The transfer of the family business: living donation or will?
Choosing the living donation or the will as a form of transmission of the family business is a critical decision that depends a lot on the family and economic context. It is, therefore, an election that requires information and prior reflection, given its fiscal effects and, above all, on the continuity and governance of the project.
That is why we wanted to shed light on this issue by exposing the most relevant considerations when choosing between a living donation or a will.
Critical aspects of the transfer of the family business
The transmission of the family business is one of the greatest challenges for its continuity and governance. In fact, very few companies usually survive the third generation. The entry of new family members as partners of the company (and even third parties) can be a stumbling block for their management capacity. Especially when there are quarrels between relatives or the new partners are not interested in the management of the firm.
In these cases, planning tools such as the family protocol can be useful. Through these tools, the entry and exit of partners can be ordered, as well as the political weight of the shares in the company. So, management complications will be greatly reduced.
Apart from these issues is the tax economy. Although donation and inheritance are free transfers, their tax regimes differ. Of course, the transfer of the company could also be onerous (a sale), but this is not the most frequent case in family companies.
We bear in mind that tax regulations are more difficult to circumvent than civil and commercial ones. Insofar as these are peremptory norms, the family protocol, the Statutes and other instruments cannot alter their regime. Issue that also comes into play before certain inheritance rules such as legitimate or forced inheritance.
Transfer of the family business through living donation
Donations do not usually pose great legal problems except when the donor has forced heirs. Which is the most common in family businesses, since both their descendants and, in the absence of these, their ascendants and their spouse have this condition. Therefore, except in rare exceptions, there will be heirs with a legitimate right, which is the part of the inheritance that is reserved for them by law. In other words, the testator cannot dispose of this part, having to respect the legitimate rights of his forced heirs.
And although we will return to the issue when we enter into succession matters, we highlight it here because it is not alien to donations. We bear in mind that living donations are considered an advance of the inheritance, since the Civil Code prohibits in its art. 636 donate "more than [can] be given or received by will."
To correct this eventuality, the figure of collation is instituted, which allows forced heirs to return to the inheritance the donations that the deceased has made in life. Thus, the donation in life must be considered made on account of the inheritance, at least with regard to the eventual forced heirs.
As the lawyers specializing in company transfers say, it should be remembered that the donation is only valid from the moment the done accepts it. From this moment on it constitutes an irreversible transmission. Which explains some of its advantages and disadvantages.
Advantages of living donation
The main advantage of the donation of the family business is that it allows the coexistence of the incoming and outgoing generations. This has a beneficial effect by facilitating an orderly and coordinated transition.
In addition, given its irreversibility, it guarantees the done his irrevocable status as a new partner. What produces legal security both within the family and against third parties.
Disadvantages of living donation
As a notable disadvantage of this form of transmission of the family business we find precisely its irreversibility. If the donor did not choose the right profile to lead the new stage of the company, they will not be able to reverse the effects of their decision.
In addition, the donation in life supposes a decapitalization. This may imply a commitment to the financial support of the donor. However, there are legal ways to prevent this risk, such as the reservation of usufruct on the transferred titles or donations with reversion.
Transfer of the family business in a will
As we have seen, living donations are not immune to mandatory inheritance rules. Therefore, the partner of a family business must always take these hereditary rules into account.
Precisely for this reason it is important that they grant a will, because otherwise, should their death occur, the intestate distribution would be applicable, which can introduce significant distortions in the composition and governance of the company.
Within this provision, it will be necessary to take into account the necessary respect for the legitimate rights of each of the forced heirs. It should also be considered that an agreement between the totality of the heirs in the seat of hereditary distribution could invalidate the testamentary provisions.
Therefore, the preparation of the will requires certain precautions. In this sense, it may be interesting to establish safeguard clauses such as the Socinian caution.
It is also convenient to be aware of the privileged forms of distribution that our Legal System admits. Particularly in articles 841 and 1056 of the Civil Code, which allow to attribute the package of shares to a single heir (in exchange for compensating the rest), thus guaranteeing the concentration of control over the company.
Advantages of inheritance transfer
Unlike gifts, wills are essentially revocable. Therefore, by means of inheritance transmission, the testator can change his mind until the moment of death. In addition, only at that time will the transfer take place, which allows the retention of capital.
Disadvantages of inheritance transmission
Precisely the fact that the will is revocable deprives you of the legal security that the donation implies for the donee and third parties. This disadvantage is disproportionate if we compare it with the benefits provided by the possibility of changing your mind, at least with regard to the choice of the figure that should succeed the culprit in making decisions in the company.
And this is because, although the testator may use his will as a reward or sanction for the actions, he is aware of in life, if the transfer of power is carried out after death, he will not be able to react to the consequences of his decision. However, there are institutions such as the trustee that can help postpone the moment of selecting the true successor of the company. Hence, it is advisable to consult with lawyers specializing in family businesses when making the decision between transferring the family business by will or living donation.
Contact us, and our lawyers specializing in business law will study your specific case. We Have:
Law firm in Barcelona
Law firm in Tarragona
Law firm in Reus
Law firm in Tarrega