Beyond the Numbers

Wealth fencing and succession planning: How to do it better

Updated: May 22, 2017 07:01:05 PM UTC

Ambit is a leading investment bank offering customized solutions in the areas of Corporate Finance, Private Equity, Asset Management, Wealth Management, Institutional Equities and Structured Finance services. The firm capitalizes on its strong track record, in-depth understanding of global economic and regulatory environment, and extensive domain knowledge to provide seamless services to its clients, which include institutional investors, corporates and high net worth families. Ambit is headquartered in Mumbai, with offices in Delhi, Bengaluru and Singapore.

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Image: Shutterstock (For illustrative purposes only)

“You just can’t replicate the Passion of an Entrepreneur”

You started your business with a meagre amount, setting up an office in a garage, selling your product door to door, carrying it on cycle. Friends and business partners whom you trusted abandoned you midway in the journey. For one month you had nothing to eat, no savings and you survived on lentil and rice soup.

But you kept going.

You toiled and persevered and turned the adversary in your favor.

You have created a mammoth profitable business, built a brand. You are revered and respected in social circles for your business acumen. But what next, when you realize, that none of this can be cloned by any other individual in this world.

The Dawn of Life is nearing and now you wish to give back to the society or just let your business run on auto pilot mode. Questions & queries cloud your mind:

What’s the future of my firm and several loyalists who have served the business for years?

How should I protect my interest?

Most business families face this daunting situation inevitably. Before focus is tilted on the solutions part of it, let’s examine why this situation has emerged.

3 Prime Reasons

a. Your direct offspring is not interested in running the business as she/he wishes to pursue other interests in life. b. You don’t trust the capability of your children and hence wish to find options that can help you and them, both reap the benefits of the hard work you have put through the years.
c. You wish to bring in professionals to lead the company and share benefits with them, so that everyone’s interests are aligned. However you have the fear of professionals surreptitiously stealing your business.

All these parameters are relevant whether the situation emanates pre-monetization or post-monetization of your business.

And hence the need of wealth fencing and succession planning.

Succession Planning is rather simple, where you identify, nurture and groom talent in a disciplined methodical manner to fill in leadership roles to successfully run the company.

What is Wealth Fencing and how can you execute it?

Wealth Fencing is a simple step-by-step approach of protecting your current net worth, ensuring it remains free from encumbrances for future and participating in the forthcoming growth of the business.

Methods
1. Basic Nomination – The first step to secure any investment whether financial or non-financial or movable or immovable is to execute nomination. Nomination helps the institution or the manufacturer which is holding the investment to discharge the investment in the name of the nominee in case of unforeseen event. However it’s important to note that Nominee is just the custodian of the asset or investment and not the legal owner of the same.

2. Wills & testaments - A will is a written document that sets forth the individual’s wishes related to  wealth, assets, estate or anything one owned at death to be distributed in a manner, he/ she desired to be carried into effect post his/ her demise. Will & testaments create an expression of the owner - how he/ she aspires to give away estate in the future. Will is a document which is accepted in the court of law, but has challenges of recognition by legal heirs and interested parties. Will can be registered or unregistered or can be written on a piece of paper with two witnesses signing on the same. If the will is made too early in life, questions on existence of last will can be raised in the court of law. If it’s drawn out too late, questions on sanity and medical & mental fitness of individual can draw legal attention. Hence one needs to be careful of this document which has certain dos and don’ts. One more negative for the Will, is that it needs to get necessarily probated to make it effective under the court of law, post the demise of Will writer.

3. Family Charter or Family Constitution – The Family Charter is a written agreement amongst the family members who agree on the future of the business and the way it will be run by future generations. It draws out the family’s vision for the business thereby specifying issues like ownership, voting, control, employment, areas of business interest, methodology of wealth distribution etc. It’s a comprehensive document which the business owner prepares in agreement with his / her next generation. It builds in a basic business framework of how existing company will transition in terms of ownership and leadership. This document also talks about how the business started and why and how it was built and principles underlying there in. This is an effective tool to guide the future generations on the path that the business should take.

4. Trusts – Trust essentially is the most effective and safe method to ring-fence the wealth from any prospective or future encumbrance. A trust is created by a settlor, who allocates the asset/ estate to a trustee. The trustee holds that property for the trust's beneficiaries, in accordance with the rules and guidelines laid down at the time of formation of trust. Since it’s a separate legal entity, it enjoys complete independence and freedom from the original estate owner’s liabilities thereof. Trust can be created during the lifetime of the owner of the asset, thereby preventing any compulsory distribution post demise.

5. HUF – Hindu Undivided Family is an arrangement or an entity under which all persons lineally descended from a common ancestor are part of, and enjoy the benefits of the assets therein. Benefits of HUF are that it’s a separate legal entity and hence can be used for effective tax planning. Also, HUF being a separate legal entity, does not run the risk of encumbrance in case of bankruptcy or attachment of personal assets.

6. Limited Liability Partnership – A limited liability partnership (LLP) is a partnership in which some or all the partners (depending on the jurisdiction) have limited liabilities. It’s a good method of transferring wealth and ownership to the next generation without encumbering the entire ownership, thereby motivating the family members to be incentivized for their hard work.

7. Creation of Separate Investment companies – Investment companies enable segregation of ownership and transfer of ownership and help in managing taxation efficiently.

8. MWP – Married Women Property Act was created to protect the properties owned by women from relatives, creditors and even from their own husbands. The Act has been created to protect women’s rights, even after marriage. MWP act is applicable for all married women of all religions. Insurance policies can be bought under MWPA and can’t be reversed until the concurrence of beneficiary is taken. Any earnings before or after marriage and property bought by woman before marriage including her stridhan forms part of MWP. Thus fathers worried for wellbeing of their daughters can freely gift the money which the daughter can use to buy the property and assets before marriage and can’t be encumbered by husband, children or in-laws.

In Wealth Fencing or Succession Planning, there is no right or wrong method. It depends on the ultimate objective of the person and the family situation he / she is grappling with.

- By Siddhartha Rastogi, Director - Ambit Capital Private Limited. Views expressed are personal.

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