Protecting family businesses through trusts

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Data from a US-based Family Firm Institute indicates that family-owned enterprises are responsible for more than 70% of global GDP. However, family businesses seldom survive into the next generation beyond death of the founding member of the business. In fact, on average only 30% of family businesses survive into the second generation, 12% into the third and 3% into the fourth. This shows that, while death and inheritance is not a comfortable subject to broach with family members, it is in the best interest of the family business' legacy.

Leaving succession planning of the ownership of the business to the remaining spouse, children or other family members is a risky and somewhat irresponsible decision that could lead to the demise of a legacy. Without an appropriate estate plan and a legally executed will, one is at a greater risk of leaving one's family business and loved ones powerless and in a vulnerable financial position upon death.

For example, a will can generate a testamentary trust to ensure business experienced trustees manage interests properly. This works particularly well when spouses are married in community of property and leave everything to the surviving partner, who may not have the necessary business acumen to continue the business. The testamentary trust will ensure that the nominated trustee will continue business as usual and ensure that the remaining partner remains as the income beneficiary of the business but not necessarily responsible for its day-to-day running.

Clients will often prefer to nominate their next of kin who are familiar with the business dealings, assets and liabilities of the estate, as the estate executor. Those taking this route should be aware of the process involved as the nomination will also need to get approval by the Master of the High Court to see that the nominee is qualified to administer the deceased's estate.

It must be kept in mind that the deceased estate is quite a complex matter, therefore one would rather advise that multiple executors are appointed - such as co-executors for the physical estate - to assist with this.

Small business owners should also consider their business structure when developing a succession plan for their business. For example, in the case of a sole proprietorship, the owner's assets and liabilities are inseparable, therefore, when the owner dies the personal estate dissolves - one of the major disadvantages for SMEs.

However, if the business is structured as a Pty Ltd, Trust or NPO, it is recognised as a separate entity and therefore business as usual can continue after death.

It is therefore advisable that business owners relook their business structure carefully and determine if it is the correct one for them. Key to this is knowing that there are capable family members who are able to keep the business operating and planning around this. If not, then businesses should take care to restructure its enterprise so that this is made possible.