Julie Howard, Partner at Boodle Hatfield, and Annabella King, Associate at Boodle Hatfield, discuss the crucial importance of establishing a strong framework for succession planning in Africa as it pertains to those looking to preserve and transfer their wealth across generations.
SUCCESSION PLANNING FOR AFRICAN HIGH-NET-WORTH INDIVIDUALS
Succession planning is vital for high-net-worth individuals across Africa. As wealth creation accelerates, the challenge of preserving and transferring that wealth across generations becomes increasingly complex and important.
This is particularly accentuated by the largest anticipated transfer of wealth forecast to take place over the next two decades. This is significant for family businesses as succession planning, governance structures, and family values need to be considered.
Planning in advance can help mitigate potential tax liabilities, provide greater certainty for family members, and limit the risks of inheritance disputes. In this article, we provide an overview of key points for African high-net-worth individuals to consider in the context of their succession planning strategy.
MAKING SUCCESSION PLANS SUCCESSFUL
It is never too early to start succession planning, as delaying it can lead to making reactive and rushed decisions in difficult times, rather than formulating a well-rounded plan for an individual’s assets.
A priority for clients considering succession planning should be ensuring that they have a valid and up-to-date will in place. More than one will may be required if there are assets in multiple jurisdictions, which is often the case for high-net-worth individuals. Without a valid will, families may face lengthy legal disputes, unintended beneficiaries, and significant tax liabilities if a family member dies. A well-drafted will ensures that wealth is passed on according to the individual’s wishes and limits the risk of family disputes.
One of the most important considerations for an individual making a will is who they would like to be appointed as their executors and trustees. Ensuring the right people are in place to manage an individual’s estate after their death will offer peace of mind and is crucial to ensuring that their estate is administered efficiently and in line with their wishes.
THE BENEFITS OF TRUSTS
A trust can be an important succession planning tool as it allows assets to be held and managed by trustees for the benefit of beneficiaries, offering a flexible and secure way to transfer wealth across generations.
The trustees have discretion to distribute capital and income among beneficiaries, taking into account the circumstances of the individual beneficiaries and any wishes of the person who created the trust (the settlor), which are typically contained in a separate ‘letter of wishes’ and which trustees will typically consider in administering the trust.
A key benefit of trusts is their ability to protect assets from mismanagement, creditors, and family disputes, ensuring that wealth is preserved and managed according to the settlor’s wishes. Trusts can be a vital tool for protecting assets from political and economic instability, which can be an important consideration for African families.
Trusts are typically established in offshore jurisdictions such as the Channel Islands with underlying assets held there or elsewhere.
By creating a ‘family trust’, individuals can provide a structured framework for managing family wealth for future generations and for passing this wealth down in an orderly manner. Trust structures can also help individuals to involve younger generations in the oversight and management of family wealth at an earlier stage.
This is particularly significant where wealth is transitioning from the original wealth creators to their successors. These structures can be tailored to incorporate flexibility, allowing the settlor to retain certain powers. Such powers may include approving changes to the class of beneficiaries, authorising specific distributions, and appointing or removing trustees, thereby ensuring the trust remains responsive to the family’s evolving needs and objectives.
Trusts also offer significant tax planning advantages. Depending on the jurisdiction, they can help minimise inheritance and estate taxes, avoid probate, and ensure privacy.
In addition to offering asset protection benefits, trusts provide a significant advantage for business owners – where company shares are held by a trust, there is no need for probate on the settlor’s eventual death, as the trustees’ ownership of the underlying assets remains unaffected. This also removes the risk of fragmentation of shareholdings that could otherwise occur on the settlor’s death, offering security and stability for the company.
GOVERNANCE AND BUSINESS CONTINUITY
Succession planning is especially important for family business owners looking to keep the company in the family over generations, and it is clear that there is scope for greater governance planning amongst them in Africa.
In a 2023 survey on family businesses in Africa, only 77 percent of family business leaders said they have some form of governance structure in place.
Putting the right planning in place can ensure continuity, stability, and ultimately, the long-term success of a business. This can involve establishing governance mechanisms to support the business for the long-term, such as shareholder agreements – which set out the rights, responsibilities, and rules governing the relationship between shareholders – family constitutions, as well as opening up the conversation between family members about the future of the business.
BUILDING A LEGACY THAT LASTS
Succession planning is about more than transferring assets; it is about establishing and preserving values and visions for the future.
By ensuring that appropriate planning is in place, for example, by establishing trusts and strong governance frameworks, African high-net-worth individuals can ensure their wealth and businesses are preserved for future generations and potential family conflicts are managed effectively.
