Why even think about the intergenerational transfer of property?

A family business built all his life and private property accumulated over the years can become more of a burden to the founding father as he gets older. This often leads to the sale of the business empire, or at least to the greatest possible marginalization of the founder's father and leaving the administration to professional management. Sometimes, however, the founding father perceives this empire as his legacy, a family legacy that must not leave his family's fortune at any cost. However, the preservation of business continuity is at risk in the event that the founding father did not plan sufficiently or planned, but unfortunately did not have time to implement his plans for the intergenerational transfer of assets.

What problems does his property face in that case? First of all, they are property disputes between individual heirs or legatees. Even if the founding father is still able to cooperate during his lifetime, the moment when it comes to breaking bread, so to speak, the interest in the family's well-being goes aside. Or vice versa, everyone has it as their priority, but everyone has a completely different idea of ​​the form of family well-being. Furthermore, it is of course a threat to the family business itself, which is suddenly not effectively managed. There is a so-called dilution of property shares and the emergence of disagreements regarding the management of private property.

Merely a will is far from enough, not even with a few links. In the same way, it is not enough to just gradually hand over management to descendants while still alive. Assets can only be effectively protected by a combination of several such mechanisms, and perhaps best through just that combination of holding and trust structure.

Family holding

Holding is a widely used way of structuring companies, which typically consists of umbrella of several separate business entities under a single company, limited liability company or joint stock company. The reason is management efficiency, where decision-making powers are concentrated in the holding company and facilitating the transfer of assets within the group. If one of the subsidiaries is drowning in debt, it is not a problem to transfer profit from another, prosperous, subsidiary through the holding directly to where it is needed. Also we use the holding company to diversify business risk.

Although the legal system does not explicitly deal with the term holding, in July of this year a significant shift occurred when the Supreme Administrative Court finally recognized it as a legitimate solution for the structuring of a business group. This is also why the creation of a holding structure is safer today than ever before. The financial authorities are very happy to mark such transactions as flat-rate abuse of rights and refer to purely self-serving tax optimization. Today, I hope we have more clarity on this matter.

Use of SPV (special purpose vehicle)

As part of building such a solution, the founding father owns not only a share or shares in the family business, but also amount of private property. Typically real estate, cars, securities or art collections. Sometimes, for example, his real estate portfolio can be so extensive that it would not be possible to effectively ensure its management through a holding company. In addition, it would be exposed to the risk of doing business at the level of the holding company and the subsidiaries below it. In such a case, their contribution to the so-called special-purpose vehicle, or SPV for short. It is about a company that is established for a specific purpose - for example, precisely to manage the assets invested in it.

Typically, this is how they arise in the first place real estate SPV, which will cover the real estate portfolio, and the operational SPV, which will enable easy management of other businesses and perhaps even the securities of the founder's father.

A typical solution for the intergenerational transfer of property

So what does the use of such a solution look like in practice? We will imagine this on a model example.

Today, the founding fathers are over 70 years old. During his lifetime, he built a prosperous family business and accumulated several properties. He has three children with his wife, one of whom is still a minor. He is struggling with health problems and running his business is becoming too much for him. He therefore decides to hand over the administration of his business empire to his children, whom he dedicates to the running of his business during his lifetime. He owns business shares in several companies, but the core of his business lies in a company engaged in the large-scale production of wooden furniture. He wants his business not to fall apart after his death and his legacy to continue and his family to be well taken care of even then.

He will therefore use the services of lawyers and tax advisors who will propose a tailor-made solution. Shares in individual companies will be invested in a new joint-stock company, which will hold a majority stake in them. This creates a holding, whereby the holding company itself will not do business and will only manage the individual shares and will manage his own property. They invest their real estate in a real estate SPV. Finally he establishes endowment fund, whose beneficiaries determine their family, and set the rules for its management. The shares of the holding company and the share in the real estate SPV will be allocated to the endowment fund.

If something were to happen to him now, his family and property are taken care of. The endowment fund, or rather the family, manages the holding through the controlling share and, through it, the entire business empire of the founder's father. Rules for decision-making and payment of money were introduced. His business continues on.

Endowment versus trust

Finally, it is necessary to at least briefly answer the question of the trust structure, which covers the entire fortune of the founder's father. In principle, neither answer is wrong, but in recent years it can be observed the trend of moving from a trust fund to an endowment fund, for several reasons.

The main reasons can be called larger flexibility, the possibility to change the charter and legal personality. However, for the sake of completeness, it should be added that the beneficiaries of the trust fund, on the contrary, have a stronger legal position. On the other hand, another disadvantage compared to an endowment fund is that at least one of its administrators must be a person different from its founder or beneficiary. This does not apply to an endowment fund, and its founder can easily be the chairman of its board of directors at the same time.

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The aim of the article was to bring closer the intergenerational transfer of property and to illustrate the use of trust and holding structures in the intergenerational transfer of property and why their use pays off. With their consistent implementation and administrative settings, you can achieve property protection, effective management, easy financing, material support for your family and ensuring the continuity of your business

In conclusion, we only want to add that although at first glance such a solution may appear to be unnecessarily complicated or too expensive, we know from our experience that such an investment will pay off in the end. We do not recommend anyone to underestimate the described aspects of the transfer of property. Planning ahead really pays off!

Source: epravo.cz

Do you need advice on the intergenerational transfer of property? You are not sure whether your property can be disposed of in the manner described above? Contact us and we will help you with everything!

JUDr. Ing. Jan Vych, attorney and partner