Sustaining Legacies Across Generations

By Theo Parperis (Head of Tax & Legal, PwC Cyprus), Phryni Yiakoumetti Mina (Director, Private Wealth Services, PwC Cyprus) Natalie Vassiliou Moustaka (Senior Manager, S.A. Evangelou & Co LLC, the PwC Network Legal Practice in Cyprus)
21 September 2021
Sustaining Legacies Across Generations
Given the uncertainty facing all businesses and the ever-changing and complex world that we live in, it is of paramount importance that business owners remain not just one step ahead but two or three steps ahead, and effectively plan for all eventualities. We are going through the greatest transfer of wealth in history, with excessive amounts of accumulated wealth being passed on mainly to the next generation. Effective wealth transfer is a science by itself, one in which comprehensive analysis and planning can surely play an important role.
Increasingly, the starting base of our conversations with private business owners and other High Net Worth Individuals (HNWIs) from around the world is the wealth philosophy of the family: “What is the purpose of your wealth and what is it going to be used for?” We consider this to be the cornerstone of family wealth planning, having great value in the process by setting out the purpose of wealth jointly as a family creates a sense of alignment, commitment and ownership.
 
Preparing and planning for the future of the family
 
Gone are the days when, on the private side, business owners only needed an emergency plan in case of death. Family planning encompasses contingency planning for various scenarios/risks, working with the family to address their needs and concerns as well as their objectives holistically. By acting proactively, especially in times of uncertainty, sociopolitical and financial turbulence, families recognize the need to set up a sustainable, solid yet flexible framework for succession and wealth planning, asset protection and the next generation taking over as the new leaders of the family business and/or managing the family wealth.
Family planning is an all-encompassing title for a very complex and often sensitive process. We consider the following to be of the greatest importance when approaching family planning:
• Succession Planning and Wealth Management: Connecting with the family and hearing the unsaid; what are the objectives of the family and how can their objectives be realised?
• Asset Planning and Protection: In which jurisdictions are the family assets and where are the family members and business located? What are the tax and legal implications of this arrangement and how can we improve upon it, in light of the family’s objectives? Is there an exit plan if required? Are existing structures appropriate? Is there a need for additional structures e.g. Trust, Foundation, Company Limited by Guarantee, a Fund? Which jurisdictions make more sense for such structures?
• The Day After: What are the critical points that need day-after planning, e.g. death or incapacity of the principal or senior executives, war in the home country? What plans are – or need to be – in place to deal with such eventualities? If there are plans in place, is there a mechanism to revisit these regularly?
• A New Model of Leadership Succession Planning: Integrated succession planning, where the integration and preparation of the next generation/non-family leaders starts early on, way before the patriarch passes on management control. When and how can children be developed to be good stewards of the family wealth? Do they deeply understand how the family created its wealth and how capital moves within systems created by their elders? How will they know if they are good stewards, even if they decide not to take an active role in managing the family business/wealth? What are the key positions that need to be taken up by non-family members? Can shareholding be open for non-family members?
• Philanthropy and Impact Investing: How can we, as a family, give back and become more socially responsible in our investments, whilst creating and sustaining the family’s legacy?
• Technology: Does it ensure that the family’s affairs are private and confidential? Does it enable timely, transparent and upgraded communication on the family wealth and amongst the family members and with key associates (e.g.Trustees)? Have we considered how to best tap into the benefits of technology in how our family office/family business operates in terms of digitalisation, process automation etc.?
 
Opting for more structure 
 
As generations grow, family circumstances become more complex and families realise that some structure can be really helpful when it comes to discussing sensitive issues, such as ownership (entry and exit), rights and responsibilities, conflict resolution, etc. This is where family governance comes in: it is the ‘glue’ that will hold things together and foster transparency and accountability, amongst others. It is not an exaggeration to state that, many times, poor levels of trust and communication are a big part of intergenerational wealth transfer failures. 
Carefully assessing, in a participative way, the options as regards governance mechanisms that are fit for each family, opting for simplicity and flexibility (unless required otherwise), regularly taking stock of how effective these processes are and adjusting as necessary, are some practical considerations. Best practices include a Family Constitution, a Family Council (with possible functional sub-committees, e.g. Philanthropy and Remuneration Committees), shared purpose/values, Shareholder Agreements and a Board Constitution for the family office/private structures, family meetings/retreats, family employment/assessment policy, conflict resolution policy, ethics policy.
 
Cyprus: A preferred jurisdiction for a second base
 
For decades now, we’ve seen families in the West running a family office. Increasingly, we are seeing families in other parts of the world follow this route. In fact, a family office is considered to be a very effective family governance structure. 
Every family is unique and if you’ve seen one family office, you’ve only seen one family office. Nonetheless, whatever the size of a family office, the most common focus areas are: effective family planning tailored to the evolving needs/circumstances of the family, greater control over their wealth and handling family affairs. A family office can evolve into a powerful ecosystem of the appropriate governing bodies, contingency planning, succession and estate planning with one ultimate goal – to successfully carry the wealth and legacy of the family into existing and future generations.
Cyprus is increasingly becoming a preferred jurisdiction for a second base. Many see Cyprus as a great and safe place for family members to potentially use as a personal base at some point in their lives, with excellent educational and health facilities, cosmopolitan and with a relatively well-handled pandemic. EU membership, English-based law, stability, a strategic location, reasonable taxation and a wide treaty network, investor- and business-friendly immigration rules, options on succession planning and asset protection structures (such as the Cyprus International Trust, Cyprus Funds, Cyprus CLGs), and high-quality professional services at competitive rates compared to other EU jurisdictions, are just some of the key corporate benefits of Cyprus. 
With more than 40 years of experience supporting family businesses and HNWIs from around the globe, we know that their business and family wealth is their legacy. Carefully assessing risks, eventualities and options from various angles, to allow HNWIs make the best decisions for their family and their enterprise, is key in supporting them to look to the future, drive growth and safeguard their legacy.
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