Protecting Family Wealth: The Strategic Conversations High Net Worth Families Often Avoid

The succession of a family-owned business requires careful consideration of “management” succession and “ownership” succession. Different factors will apply to these two aspects, and any succession plan will need to address both.

Succession planning within families can cause conflict within a family due to personal relationships, emotional ties to the business and competing visions for the future. In many instances, there is a tension between family members who work in the business and those who do not.

Failing to prepare for succession can be disruptive, as the younger generation seeks to make its mark, while the current generation is hesitant to step back. Ultimately, a poorly managed succession could have reputational consequences and jeopardise the continuity of the business.

Having conversations early with the next generation is vital so that plans can be put in place over a number of years, rather than months. Setting expectations early can foster a collaborative approach and provide the opportunity to engage and support the next generation as they take the next step in leadership.

The timing of setting up a trust can significantly impact future tax liabilities.

At Myerson Solicitors, we prepare the relevant trust documentation, collaborate with advisors, and help navigate the tax aspects, ensuring clients understand how different trusts can affect each situation.

Prior to setting up a trust, families should consider when (if ever) children should become trustees, whether wealth should be released to beneficiaries gradually or conditionally, and how to balance protecting a beneficiary on one hand and encouraging independence on the other.

The conversations held around these topics can then inform decision-making when considering trustee succession, updates to letters of wishes, and the needs of the wider family.

An FIC can provide an efficient structure to discuss and manage family wealth, and can foster a collaborative approach within a family. It can also help to educate younger family members about wealth management and financial responsibility more generally. The FIC must be carefully designed to balance control, tax efficiency, and the family’s long-term objectives.

At Myerson Solicitors, we routinely advise high-net-worth families on the creation, governance, and tax structuring of FICs and work closely with accountants and financial advisers to ensure an FIC is appropriately tailored to suit a family’s objectives.

The team at Myerson are able to assess and explain the specific needs of those with diverse international portfolios and work with an established network of international lawyers, accountants, and tax advisers to ensure the optimal level of asset protection to suit needs.

In addition to preparing wills to ensure assets are managed in accordance with wishes rather than being caught by local inheritance laws, international trusts can be established to provide flexibility and control over asset distribution, whilst (depending on where an offshore trust is settled) also providing a level of privacy for high-net-worth families.

An LPA ensures that if capacity is lost, trusted individuals can step in and make vital decisions about health, finances and even businesses. Without the protection of an LPA being in place for when the unexpected happens, high-net-worth families and their assets become vulnerable.

Without an LPA, assets may be frozen, family members may disagree on medical or financial decisions, and businesses can face operational standstills if authority isn’t clearly delegated in advance.

A common misconception is that spouses, civil partners or children will be able to deal with a person’s affairs should they lose capacity, but this is incorrect. Only those appointed under a registered power of attorney can manage property and finances.

Option agreements, including cross-option and buy-sell arrangements, play a critical role in ensuring business continuity and protecting value on the occurrence of specified events such as death, incapacity, or retirement. While often referenced together, these structures operate in distinct ways and should be carefully considered in the context of the family’s wider succession plan.

A cross-option agreement is typically used to govern the circumstances of the death of a shareholder in a private company. An option is granted both to the surviving shareholders and the personal representatives of the deceased, whereby the personal representatives of the deceased are required to sell the shares or the surviving shareholders are required to purchase the shares of the deceased.

Once the option is exercised, it is a legally binding obligation. Cross-option arrangements are commonly supported by life insurance policies so that, on death, funds are available to facilitate the purchase. It is essential that the policy ownership, beneficiary designations, and the terms of the agreement are aligned so that the insurance proceeds are paid to the correct party and can be used as intended without unintended tax consequences or delays.

By contrast, a buy-sell agreement typically imposes a binding obligation on one party to sell and another to buy on the occurrence of a trigger event. While this can provide certainty, it may also reduce flexibility and can have different tax implications depending on how the arrangement is structured. Care must be taken to ensure that any compulsory transfer provisions do not inadvertently prejudice reliefs or create outcomes that are inconsistent with the broader estate planning strategy.

A shareholders’ agreement is a way in which a shareholder can protect his or her interest in a private company. A shareholders’ agreement is more typically adopted in respect of trading businesses rather than investment companies. It is a private agreement between the shareholders and the company. To create a robust arrangement, where a shareholders’ agreement is adopted, we would also recommend that the company adopt new articles of association in order that the two documents complement one another. The company’s articles are filed and are open to public inspection at Companies House.

A shareholders’ agreement and the company’s articles deal with a number of matters governing the administration of the company including inter alia the level of shareholder consent required to make certain key decisions, dividend policy, non-compete restrictions, the issue of new shares, restrictions on the transfer of share (ensuring that share ownership remains within the intended group), valuation of shares, the rights attaching to shares, appointment and removal of directors and the conduct of directors meetings.

A shareholders’ agreement will provide clarity, which is particularly important where ownership is spread across family members with differing levels of involvement, experience, or expectations. If a shareholders’ agreement is not adopted, the rules that apply are primarily set out in the legislation that applies to companies. This could lead to an unanticipated and unexpected outcome.