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Succession Planning: Transitioning the Current Generation out of the Business

6 minutes read time

There are various succession options

This is one of an ongoing series of 10 articles on this topic. This article is the sixth in the series, and follows on from Employment and Equity in Succession to the Next Generation, Sale of the Business as an Option in the Succession plan, Succession Planning: How to Bring Non-Family Members into the Business, Understanding Business Structures for Succession & Asset Protection and How to Create a Succession Plan.

If there are no children or grandchildren interested in the family business, an option is a sale. Transitioning out of the business in this scenario is simple, and almost immediate. A sale provides access to liquid assets for retirement, and enables the estate to be divided equally between children if appropriate.

If the children cannot work together going forward, another option, in the case of a wine business for example, is to give or sell the winery and the brand to one child, which logically go together, and the vineyards to another child.  The vineyards could either be tied into the winemaking business with long-term grape supply agreements, or the recipient of the vineyards could build a separate business around the vineyards with a new brand, and winery.

Alternatively, all children could receive equity in the business, regardless of whether they also have an employment or governance role.

Another option is for equity in the business to be given to only one of the children, for example through full control of the trust through which the business is run.  The trust deed could provide for a fixed income stream to be paid from the business to the other children, if the business can afford this, and if not, other children could receive non-business assets if available.

If the current generation want the next generation to act only as “custodians” of the business for future generations, this is more complex.  It is extremely difficult to protect the capital value of the business from the Family Court, on marriage breakdown for example.  To reduce risk, the business could be structured in South Australia (which has no perpetuity period and therefore trusts can last forever) as a perpetual hybrid trust by the current generation.  Alternatively, if the business is currently run through trading and asset-holding companies, the current generation can set up a perpetual hybrid trust, and on death, so as not to trigger tax, leave their shares in these trading and asset-holding companies to the trust.  The trust capital is never intended to vest, or pass to any of the potential beneficiaries of the trust, who would usually be bloodline relatives only, and fixed income units would be issued to distribute fixed amounts of trust income to the next generation, or their family trusts for tax-efficient distribution.  Even in South Australia, the next generation potential beneficiaries of the trust could potentially apply to Court to have the trust vest, but the Court would have regard to the spirit of the original intention.

Transitioning the current generation out of the business should have been planned over a number of years, a Succession Plan agreed, willing and able successors identified, and a board constituted to assist with transition if appropriate.  The transition may be a sale, a lifetime gift or a gift by Will on death.

As discussed in previous articles, lifetime transfers of equity of shares in a company or units in a unit trust can trigger tax (which may be mitigated by small business concessions for example).

The lifetime transfer of control of a trust, and transfers on death of shares, units or control of a trust under a Will are not subject to capital gains tax or stamp duty.

If the business is run through a discretionary trust (which may or may not own the shares in trading and asset-holding companies), and a lifetime transition is appropriate, the current owners can give some or all of the shares in the corporate trustee of the trust to the next generation and appoint them as directors, allowing them to manage the business, while retaining the key controlling role of appointors of the trust and therefore the ability to remove and replace the corporate trustee, and its directors, if necessary. In that way, the current owners can take a step back, but retain ultimate control of the business in case things go wrong.  If they are subsequently happy that the next generation are running the business well, and there are no prevailing asset-protection considerations such as a relationship breakdowns to take into account, they could transfer control of the business entirely through a transfer of all of their shares in the trustee company of the trust, and retirement as directors of the trustee company and appointors of the trust.  They may however decide, for asset protection reasons, to retain ultimate control until death when they can pass their shares and the trust appointor roles by Will.  There are no tax or duty consequences in the transfer of control of a business run through a trust, either in lifetime, or on death.

If the current generation do not wish to let go of the reins entirely, and it is of value to the business to retain their knowledge, experience and entrepreneurial skills, then their ongoing involvement and roles within the business also need to be clarified.  It may be agreed that the current generation act as ambassadors, or retain roles on the operating board, as directors, to ensure a smooth transition, and mentor the next generation.  If this is the case, there should be written clarity as to roles, reporting and boundaries.  If they are handing over management and day to day operations, they should try to step back and allow their successors to make their new roles their own, providing guidance and input when asked.

There are many options; which is appropriate will depend on the family, and business, in question.


This was originally published in Australian & New Zealand Grapegrower & Winemaker. 

This article is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.