Preparing a family and its wealth for intergenerational transfer

Interview: Michal Šubín, Jean François Cats More and more business families in Slovakia started discussing generational succession. They face a wide range of questions they seek to answer, discovering that they are learning on the fly, so they have less time for preparations than they would need. Representatives of RSM CZ Family Office, Jean François Cats, an expert specialising in intergenerational transfers for more than 30 years, provides a perspective of families operating in developed markets, and Michal Šubín describes his experience in the CEE region that faces this problem for the first time.

What mistakes do parents and children most commonly make in their communication and which of them do you consider the most serious?

JFC: An absolutely fundamental problem is the absence of communication about property and how it is generated, about revenues, losses, risks and the like. If such communication is missing between parents and children, then the head of the family is creating a huge problem for the future. Communication is a basic manifestation of responsibility for the future of the family and for preserving its development for the next years. Although discussion centres on property, in the end, it should bring peace and harmony to the family. This is impossible to achieve if the property is disintegrating due to badly defined administration and misuse. I have seen various situations but one of the traditional negative aspects is when the head of the family discriminates between his kids. What gives me the biggest shock is when the discrimination is against daughter in favour of son. This even happens in situations when the daughter is more capable and qualified than her brother. At the same time, I am surprised to see the daughter accept the situation.

Can missing communication directly endanger the family itself?

JFC:  I have seen situations where father treated his children with different preferences and the different treatment was only discovered after his death. The feeling of grievance can cause that the children will fight one another, will not communicate and, in the worst case, will end up in court. Last but not least, I have seen cases where children only found out that their father has left debts and no wealth behind when he died.  This, of course, immediately ruined the father’s reputation.

What risks are involved with the transgenerational transfer for Czech families?

: Paradoxically, the main objective is not to preserve the property – this is in fact a secondary aim. Each parent secretly wishes that the family, its internal harmony and future would be preserved. In this respect, wealth can make a major contribution, or can cause major damage. In the first place, the transfer of wealth across generations lacks tradition in our environment. Those who could consider the transfer now started building their family background and wealth in the 1990s and have dedicated their entire lives to it. Consequently, an unprepared transgenerational transfer can present a real risk to the family. On the one hand, there is a family that has no ‘manual’ on how to use its assets and often has no idea what shareholdings it has and where, and what debts are owed to whom. They have no clearly defined powers and assigned duties as to how to treat and administer the wealth. On the other hand, there are assets that will be, unless prepared, difficult to transfer to the next generation and the transfer will most likely take its toll. The extent of damage is directly proportional to the size of the property.

When is the right time to start making preparations?

: Each family is different and their property is equally specific. The best time to start the preparations is, of course, as soon as possible. We have clients in their early 50s as well as in their 70s. However, the most important thing is to start doing something. If the process is started by the founder, he can give it his stamp, define his legacy and, last but not least, outline the vision. We have experienced processes related to wealth transfers from parents to the second generation. But we have also seen cases when the property of the second generation became involved in the process and we in fact prepared the rules and the structure for the third generation although they were still teenagers.

What factors affect the choice of the future structure for family wealth?

: The risk faced by any asset in any environment is a change. Probate proceedings can be considered a fundamental change. If there are more children in the family who are scattered all over the world, have a large age difference and the like, then it is worth considering defining a structure that ensures that the family wealth is not inherited but solely administered by the next generations to derive full benefit.  If it is a simple family, with one or two children, then this solution may be a bit too robust. Equally, it should be considered whether any child is interested in participating in running the family business. If so, it is important to formulate fair and reasonable rules among the siblings to avoid any unnecessary confrontations. If the family holds interests in several companies, and owns financial assets, real estate and such, the assets will be consolidated differently than those concentrated in one family business. The consolidation of assets into a family holding can help the family keep control over its property and its community and to use that control to protect the wealth.

Can the consolidation of family wealth be useful to those close to the family?

: No doubt. Usually, major customers ask their suppliers what their strategy is and whether there is any strategy at all for transferring competencies to the next generation. And they do not want to be surprised when their long-term, stable supplier collapses due to an inheritance dispute. Of course, an intergenerational transfer is something competitors will become aware of and will not miss the opportunity to benefit from any weakening. Source: TREND Holding, s.r.o.