Plan for succession to protect your wealth

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Personal Finance

Plan for succession to protect your wealth


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It is critical to have a formal succession plan in place to protect the asset you have built for your family to enjoy the benefits. PHOTO | SHUTTERSTOCK

Summary

  • Professional wealth structuring and planning helps protect your family’s assets, now and for the future. It helps preserve your family’s financial confidentiality.

You have worked so hard over the years to grow your business so that it can sustain you and your family in future. What happens to the business when you retire or step down? Do you have the luxury of retiring if your children are not interested in the business? What happens next?

Every business is different and in Kenya, we see this very clearly. There are family businesses run by brothers, sisters, parents and other relatives and on the other hand, businesses that are essentially one-man shows. Each has its own challenges when it comes to succession planning but more importantly, each family member also is unique in what they want from the business in the future and what their plans are.

In some Kenyan communities families tend to bring their children into the business from a young age to groom them, assuming the children want to take over, but in others the patriarch or business owner holds on until the end before handing over the reins. This can lead to a situation where heirs are unprepared to take over a business and potentially result in loss of generational wealth.

It is therefore critical to have a formal succession plan in place to protect the asset you have built for your family to enjoy the benefits. However, remember there is no “one size fits all” solution to succession planning.

Why succession planning is crucial

Family businesses are a great way to build generational wealth. If this is your case, wealth structuring needs to extend beyond personal finances (accounts on or offshore) or shares in businesses. These cannot be done in isolation from each other. There are complex considerations at play, and it may be a good idea to work with professionals to ensure that you have a formal plan in place that protects all facets of your family’s wealth.

Professional wealth structuring and planning helps protect your family’s assets, now and for the future. It helps preserve your family’s financial confidentiality

It also allows for an orderly succession of assets across jurisdictions.

When should you start succession planning?

The sooner you start your succession plan, the better. A successful succession plan enables the smooth transition of businesses, wealth, or both. The process can be quite lengthy depending on each family and business situation and therefore there is merit in starting early.

Given the current pandemic, it is even more prudent to start early as we have seen situations where a family member has passed away from Covid-19 leaving the family in a very precarious situation. The more thought and planning that goes into it, the more prepared you will be for every eventuality.

Are your children ready for leadership roles? Do they have a firm grasp of the family’s financials?

Many business owners do not feel comfortable talking about finances or their demise with their children, particularly if they are not yet adults.  The result is that heirs only start learning about financial literacy when they are adults which impacts their ability to manage and preserve a lasting legacy.

The absence of a succession conversation can cause a delay in heirs developing the necessary skills required for a leadership role.

How should you tackle succession planning?

Given that succession planning is a roadmap for heirs to follow for the long-term preservation of generational wealth the circumstances of each family member, therefore, needs to be taken into consideration.

Identify your goals. Will you and your spouse need future income from the family estate? Will you need to support children and/or grandchildren from this estate?

How involved do you want to be in the business once you step away from a daily leadership role? Is it essential that specific values are maintained in the business once you step away? How will the wealth be distributed between beneficiaries who are involved in the business and those who are not?

Quite common in Kenya has been the disputes that have arisen when the patriarch has passed away leaving billions of shillings worth of assets in abeyance since there are family disputes. This would not normally have resulted if proper succession planning had been done.

Determine how you will achieve your objectives. You may need to establish a variety of trusts, gift shares, or create buy/sell agreements. By considering every angle now, you minimize potential problems, conflicts, or legal issues down the line.

Implement the plan. Every plan should be regularly revisited, and this is particularly true of a succession plan. Circumstances could change, and it needs to remain relevant. What happens if there is a divorce in the family, the death of a stakeholder, or changes in the business’s profitability? How does this impact the plan? What about business skills? Are your heirs prepared for leadership roles? Regularly revisiting the plan keeps everyone on track.

Do you have a retirement strategy?

One of the most important benefits of a succession plan is that you can work alongside the future leaders of your business. 

This allows you to clearly define your expectations from those you have left behind to run the business.

It also gives them the ability to share their plans and aspirations. For example, perhaps they do not want to take over the reins of the family business or what we have seen more recently is that the 3rd generation has very different plans for the company than those of the 1st generation. What does this mean for your retirement plan?

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