Succession planning: Building a legacy for generations

Succession planning is an intricate but indispensable process for preserving wealth, harmony, and vision across generations. It demands a nuanced approach that integrates governance, asset management, and conflict resolution into a cohesive framework.

Succession planning is the cornerstone of ensuring the continuity of leadership, governance, and asset ownership in businesses, particularly family-run enterprises, large or small. It is a structured process that addresses three intersecting spheres—ownership, business, and family—while balancing diverse stakeholder interests. Effective succession planning requires a careful assessment of leadership capabilities, governance frameworks, asset distribution mechanisms, and conflict management protocols.

Leadership and Governance Succession

Leadership succession sustains a business’s strategic vision and operational stability. It involves grooming future leaders from family members, non-family employees, or external professionals. Family owner-managers who actively participate in business operations are natural successors, but they must be prepared through mentorship, training, and gradual integration into decision-making roles. In contrast, inactive or passive owners who hold stakes without operational involvement need structures that align their interests with active participants. Introducing next-generation family leaders in the presence of senior external management demands a phased approach to maintain stability. Successors should begin by shadowing senior leaders, gradually take on strategic responsibilities, and eventually assume formal leadership roles with the outgoing leaders' support. Additionally, post-transition mentorship by predecessors ensures continuity in leadership philosophy while providing a safety net for successors. This phased approach respects the contributions of external senior management and prevents friction, safeguarding the organization's culture and operational integrity.

Effective governance structures ensure the seamless functioning of family businesses, where overlapping personal and professional interests often lead to conflicts. A Family Charter serves as a vital, non-binding framework that encapsulates the family’s philosophy, values, and governance roles. By outlining the expectations for family members' participation in business roles and laying down a clear separation of ownership and management, it provides a roadmap for involvement without causing disruptions. Additionally, it can incorporate conflict resolution mechanisms, such as mediation or arbitration. A Family Council provides a formal platform for family members to engage in discussions and contribute to business decisions without interfering with day-to-day operations. This body often includes advisory boards comprising external experts who offer unbiased perspectives, bridging the gap between family interests and business priorities. A more formal and binding Shareholders’ Agreement complements these structures by codifying ownership rights, decision-making protocols, and dispute resolution mechanisms. With provisions such as rights of first refusal, voting thresholds, veto powers, exit and buyout clauses, and non-compete and brand usage clauses, it safeguards strategic interests while ensuring orderly transitions. Together, these governance structures create a balanced framework that preserves family harmony and ensures the sustained success of the business.

Ownership Succession

Ownership succession involves the transfer of a complex mix of wealth—shares and other interests in operating businesses, immovable properties, insurance policies, art/artifacts, jewelry, portfolio investments, digital assets and footprints—or even hidden liabilities such as personal guarantees. Tools such as wills or trusts, each tailored to specific family dynamics, often cater to this requirement. Wills, while traditional, offer a straightforward means of distributing assets post-mortem. However, they may lack flexibility since they only deal with the transfer of assets and are subject to probate processes, which could be contested by conflicting parties, complicating the transfer. In contrast, trusts combine governance and asset succession into a single framework, operating both during and after the promoter’s lifetime. Trusts offer a structured approach to asset succession, preserving control and minimizing disputes. Separate trusts can be structured for different asset classes—operating business interests, immovable properties, and other assets.

The appointment of trustees is critical; while the initial trustee is usually the promoter, the question of successor trustees assumes paramount importance, especially in small families. Trustees act in a fiduciary capacity, safeguarding assets, ensuring governance, and ring-fencing them from external liabilities. Therefore, the choice of trustees is one of the most important decisions for a family. Beneficiaries, usually family members, must be clearly identified. Specific trusts define their proportionate interests explicitly, while in discretionary trusts, it is left to the discretion of the trustees. Delicate matters, such as removing beneficiaries in extreme circumstances or including spouses of lineal descendants, should be handled with care to ensure consensus among key family members. Trusts also provide flexibility to include governance provisions such as veto rights for specific trustees managing particular assets or businesses, or stipulating unanimous versus majority decisions for asset distribution, addition of beneficiaries or trustees, investment philosophy, or accelerated dissolution of the trust. Trusts may also include special clauses such as non-compete agreements, exit rights, and voting protocols, effectively mirroring a shareholders’ agreement.

Regulatory and Tax Considerations

The regulatory and tax landscape surrounding succession planning adds further complexity. The contribution of assets to a trust is not subject to deemed income tax if the trust benefits the immediate family of the contributor. However, joint family trusts that include family members one or more levels removed may attract deemed income tax, necessitating the creation of separate trusts for each family. This, in turn, may require a shareholders’ agreement between the separate trusts to maintain joint governance. The contribution of shares of a listed company often necessitates prior SEBI approval unless the trust has been part of the promoter group for over three years. Under FEMA regulations, having a non-resident trustee in an Indian trust holding Indian assets is generally not permitted since the trustee is the legal owner of the trust assets and is subject to restrictions on capital account transactions. While beneficiaries may be non-residents, any distribution is capped at $1 million per financial year. Although distributions to beneficiaries are not taxed in India, they may attract tax implications in the beneficiary’s country of residence. Additionally, contributing immovable properties into trusts attracts state-specific stamp duties, which can be significant if reckoner values are high. Succession planning is an intricate but indispensable process for preserving wealth, harmony, and vision across generations. It demands a nuanced approach that integrates governance, asset management, and conflict resolution into a cohesive framework. By leveraging comprehensive frameworks and aligning with the unique needs of each family, businesses can ensure a seamless transition of leadership, governance, and assets.

Binoy Parikh is Executive Director, Katalyst Advisors

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