Estate planning is often mapped out with the best of intentions with a view to transferring a business to the next generation.
That's fine, but make sure there is scope for adjustment, because sometimes things turn out differently and this could have unfortunate consequences. How do you leave room for unforeseen future changes in your estate planning?
Mapped-out path versus reality
Filip and Mia's story
Filip and his wife Mia, who are dedicated entrepreneurs, were amongst the first in Belgium to establish a company specialising in computer security software 30 years ago. It turned out to be a very smart move because today they are global operators in computer and internet security. Meanwhile, their only son Tim has also joined the business as a director. Time for estate planning.
Well-intentioned estate planning
Now that Filip and Mia have reached a certain age, they want to enjoy their well-earned retirement in their second home by the sea. However, they still want to keep an eye on the business. Tim is taking over and in order to demonstrate their confidence in him, Filip and Mia are allocating their shares tohim, albeit with reservation of usufruct. This way, they still have a degree of control and confidence in the financial side of the business.
The 10 million question
However, less than twelve months after the share transfer, the family business is approached by an American computer and software giant, which has set its sights on the Belgian company as the family business fits perfectly into its strategic plan. They are very keen to take over the company and are prepared to pay 10 million euro for it.
Filip and Mia don't hesitate for a second: this is a unique opportunity they don't want to miss, but to their utter surprise Tim sees things differently. He is fundamentally opposed to large American players who, in his opinion, monopolise the market and squeeze it dry so that in the end only 'the big guys' are left. To the disbelief of his parents, Tim is unwilling to sell his shares, which he owns outright following the gift.
Nothing to be done?
Filip and Mia decide to seek advice. It cannot be that the shares of which they only gifted bare ownership to their son cannot be sold just because he does not agree? Unfortunately, it can. The sale of shares requires the consent of both usufructuaries and bare owners. Without Tim's consent, no sale...
But perhaps there are ways in which to revoke or cancel the donation? Again, the answer is not what Filip and Mia were hoping for. A gift to children is final and irrevocable.
Filip and Mia do not understand and are devastated. They had never considered this might happen and if they had known, they might not have made the gift at all...
Partnership as a means of control
Unfortunately, fictional stories such as that of Filip and Mia do occasionally occur in practice. This does not mean, however, that a precarious situation such as this cannot be avoided. A relatively simple and practical solution is the insertion of a partnership as a means of control.
Before donating the shares directly to Tim, Filip and Mia could, for instance, opt to incorporate the family business shares into a Belgian partnership, a company without legal status. In exchange for their contribution, Filip and Mia receive shares in the partnership, which they donate in bare ownership to their son Tim. They themselves remain usufructuaries.
The solution lies in the Articles of Association of the partnership, in which Filip and Mia are appointed as managers of the partnership. In this capacity, they are entitled to sell the partnership's assets, i.e. the contributed shares in the family business, obviously providing this is in the interest of the partnership. As managers of the partnership, they can consequently decide to sell in the event of a high takeover bid, given the expected capital gain.
Moreover, as usufructuaries they are entitled to the proceeds of the partnership assets. This may be a distributed dividend from the underlying family business, but also the capital gain realised as a result of the sale of the family business. However, this must be specifically stipulated in the Articles of Association and the deed of donation.
With estate and inheritance planning it is important to look ahead and to allow scope for change in case of unexpected events. Sound preparation is crucial. Please do not hesitate to call upon our Estate Planning experts, who will be happy to discuss the various options with you.