact. Planning ahead can deal with issues of being excluded from inheritance or receiving less; whether and when assets should be sold; and control or management of the family business.
Most importantly, patriarchs must make an honest assessment of the familial situation and take decisive action while there is still time.