Distributing Assets Fairly
2nd December 2016
We’re all living longer these days; healthy individuals in their mid-seventies now may well one day celebrate their 100th birthday. Few would dispute that longevity is a positive thing, as long as the individual is in good health, but it does make the need for solid financial planning even more pressing. A good adviser should help you take a long-range view of your finances, providing an overview of your current position and working out how much you are likely to need for a comfortable retirement and old age. This information can help inform inheritance tax (IHT) planning and the will that you eventually draw up that shares out assets fairly and creates a legacy of family harmony rather than strife.
A fine balance
If there is a landed estate and you don’t want to sell it or break it up, then it can only go to a single heir. In the past, this would almost always have been the eldest son, but this may not now be relevant in all families. Maintaining and running a family seat will incur substantial costs, and this means other assets may have to be allocated so that the heir receives the lion’s share, in order to reflect his or her weightier responsibilities. To redress the balance, other children could be given remaining properties on the estate if they are available. Indeed, many may be happier with this solution.
Financial assets can be sliced much more easily, and where there is no family seat to consider, it may appear simple to distribute assets equitably. But dig deeper and this may not be the case. If you have two children, one may have married an investment banker and be very comfortably off, while the other may be a nurse and be struggling financially. Should you distribute the assets equally, or to address each child’s actual needs? Either route may cause friction and the decision needs sensitive handling.
The distribution of tangible assets, such as jewellery or paintings, is another area that can stir up strong feelings. The key is to be clear about your wishes. Problems often occur when several people feel they have been promised the same item. These things may not be clear in the will and letters of wishes are just a guide, rather than legally binding.
An experienced adviser can help you spell out your instructions as clearly as possible and, if appropriate, circulate the document round family members to iron out any issues.
Today’s competitive global marketplace makes it imperative that the person running the company is a talented and highly skilled individual. If such a person cannot be found within the family, it may be a better option to bring in someone else.
Some families are determined a family member should continue to run the firm, while others realise they need an outsider to take on the role of CEO or CFO. But if you put the wrong person in purely for family reasons, you can decimate the wealth. The patriarch or matriarch has to decide who is the most appropriate individual to take the business forward, for the benefit of the rest of the family. Even if they are not a driver of the business, a family member may remain on the board as a valuable link between the past and the future.
Where an outsider is appointed, it is important that they have excellent interpersonal as well as business skills, in order to develop good relations with the family and to deal firmly with any members who think they themselves should be in charge. Some families may consider appointing a trusted adviser to be a non-executive director and conduit between family and board. Another option where there is no natural successor to run the business is to sell it off and divide the proceeds. This will bring with it changing tax considerations which may affect long term IHT planning.
The cost of living
Over the generations, as shares pass from parents to children and grandchildren, interest in the family business will be diluted. Each shareholder will own a smaller number of shares, but these may nevertheless provide a useful flow of dividends to pay for school fees and other living expenses. If you haven’t paid dividends to date, you could start to do this; if you have, then you could increase the level or frequency as a way to move wealth into the hands of family members who really need it. You may also want to consider helping children or grandchildren to purchase a property if they can’t afford to do so themselves.
If you begin handing on assets before their death, this can reduce IHT liability. However, you must
be careful not to leave yourself without adequate provision for your own needs. You may lower their expenses by moving into a smaller property on the estate, but will still need to ensure you retain sufficient assets to pay for long-term care should it become necessary.
About Smith & Williamson
Smith & Williamson is one of the UK's leading independently owned private client houses. For more than a century, a major part of their business has been the provision of wealth management services to ultra-high net worth families, their trusts, and family companies.