“Succession planning is not an easy thing. Not at all,” began Pascal Julliard, CEO of HSBC Private Bank Luxembourg during his introductory speech at the Luxembourg for Finance webinar. “The process of transferring leadership and ownership of businesses’ wealth and assets from one generation to the next is very complex.” It involves ensuring a smooth transition between leaders and preserving the value of assets.
“According to statistics, 60% of family businesses fail due to communication or trust issues, 25% due to lack of preparation and planning, and 15% due to not appropriate or not relevant financial and/or legal decisions,” said Julliard, before highlighting three main challenges related to succession planning.
First, there is the risk of a lack of governance and clear rules around expectations and rules for the family and non-family members--who will take over management or ownership, for instance, or what is the “limit” of the family itself. “Then, the risk of lack of preparation of the next generation--are they skilled enough? What is the learning curve?” said Julliard. Third, there’s also the risk that they do not have a clear or shared purpose regarding the business or how to manage wealth.
Managing tax, legal and regulatory planning, and compliance must be considered and planned very carefully
Different European countries have different laws and regulations, Julliard pointed out, which have an impact on how succession is structured and planned. Families are becoming more mobile and international. “Managing tax, legal and regulatory planning, and compliance must be considered and planned very carefully.”
As practices and approaches to succession planning vary from one country to the next--each with its own cultural, legal and economic aspects--having advisors that can manage cross-border challenges is “paramount,” he said.
Start early, make a (single) will
Though it may seem fairly obvious, the first point that Luca Derlin brought up during one of the webinar’s panel discussions was the importance of making a will. “You will be surprised, but no matter how wealthy individuals are, how educated or structured they are in terms of support and family offices--oftentimes, they happen not to have a will, which, clearly--this is a problem.”
Derlin, who is head of international private banking in Luxembourg at Deutsche Bank, was one of the participants on a panel discussion focusing on cross-border solutions for international and intergenerational needs. “Even there, make sure that you have no more than one will. Because otherwise, you will find yourself in a pretty sticky situation,” he added. Later wills could, for instance, revoke what was in defined in earlier agreements.
You want to make sure that you don’t leave anything to chance
The second key element was “perform regular reviews,” or “tax health checks,” said Derlin. “Many of our clients live in a very international environment, across multiple jurisdictions.” Inheritance rights can vary between countries, he reminded the audience. “So it is important that they understand what are the different succession rules, which apply to the different assets.”
“Last but not least--let’s call it an overarching principle--do not leave things to the last minute,” Derlin emphasised. “Thinking through a succession is not something that you think about when you’re 75-80, plus. That’s something that you should start thinking about 20-30 years before.” It’s a “complex” exercise that takes time and requires the participation of an entire family in order to ensure that everything is properly planned and executed. “You want to make sure that you don’t leave anything to chance.”
Tools to be used in transferring wealth
“The big challenge regarding the transfer of wealth in the next coming years, is that we don’t have any reunified succession law,” said Claude Medernach, another panel participant. Medernach is legal counsel in family office services at the Banque de Luxembourg. “Some countries are considering the law of the deceased person, other countries are considering the law of the beneficiaries--meaning where the heirs are resident. It’s also a difference whether the assets are movable assets or immovable assets.”
Our wealth management toolbox contains some good solutions for doing estate planning
“Luckily, our wealth management toolbox contains some good solutions for doing estate planning,” she stated. Assets, for example, can be structured through different types of companies in Luxembourg. These include family wealth management companies (société de gestion de patrimoine familial, or SPF, in French), limited partnerships (société en commandite) or soparfi vehicles (société de participations financiéres).
The legal regime of the limited partnership was recently amended, said Medernach. “Now we have really a very flexible and good vehicle.”
Life insurance “recognised everywhere in Europe”
“Life insurance products are quite powerful and unique,” argued Alexandre Draznieks, CEO of Cardif Lux Vie, during the panel discussion.
The beneficiary clause--which is usually in the contract and stipulates who receives the insurance death benefits should the insured person die--was the first point that Draznieks highlighted. “The key element here is that those beneficiary clauses can target--in essence--anybody.”
The life insurance policy is quite flexible…in terms of succession or organisation of succession planning
“The second element is that whenever there is a succession, the payment of the insurance death proceeds can go to anybody,” he said. “This is disconnected from the succession process itself.” Based on these first two elements, “the life insurance policy is quite flexible, from that perspective, in terms of succession or organisation of succession planning.”
For Draznieks, a third important element is that “life insurance is recognised everywhere in Europe. It means that when somebody moves from one country to another, the very--I would say--legal existence of his or her life insurance contract will not be questioned.” Even though contracts need to be “carefully adapted” when moving from one country to the next, the portability of this product therefore makes it a useful tool in cross-border succession planning.
ESG, philanthropy and impact investing in succession planning
The livestream also featured a panel discussion on the role philanthropy plays in succession planning. For panellist Frederik Hansen, head of A&S wealth planning advisory at UBS Luxembourg, the younger generation want to see more impact and action from their investments, while moderator Hannamari Koivikko, executive director, wealth advisory at J.P. Morgan Luxembourg, argued that sustainable investment is not just a fad or something “nice to have.” “It’s simply a must,” she said.
But there’s a difference between just speaking about it and actually creating a written document that specifies values and purpose, said Espen Raakil, senior client executive in the professional family office at SEB Luxembourg. It’s important to put pen to paper and to write out concrete visions and values.
And finally, “make sure to start early,” said Raakil, tying back to one of the key messages in the panel on cross-border solutions. “It might be a bit risky to plan to do it when you’re 100, because something might happen before that.”
Find the replay of the Luxembourg for Finance livestream .