The succession journey

Much has been written about why Roald Amundsen was the first explorer to reach the South Pole in 1911, 34 days ahead of Robert Falcon Scott. Over 100 years later, it is generally agreed that the Norwegian explorer had a deeper understanding of his journey, for which he planned accordingly. Scott traveled with 3 motor sledges (but no engineer), ponies and dogs. Amundsen traveled with dogs and skis, avoiding defunct machinery and delay by ponies who sank into the snow due to the weight they carried on small hooves.

It’s a captivating tale of the golden age of polar exploration and perhaps its greatest lesson is that a successful journey is one where goals are clearly defined and understood, the path is chartered clearly and vehicles are selected only on the basis that they help achieve the desired outcome of the voyage.

That lesson holds true when individuals and families are planning to transition wealth from one generation to another and even more so now, given the current situation, they need to ensure clear and constant communication of their governance and transition plans. The first point is to treat succession as a journey, rather than as an end point of pre-determined coordinates. It can be tempting when planning for succession to move to the execution stage first, to select a vehicle for passing wealth to the next generation such as a trust or foundation and instruct advisors to set up the necessary structures in a tax efficient manner. The result is usually unsatisfactory in the long term. The structure may offer some tax and legal benefits to the transferor and to the individual that inherits, but does it allow for both of their visions of success to be realized both now and in the future? Are those visions even the same? 

Treating the process as a journey allows individuals and families to spend time clearly defining and understanding their goals from the outset to set them up for success. Particularly in situations where wealth is passed to more than one of the next generation and the wealth continues to be held and managed together, it can be critical to the future cohesiveness of the family to ensure that there is a shared purpose between the family members. Increasingly, families are involving as many generations and family stakeholders as possible in conversations on the future of the family’s wealth. Some individuals may find this concerning, especially in situations where they feel younger generations should be shielded from having full knowledge of their future wealth until they have matured. The decision is one for each individual family, but the key is that deciding who to involve in such conversations and when to involve them should be a choice consciously made.

Adapting to change can be a challenge for everyone and succession by its very nature occurs at a time of great change within the family ecosystem, in some cases on death or in others when the matriarch or patriarch steps back from actively managing the family’s wealth. At such times, having family members aligned to a shared purpose can provide a sense of continuity and community that is central to the family’s continued success. Just what that success is will differ from family to family. For some families, success will mean that they continue to manage wealth collectively. For others, success will be dividing the assets to ensure that each family member has the required resources to follow their own aspirations. All of these visions are valid. The important point is that verbalizing, sharing and getting as much commitment as possible to the vision across the family ecosystem will lead to a succession plan that has the potential to be a success. Crucial to this is understanding where each individual’s aspirations fit into the family’s future plans.

Imagine a family from a jurisdiction where the legal system is derived from the common law system such as the UK. The family, although resident in the UK are self-declared Francophiles. The parents are looking to pass their wealth tax efficiently to the children and set up a trust in order to do this, informing their children after they have done so.  

Article written by Hugues Salome, KPMG Switzerland and Daniel Trimarchi, KPMG Canada.

Given their great love of France, the children decide to relocate and on doing so learn that French law derives from civil law and the treatment of trusts in France is not the same as in the UK. Immediately the children are beset with tax and legal issues, all of which could have been avoided if the children had been involved in the decision making process and put forward their own aspirations from the start.   

Once the goals of succession planning are clearly defined, the family can move to charting the correct path and establishing an overall succession plan.  This may have many different facets to meet a family’s myriad and unique needs, involving different structures as well as simple planning tools such as outright gifts if this helps the family achieve their vision and if it provides sufficient tax efficiency.  Only at the point that this overall plan has been determined should the family move to consider what form of vehicle is correct for their needs, if indeed one is required.  

There are certain benefits that the use of a vehicle can offer in our increasingly complex society and when making their selection families will need to compare the specific benefits each vehicle provides against the family’s wider requirements. The most common benefits vehicles offer include:  

Asset protection: Many families we speak to are looking for a way to protect the family’s assets, against divorce, tax regime change, errant family members and even in some cases overly-risk averse family members. Just as important to a family can be protection of the family name; public perception of the use of structures to enable succession planning leads many families to select well-known succession vehicles rather than newer structures.   

Flexibility: The connectedness and pace of change in the modern world is unprecedented and having structures which allow for flexibility to respond to situations and seize new opportunities with ease is becoming a highly valued attribute. This is particularly relevant for families where their members are more internationally mobile as a vehicle may be treated differently for tax and legal purposes in different jurisdictions. 

Tax efficiency: In an article authored by a tax advisor, one might expect tax efficiency to feature more highly in this list. While tax efficiency is certainly a key consideration for families, it is quite rightly rarely the driving force behind the selection of a vehicle. An important stage of the succession journey is understanding how a family’s ambitions can be achieved in the most tax efficient manner and tweaking either the vehicle used or the family’s succession plan based on how important tax efficiency is to the overall plan. 

Trusts, foundations and companies (limited by shares or guarantee) offer these attributes to varying degrees and should all be reviewed in light of the family’s wider succession plan when selecting a vehicle. 

As with any true voyage of discovery, the ‘end’ of the journey is never truly reached. Families and the world they operate in continue to evolve and there must be ongoing monitoring and adjustments made to ensure that the succession plan continues to meet the family’s objectives and is aligned with the various legal frameworks and tax rules impacting the family members. 

Those in the midst of a succession planning process may feel that it’s an extreme challenge, but if the tale of the battle to the pole teaches us anything, it’s that all elements of the journey, including the path itself and the vehicles used must align to the overall goals of the expedition. As Amundsen himself noted, “victory awaits him who has everything in order”.