Succession is a governance problem wearing a tax costume

A family arrives with a spreadsheet. The spreadsheet models transfer tax under several structures, and the family wants to know which number is smallest. It is a reasonable question and it is almost never the question that determines whether the plan works.

In twenty years of this practice, I have seen very few plans fail because the tax analysis was wrong. I have seen many fail because nobody decided, in advance and in writing, who gets to make decisions once the founder no longer can.

Four decisions that precede any structure

• Who controls the operating business, and does control follow ownership or is it separated through voting and non-voting classes?
• What happens when a child who does not work in the business wants liquidity that the business cannot fund?
• Who is the trustee, and what standard governs distributions when two beneficiaries disagree about what is reasonable?
• How is a valuation determined when a family member exits, and who chooses the valuer?

Answer those four, and the structure follows. Draft the structure first, and the four questions surface later in a courtroom, where they are answered by someone who has never met the family.

Every contested accounting I have litigated was a governance conversation the family declined to have while it was still free.

Separate ownership from control deliberately

Voting and non-voting equity classes let a founder transfer economic value to children who will not run the business while keeping operational control with the one who will. This is not merely a valuation-discount technique. It is the mechanism by which a family avoids the situation where four siblings hold equal votes and no decision can be made.

Write the buy-sell before anyone wants to sell

A buy-sell agreement drafted while everyone is on good terms will contain a valuation method everyone thinks is fair. The same agreement drafted during a dispute will contain a valuation method that favours whoever has more leverage that week, and it will be litigated.

Fund it. An unfunded obligation to buy out a departing family member at fair value is a promise the company may not be able to keep, and an unkeepable promise is where fiduciary litigation begins.