The traditional nuclear family of mum, dad and 2.5 children still exists, but these days families are just as likely to consist of an extended group of parents, stepparents, stepchildren, half-siblings and domestic partners. While married and civil partner families were the most common in the United Kingdom in 2017, according to the Office for National Statistics, the number of families headed by a cohabiting couple is growing the fastest.
“Everyone should get on top of their estate planning, but the further away your family is from the traditional nuclear family, the more pressing it is to do your estate planning," says Julian Washington, head of client insight for RBC Wealth Management in London. “Complex modern families that include unmarried partners, step kids, second and third marriages and other non-traditional relationships need to understand how the rules apply. There can be legal, tax and estate consequences that need to be addressed."
Estate planning for family-owned businesses can be challenging even when you have a traditional family that functions well, but a blended family can create further complications, says Sarajane Kempster, director of the Fiduciary Specialist Team for RBC Wealth Management in Jersey.
Washington says a family-owned business, in combination with a complex, blended family is the “perfect storm of estate planning.”
Commissioned by RBC Wealth Management, The Economist Intelligence Unit (EIU) undertook a study of 1,051 high-net-worth individuals (HNWIs), including 207 respondents in the UK, from March to May, 2018. The survey explores how the meanings of legacy and wealth are being redefined across regions, genders and generations.
Determining how to allocate cash, real estate holdings and investment accounts in an estate plan can be relatively simple compared to the advanced planning needed for a family-owned business, says Washington.
“The lack of liquidity in a business makes it more difficult. If you're dealing with cash you can drip-feed wealth to the younger generation to see how they cope," says Washington. “You can't divide £100 million in business assets the way you can £100 million in cash. In addition, the business founder may have great kids and grandkids, but they may not have the same entrepreneurial drive or the skills necessary to run the family business."
Family governance the first step in business succession planning
Washington recommends business owners step back from individual planning initially to take a broader view of family governance.
“The long-term survival of the family business depends on consensus and a big-picture vision," says Washington. “You might want to establish a family charter to get younger members to buy into the idea of a family vision. A family governance document can be a non-legally binding way to establish guidelines about how the business will be run."
According to The new face of wealth and legacy survey, 67 percent of business owners in the UK agree a successful family business has a strong succession plan.
The family dynamics are more acute when you have a blended family, particularly if the founder feels differently about children versus step-children or one branch of the family versus another.
A major challenge in any family-run business is to determine whether the family wants to establish an ownership structure to keep it in their own hands or to maintain legal ownership but separate the family from day-to-day management, says Kempster.
“When you have a blended family, the first family of the value creator may not want the blended family members to benefit from the income or capital value of the business," says Kempster. “If that's the case, you need to find a way to protect members of the first family. At the same time, half-siblings or other members of the family may have a legal entitlement to parts of the estate and assets."
On the other end of the spectrum, Kempster says there are blended families where everyone works well together. Even so, family dynamics should still be considered.
Relationships with family rank high, with 52 percent of respondents in the UK highlighting this as an important part of their legacy.
“Blended families may want to design a family business structure with tiered voting rights so that the founding family members have more clout," says Kempster. “This can be a good way to make sure everyone is fairly compensated and has a voice at the table. At the same time, you want to make sure everyone's efforts in the business are recognised at the level they put into it."
Kempster says it's rare to find a blended family on middle ground. Typically, they either all get along and want to include everyone equally or the first family wants to establish a legal structure to protect their interests from later additions to the business.
Family business: Planning for a successful transition
One of the most essential steps to keep a family business functioning for multiple generations is a succession plan. While it's typical to start with the oldest son or daughter, in some cases a son-in-law, daughter-in-law, stepchild or half-sibling can be identified as the favored successor.
“In one Middle Eastern family the 88-year-old patriarch wanted to pass on the business to his sons, all of whom were in their 60s and wanted to retire," says Kempster. “Eventually they decided to skip a generation and install the grandkids to fill the positions."
In that case, the blended family included the patriarch's two concurrent wives, six sons, two daughters and numerous grandchildren. A three-year plan was developed to transition the business to the grandchildren.
A good reminder is a flourishing business benefits everyone in a family and this can help ease acceptance of a new leader.
When there's no obvious successor, says Kempster, families need to determine if they can agree on a new leader or perhaps decide to break up the business into different geographical areas or different divisions.
In some cases, the value of a company is tied so tightly to the brand or personality of the founder that the family may need to start planning for the business to be sold, Washington says.
“Not every business will last for several generations, so you need to plan for a liquid position and determine how to extract value," says Washington. “You'll need tax, business and legal advice for your long-term strategy."
Trust structures for family harmony
Establishing a trust for the family business is one of the most common ways to separate emotional family ties from business decisions.
“The big benefit of a trust is that the legal owner of the business becomes the trustee, not the family," says Kempster. “If there are difficult decisions to be made, this takes the fire out of the discussions because the trustee isn't a family member. It can be a good way to reduce family tension."
A foundation structure is another option, which is like a trust but leaves more power in the hands of the founder of the business. Kempster says trusts are generally the best structure for blended families.
“A trust is the ultimate flexible vehicle that can be used when the founders are worried about ceding control to the next generation," says Washington. “The beneficiaries of the trust get the value from the business but the control rests with the trustees."
No matter what kind of structure you choose for your family business, Kempster says it's essential to be respectful of all family members.
Advisors experienced with both family businesses and blended families can make for smoother business transitions and greater family harmony.