By Nigel Rotheroe

Most people who do a Will for the first time do it more out of necessity than desire, in that they wish to address the formalities in case the unfortunate event happens, i.e. they die unexpectedly.  However, in their own mind they know that the Will they have made is probably not fit for purpose when they think of those who are going to benefit from their estate in the future.  They often look to address the shortcomings when time permits, but more often than not they don’t.

Aside from one’s spouse/partner, there are two sets of people one generally has to consider when looking at wealth management and preservation for future generations; the first being any minor children and young adults and the second, the more mature adult children who are married or likely to be so in the foreseeable future.

Most people understand why minors or young adults shouldn’t inherit directly large sums of cash or property.  It is for this reason that people invariably seek the assistance of someone more mature and with experience to manage the assets and make any spending decisions.  This is why for minors and young adults inheritances routinely are left in trust until the children concerned reach an age and/or maturity where they are able to “look after themselves”.

As regards more mature children the question often or not comes down to whether you give them cash, property or shares during your lifetime or when you have died.

I am a great believer in the family business where one can see parents encouraging their children to become actively involved as they get older.  Inevitably and at some stage, mom and/or dad will want to transfer the business to their children.  For obvious reasons, such as wealth distribution, family support, encouraging involvement and parents wishing to take a more “backseat approach” to the business, whilst still being involved and keeping a “watching brief”, the question inevitably arises as to how and when the transfer of the family business takes place.

More often than not the transfer of the business, let us say shares in a family company, will be done in two or three tranches.

• The first tranche is usually in recognition of the child concerned working in the family business and showing a commitment to stay;
• The next tranche is typically made when the “child”, perhaps now in their late thirties or early forties are fully involved, actively taking part in the management of the business and more importantly its future prosperity; and
• The final tranche is usually transferred on the death of the parent(s).

This staged transition of ownership is very much in keeping with the well-founded view that a particular age doesn’t mean someone is financially sophisticated.  As the value of an inheritance increases, so does the level of financial acumen needed to manage it and where this is directly related to a family business there are other peoples’ lives to consider, e.g. employees and their families, who can be affected by ill-founded decisions and careless action.

As your children get older one has the joy of a son or daughter getting or being married and then having grandchildren.  But with all the blessings this may bring one has to be mindful that a marriage may regrettably break down and one is then faced with the repercussions of a divorce and the anxiety and uncertainty that this brings.

An ex-daughter or son-in-law could mean one ends up with a once family member now owning shares in the family company, with voting rights, possible board representation and claims, where perhaps post-divorce an acrimonious position results, for persecution of minority interests if dividends for instance are not paid.  Worst of all, it could stymie the future prosperity of the family business.

It is at this stage that people often overlook the benefits of leaving assets in trust for mature children instead of having them inherit the property outright; whether this is during their lifetime or on their death.

On divorce the courts usually look at the assets in a trust as a resource available to a former spouse, such that:

• Your son or daughter’s considered interest in the trust is valued and the Court seeks to take the value of that interest into consideration in the divorce settlement it determines, regardless of whether the son or daughter is ever likely to receive such funds; or
• The court makes a determination that a proportion of any funds received from the trust are to be given to the former spouse.

However, there are positives to consider, such as:

• Your son or daughter, up to the unfortunate event, i.e. the divorce, tend to get valuable independent advice and professional support in what they are seeking to do;
• The shares in the family company are legally owned by the trustee(s) (but held for the benefit of the trust’s beneficiaries which usually includes not only a particular son or daughter, but also any grandchildren) and as such any voting rights in the family company are held by them and as they act in a fiduciary capacity tend to vote in the interests of all the trust’s beneficiaries and not just a single beneficiary. Protecting the family business and those involved is something they will wish to do;
• The personality and acrimonious positions as regards a family company that may arise on divorce usually go away;
• The next generation, i.e. the grand-children, and their future involvement with the family business tends to be protected;
• Your son or daughter continue to benefit from the family business;
• One is not subject to the vagaries of a court judgement when consideration is perhaps being given to a pre-nuptial or post-nuptial agreement which may also bring about a claim being made in another jurisdiction; and
• The normal benefits associated with a trust when one considers children who may:
  • Be spendthrifts;
  • Face claims from creditors;
  • May have a problem with substance abuse or gambling; and
  • May die unexpectedly leaving a spouse/partner with children where the assets from which they can all benefit are protected.

Those in business are often advised to consider a family company with multiple shareholdings, dividend and distribution rights, but these can get very complicated, give shares away outright, do not address satisfactorily the issue of any increase in value of the family business or the abnormal event, such as a divorce or unexpected death.

So the upshot is do a Will, seriously consider where you are, what you want to do with your wealth going forward and think about setting up a trust to benefit not only the existing family generation but any future ones.