Mark Hunter is Partner in the private client team at Macfarlanes, where he advises on a broad range of multi-jurisdictional tax, trust and estate planning issues with a particular focus on family offices and the creation and operation of asset-holding structures for family owned businesses.
Family fractures
Founders often envisage the business they have created surviving indefinitely under the stewardship of their children, grandchildren and future generations, yet this vision often conflicts with the practical reality of inheritance and succession.
The share capital of a family business can become divided and unwieldy in only a few generations, and although there is often great optimism about how to run the business directly, this can often produce tensions which are common causes of families fracturing. How should competing visions for the business be resolved? How should differing liquidity needs be addressed? How should family members be treated fairly when they don’t participate in the business?
Gulf state challenges
This is a common trend but one which is particularly notable among families living in the states of the Gulf Cooperation Council (GCC).
As these economies have grown there is now a group of successful entrepreneurs looking at how to protect their businesses for the long-term as they approach a point of generational change. However, the application of Shari’a inheritance rules and the tendency towards larger families with multiple spouses can often accelerate the subdivision of the family business and the tensions this creates.
Recognising these trends, there has been an increased interest in legal ownership solutions which can mitigate the consequences of divided ownership while still ensuring that family members benefit fairly. The best structure varies between family and jurisdiction but trusts and foundations are often favoured as long-term asset holding vehicles.
Proper caution
There has been some popular concern about the use of trusts and foundations, particularly in places like Panama and the British Virgin Islands, following the high-profile leaks of information in the Panama Papers, the Paradise Papers and so on.
Families are therefore rightly cautious about transferring prized assets into a trust structure. However, a family trust is intended to be a long-term arrangement and it remains a valuable way to keep shareholdings together, bring in an element of third-party professional management and allow family members (who would be the beneficiaries of the structure) to receive the profits and benefits of the assets held.
These are all key advantages which can help manage tensions and reduce the risk of family fracture.
A rising trend
The market is evolving to ensure that options along these lines are available even to families in jurisdictions which do not traditionally have the concept of a trust. The Dubai International Financial Centre and the Abu Dhabi Global Market are both jurisdictions that allow the creation of trusts which can often hold assets within the GCC. There is a great deal of interest from families in the region in structures along these lines especially where they have witnessed inheritance disputes and businesses suffering as a result.
Even in the UK there remains a strong interest in holding private family businesses through trust structures. There is a relief from inheritance tax on privately-held trading businesses intended to ensure these businesses stay together, which can be helpful in transferring these assets to trust.
Trusts and foundations are ultimately only one tool in keeping families and their businesses together for the long-term, but they can have an important part to play in ensuring stability within a family-owned business during times of generational change.
About Mark Hunter
Mark Hunter is Partner in the private client team at Macfarlanes, where he advises on a broad range of multi-jurisdictional tax, trust and estate planning issues with a particular focus on family offices and the creation and operation of asset-holding structures for family owned businesses.
About The Lede
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