Over the course of the next two decades we will see the biggest transfer of global wealth from the older generation to their successors. In Africa this will involve in some instances the transfer from first-generation wealth creators, such as entrepreneurs, to children and grandchildren.
Succession planning is vital for ensuring the smooth transition of assets from one generation to the next. It involves preparing for the transfer of wealth, business interests and other assets to future generations. In Africa, where family ties and heritage play a significant role, effective succession planning is not just about preserving wealth but also about maintaining family harmony and legacy. This takes on greater importance given the growing wealth across the region, the importance of family businesses and assets typically spanning more than one country. Planning in advance can not only help mitigate potential tax liabilities, but can also manage the risks of family disputes surrounding the inheritance of family wealth and ensure that assets pass in an orderly fashion. There are a number of possible strategies that can be used, each with their own set of benefits.
Cross-border complexities
Many African families diversify their assets internationally. Where assets span multiple jurisdictions, it is important to understand the tax liabilities that could arise in relation to those assets when they pass to successors. The legal framework for passing assets is also crucial and there will be varying laws between countries regarding inheritance, wills and trusts.
Having a will in place is fundamental for the orderly passing of personally held assets, ensuring that your wealth is distributed in accordance with your wishes.
Trusts can be established to manage and protect assets, providing a structured way to transfer wealth to minimise the risk of family disputes. They can be a vital tool for protecting assets from political and economic instability, which can be an important consideration for African families.
In particular, using trusts ensures that the ongoing ownership of underlying assets is unaffected by the passing of family members and that the ownership of those assets remains consolidated, avoiding the fragmentation of ownership that would otherwise occur when assets such as companies are transferred to successors. The need for probate is avoided and this is particularly valuable where assets span multiple jurisdictions.
Sophisticated trust structures can also provide scope for younger generations to become involved in holding and running family wealth. This is an important consideration for African families where wealth may pass from the first generation of wealth creators to the next. Flexibility can be built into the structure to enable a settlor (the person who creates a trust) to retain a level of involvement in the trust, for example by approving the addition and removal of beneficiaries or certain distributions, as well as by having the power to appoint and remove trustees. While trustees have discretion to manage the trust fund, the settlor can set out his vision as to how the trust should be used to benefit the family, which the trustees can take into account in administering the trust.
As well as, or instead of, trusts the ownership of assets can be consolidated in holding companies, which can also be helpful where there are cross-border investments and interests that would otherwise have to pass separately.
Family offices can also be established by wealthy families to manage their financial and personal affairs and intergenerational wealth.
Business succession
Sadly, statistics show that many family businesses fail by the third generation. It is vital for family businesses to have a succession plan in place to help prevent this and ensure that the business continues to grow. This can involve identifying suitable successors, having open conversations about this with family members involved in the business and establishing a governance structure to support the business for the long-term. Shareholder agreements can be used to regulate the relationship between shareholders, setting out, for example, what should happen if a family member wishes to exit the business.
Wealthy families should consider their values, vision, family culture and the impact they wish to have in the future. Questions such as how the wealth of the family should be used to benefit successive generations, the potential impact the family would like to have on society, and values for guiding family and business decisions should all feed into the meaning of a family’s legacy in order to align succession planning with the family’s long-term aims. This can result in creating family constitutions and philanthropic goals and can ensure that the younger generation are more engaged, committed and prepared for their future inheritance.
Family communication and engagement with younger generations
As discussed, it is important to discuss succession plans with family members to prevent future disputes and misunderstandings. Succession planning is just as much about transferring assets as about preparing the next generation to manage and continue to grow the family’s wealth. Educating and mentoring that generation is vital, as is giving them exposure to family businesses.
Given the complexity of succession planning, families should consult experienced advisers who can provide bespoke solutions to reflect a family’s unique circumstances, values and goals. Professional advisers can also play a role in enabling difficult family conversations to take place. It is important to review existing planning already put in place and update this as necessary to reflect changes in assets, family circumstances, tax exposure and legal requirements.
Effective succession planning is essential for African families to protect their wealth and ensure a smooth transition of assets to future generations. By understanding the legal framework, involving family members, preparing the next generation and seeking professional advice, African families can ensure their wealth is protected, passes in an orderly fashion and continues to benefit future members of the family.
