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29th January 2020

Next in Line: Succession Planning

A succession plan begins with a vision for the future and ends with a realisation of how to get there. Ultimately, the aim must be to achieve “near-zero-transmission-loss” in the succession of wealth to future generations.

After years of considerable economic growth around the world, we are now entering a period of deceleration. China’s economy is slowing and commodity-exporting, emerging economies have been hit by lower prices and demand. Meanwhile, retirement has become much more expensive as interest rates lower and people live longer. So, what does this mean for ultra-high net worth individuals (UHNWIs)? It’s a particularly important matter in the Middle East, where a higher proportion of family businesses want to ensure that their business stays within the family – 38% compared to 30% 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 law 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 welcomed 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 accordance with their wishes.

The more time one can spend on succession planning, the smoother the transition process is likely to be. When it comes to family business, a lack of clarity in management can lead to dysfunction. Understandably, most families do not want to have conversations about mortality or illness. To top it off, the dynamics of a typical family hierarchy and a very human reluctance to discuss money often mean that families procrastinate, putting off the discussion indefinitely. But it’s important to remember that 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, in which management can clarify its growth strategy, financial targets and transition of ownership. it should be built in parallel with an estate plan.

A good succession plan can ensure that 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.

Succession planning is strategic planning

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 including: 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 you choose should reflect your goals, whether that be as an individual, a business founder or owner. As with taxes, technology, and legal contracts, it’s usually wise to seek the assistance and advice of a specialist.

Effective succession planning is an ongoing process. It should begin early and be reviewed whenever the company’s or successor’s financial position changes. It’s ideal for the business advisor to work with the personal financial advisor, as well as a lawyer and an accountant, to help manage options as a team. Trusts can often be particularly complex, so getting advice from financial experts is crucial. In addition to explaining the options before you, over time these professionals often become a mine of information on your company and can act as outside counsel whenever new leadership comes in.

The role of the investment advisor

Managing wealth should be an integral part of any comprehensive succession planning process. To successfully anticipate and plan for future needs, investment advisors must understand their clients’ attitudes and competencies including their overall investment goals and objectives; personal risk tolerance; personal level of knowledge relating to investing; current investment strategy and current investment portfolio.

An investment advisor will develop asset allocation models and help draft an investment policy statement. Beyond that, an advisor can help you identify the money managers best suited to your investment policy. One key element of success is regular reporting. This means detailed summaries of portfolio holdings and transactions, portfolio performance reports, and ongoing supervision of investment policy should be provided to ensure everything is going according to plan.

The hope for every retiring business owner is to experience seamless coordination of the plan by an investment advisor who is independent, tax sensitive, and understands the succession plan.

by Gautam Duggal, regional head of wealth management for Africa, the Middle East and Europe, and head of wealth management for the UAE, Standard Chartered Bank.

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Succession Planning