Succession planning is the process of exploring the options available to protect a family’s wealth or business and choose the right strategy for the future of the same — whatever that may be.
A succession plan begins with a vision for the future and ends with a realisation of how to get there. The aim must be to achieve “near-zero-transmission-loss” in the succession of wealth to future generations.
After years of considerable growth in the number of wealthy around the world, we are entering a period of deceleration as China’s economy slows and commodity-exporting, emerging economies are hit by lower prices and demand. Furthermore, with low interest rates and increasing life expectancy, retirement has become much more costly, increasing the challenge for ultra-high net worth individuals (UHNWIs) to maintain and pass on wealth.
This is especially important in the Middle East, where a higher proportion of family businesses want to ensure that their business stays within the family — 38 per cent compared to 30 per cent globally.
Inheritance issues for Muslims are dealt with in accordance with Sharia, whereas for non-Muslims, the law of the deceased person’s home country can apply. Succession under Sharia principally operates by a system of forced heirship or reserved shares.
After years of observing the pressing need for clarity on the current UAE wills and inheritance legislation, everyone welcomes the newly launched DIFC Wills and Probate Registry. It provides certainty for non-Muslim expatriates to pass on their Dubai estate in the event of death to their chosen beneficiaries.
The Registry marks the introduction of a new set of rules relating to succession and inheritance matters for non-Muslims with assets in Dubai and a mechanism to pass on their estates in Dubai according to their wishes.
The longer one gets to spend on succession planning, the smoother the transition process is likely to be. A lack of clarity in management leads to dysfunction. As it turns out, most families do not want to have conversations about mortality or illness.
Add in the family pecking order with discussions about money, and you have a recipe for procrastination. Failure to discuss such matters can be both financially and emotionally devastating. Much like an estate plan is written to protect heirs from tax implications, there are dire consequences for families who do not discuss the management and financial ramifications of transition.
Every business should have a written strategic plan. Within the plan, management can clarify its growth plan, financial targets and transition of ownership. A strategic plan and estate plan can and should be built in parallel.
A good succession plan can ensure you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation. Strategic planning and succession planning are inextricably linked with succession planning being a subset of the strategic process.
The aim should be to maximise one’s wealth and, at the same time, deal with the key issues of succession, asset protection and inheritance. This includes setting up a tight asset protection structure, rationalisation of asset holdings and investments, incorporating a succession plan and gaining advice on wealth management.
There are many things to consider when preparing and implementing a succession plan, and the approach one ultimately takes should reflect one’s own personal goals, whether for an individual or a business founder or owner, as well as the specific nature of the business. As with taxes, technology, and legal contracts, seeking the assistance of a specialist can be a wise course of action.
Effective succession planning is an ongoing process. It should be started early and reviewed when the company’s or successor’s financial position changes. It’s ideal for the business adviser to work with the personal financial adviser, as well as a lawyer and an accountant, to help manage options as a team.
When working with trusts, it’s important to get advice from a financial expert because they can be complex. These professionals often become a repository of information on your company and can act as outside counsel when the new leadership comes in as well.
It’s important to mention here that managing wealth should be integral part of any comprehensive succession planning process. To successfully anticipate and plan for future needs, investment advisers must understand their clients’ attitudes and competencies, including their overall investment goals and objectives, personal risk tolerance, level of knowledge relating to investing, and current investment strategy and investment portfolio.
The investment adviser will develop asset allocation models and help draft an investment policy statement. The adviser will provide information on money managers, and aid in identifying money managers ready to work within the bounds of the investment policy statement developed in the analysis and recommendation phase.
On a periodic basis, detailed summaries of portfolio holdings and transactions, portfolio performance reports, and ongoing supervision of investment policy should be provided.
The hope for every retiring business owner is to experience seamless coordination of the plan by an investment adviser who is independent, tax-sensitive, and understands the succession plan.
Gautam Duggal is regional Head of Wealth Management for Africa, the Middle East and Europe, and Head of Wealth Management for the UAE, Standard Chartered Bank.