Advising a family

Advising a family on their governance and succession planning is a skill that private client solicitors need, and, fortunately, many have.  Individuals now, more than ever, recognise the need to enhance and protect family wealth for current and subsequent generations, and avoid the erosion of the wealth (and family harmony) caused by costly disputes along the way.  Many families are developing a family governance structure as a pre-emptive strike, in order to provide practical core guidance as to how the family should operate their succession and business matters through the generations.

Succession issues within a family structure may be relatively straightforward, but equally can be emotive and complex.  These issues can be complicated by the existence of certain rules, based upon an individual’s domicile or religion, which restrict that individual’s right to leave his entire estate as s/he wishes on death.  An added layer of complexity arises where a key family member has built up a business by him or herself and is now concerned with business succession planning as well as the wider aspects of the family’s global estate and succession.  This is particularly important where some (if not all) of the core family members, or different strands of the family, are involved in the running of the business.  Different family members may have competing interests within the business, and will often have different expectations regarding the inheritance of the business.  Where a family business exists, the succession issues for the family and the business are often linked.  Ideally, these two issues should be reviewed together, with the more complex decisions regarding the management of the family business being made in light of the overall succession strategy for the family as a whole.  A balance must often be struck between ensuring the continuity of the business, preservation of the business and family assets, and protection of the family members, particularly if any are vulnerable.

Potential conflicts between siblings must also be managed – a son might expect to inherit a greater share than his sister, or a daughter might have greater business skills than her brother who may wish to simply “cut and run” with his ‘share’ of the company.  Further problems arise when a child is unwilling to join the family business when expected to do so, when family members wish to leave the business, or when children of the family marry and there is an expectation that the new spouse (who might have greater business skills than the patriarch’s own bloodline) might join the business.  What is that spouses’ interest to be, pure remuneration or an equity stake?  What happens when a child of the family leaves the jurisdiction?  What happens when there is a relationship breakdown, e.g. as a result of divorce or family dispute, or where a child of the family becomes vulnerable to third party creditors, or is simply a frivolous spendthrift by nature and needs protection from him or herself?

Solutions to any possible problems must be bespoke and relevant to the family.  No assumptions should be made.  There should be no discussion of solutions until all the issues have been identified.  It is tempting for a lawyer, when meeting with a family for the first time, to roll out a whole raft of documents designed to deal with all possible scenarios (often from a prescribed set of precedents).  Nothing is more important than the facilitation of an open forum for discussion between the family members, with a platform for each of the key family members to raise their own particular concerns and issues.

Some families may not require any formal documentation whatsoever.  The process of discussion, facilitated by the independent lawyer, might be enough to set in place that family’s unwritten, but nevertheless effective family governance structure.  Other families might simply want a basic ‘Heads of Terms’ on one page.  Alternatively a family might want a full bible of documents to deal with every eventuality that might be envisaged.  At first glance, this seems like the ideal solution, but in practice could be dangerous if the family then places too much reliance on prescriptive documentation and is then unequipped to deal with an unforeseen eventuality.  The ideal solution is often somewhere in the middle, i.e. a governance structure that is both detailed enough to provide clear and concise guidance, but wide and fluid enough to enable flexibility and change within the family unit and dynamics of the often complex family relationships.

At the very least, all of the adult family members should have a Will in place.  Trust structures are still commonly used for succession planning (and particularly where an individual wishes to segregate funds for clarity), and carefully worded letters of wishes should sit alongside these documents.  Instead of, or in addition to any trusts, a family might wish to consider other vehicles for planning, such as a family investment company with a careful division of share rights.  For unmarried couples, a cohabitation agreement might be useful.  For married couples there is an increasing use of prenuptial agreements (and often post-nuptial agreements for couples moving in and out of new jurisdictions, or who are already married when the planning takes place).  Where a family business structure is in place, there may be a number of business documents that would be useful, such as partnership or shareholders agreements etc.  It is important that these documents are not seen as stand-alone documents, but are integral to the overall family planning structure in order to avoid potential conflict and contradiction between them.

It is not uncommon for an individual to prefer that the spouse and children ‘sort it out amongst themselves’ after his or her death, and this approach keeps our dispute resolution colleagues busy, but it is without doubt best avoided.  A carefully configured bespoke governance structure, achieved as a result of continuing collaboration by the family, should be the favoured choice.

For further question in relation to  Private Client Partner Amanda Chapman on [email protected] or 020 7822 2254.

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