Succession planning has been a matter of intense debate and discussion over many years amongst Indian business families. While the concept has many facets, at the root of the idea is the fact that the family gold does not lose its sheen as it changes hands over generations. History has seen many families struggle through succession issues, while at the same time a structured approach has helped an amicable succession plan to be formulated by many others. The recent spat at Raymond, the management versus ownership debates at Tata and Infosys, are all cases of succession issues and their complexities.
The matter of succession is a function of an entire host of family priorities, vision for the business, balancing of disparities in personalities, interspersed with emotions and sensitive relationships. Regardless of the different mindsets of different families, certain common threads need to be sewn together for an efficient and strong plan to emerge. The elements of succession planning include seamless change in ownership of assets, transition of control and management, and germination of fresh ideas in a manner such that the wealth is not only preserved but also enhanced at all times.
One of the foremost considerations behind this is the entire Indian tax and regulatory framework, which has a bearing on how ownership transfers can be effected. There are talks around reintroduction of an estate duty or inheritance tax regime in India, which used to exist until 1985. Simply put, the concept of inheritance tax is to levy a tax on the estate of a deceased person. Many countries across the globe, such as the US, the UK and Germany, have inheritance tax as part of their tax structures, with rates as high as 30-40%.
The current Indian tax laws have beneficial provisions for transmission of assets, through a will or inheritance. However, as we have seen in the past, wills are subject to disputes, with warring families in courts making newspaper headlines and eroding family wealth in the process. History has witnessed businesses closing down due to such family disputes. Clearly, there is a need to look at succession planning as a more meaningful and value accretive exercise.
In recent times, private family trusts have emerged as vehicles for a perpetual succession of family wealth. If planned appropriately, trusts offer significant flexibility, while retaining the key characteristics of a will. While ownership of assets moves into a trust today, the patriarch can still retain protection over the assets and flexibility over creation of beneficial interests, through provisions built into the trust. Legally speaking, a trust is not a separate entity, but an obligation assumed by the trustee for someone’s benefit. The trustee owns the assets in a fiduciary capacity and is obliged to discharge his duties accordingly. Protection against unauthorised actions by the trustee is available to the beneficiaries under law. In addition, the creator of the trust who transfers assets into the trust has options to retain protection rights to ensure that the objects of the trust are not compromised at any stage.
From a tax perspective, transfer of assets by an individual into a trust created solely for the benefit of relatives is fully exempt. For non-relatives, the tax matters get complex and need to be more carefully planned, ranging from issues such as what constitutes property, valuation rules for transfer of shares in multi-layered structures, discretionary versus specific trusts, etc. From a regulatory perspective, inter alia, one needs to take into account impact of Sebi’s takeover regulations for transfer of shares or control in a listed company into a trust, impact under the exchange control regulations for foreign assets or non-resident family members, partnership laws for limited liability partnership structures and stamp duty costs for immovable properties.
With more and more Indian families having cross-border business interests, a key element of succession revolves around transfer of wealth to non-resident successors. Family trusts may be structured as effective means to bring in non-resident successors in light of issues such as limited capital account convertibility and restrictions on transfer of assets to non-residents under the current Indian exchange control norms.
The other complexity that one needs to grapple with in the wake of offshore assets or offshore family residents is the exposure to inheritance taxes in countries of situs or residence. Consider, for example, the US, which has much advanced laws governing estate duties, gifts, etc, and US green card holders and US citizens are subject to more stringent provisions under the estate law. Provisions around throwback tax rules, passive foreign investment company/controlled foreign corporation classification have a significant bearing and call for careful consideration of relevant issues to mitigate tax exposures. Again, the UK has recently introduced certain changes in its inheritance tax law on residential properties located in the UK held through offshore structures, including foreign trusts.
In addition to the legal structure, another important element of succession is the evolution of a sound governance framework that serves as a guidance for the family across a whole host of issues impacting business, assets, spending, etc. Such family constitution may take the form of a governance council or a family board, which is responsible to devise rules around interests, rights and obligations of family members inter se, decision-making powers in relation to businesses, returns framework to incentivise performance, and to preserve interests of future generations. The idea is to ensure that family disputes should not impact business, wealth and interests of successive generations, while at the same time retain flexibility to resolve disputes, provide exits wherever necessary, avoid creation of conflicting/competing interests in businesses and encourage generation of fresh ideas in the family.
Clearly, succession planning is not an end, but just a means to an end, which requires a committed effort, an anchor to ensure the process doesn’t slip between the cracks and, most importantly, a family where the larger group interests find priority over individual needs. Either way, it’s an opportunity to write a legacy for our generations in the annals of history.