Sages Business Case: Estate Planning for the family business

Estate Planning for the family business


Adjunct Professor of Entrepreneurship and Family Enterprise, INSEAD

KPMG contributor


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After the funerals

Thomas Sages looked stern and preoccupied upon his return from the funeral of his friend David’s wife, Laura. When David died a few years earlier, Thomas was very shocked by David’s death, and this new loss reopened the wound.

David had been Thomas’ closest and oldest friend; he also was his business associate – contributing 10% of the business equity when Thomas started the expansion of his supermarket chain. And these ties were further strengthened when David and Laura’s son married Thomas’ daughter.

As Thomas’ thoughts wandered, he found himself thinking about the future of the business he had so successfully built. Two of his children worked in the business, and he felt rather comfortable with their ability to lead it forward – even though he had occasional disagreements with them about new developments.

The future of the business

His main concern, reinforced by the funeral, was the transfer of his ownership stake. He had written his will many years ago; however Laura’s funeral had made Thomas think he should revisit it. The high quality grocery store that Thomas launched in 1954 had quickly developed into a very successful supermarket chain thanks to his entrepreneurial drive.

While his son Louis, born from a first marriage, had never been included in the business, the three children from his second marriage had all worked there. The two youngest, Caroline and Timothy, had made their way up: Caroline was in charge of the consumer credit division and Timothy of the supermarket operations. However, their older brother Charles, had left the business after some tension.

When Thomas’ children joined the business, he gave each of them 5% equity, to link the responsibility of ownership to that of management. His wife Martina, his friend David, and a fund for the managers, each owned 10% of the capital.

The transfer of ownership

David’s shares had gone to his only son David Jr, who was married to Caroline. Thomas wondered how he should transfer his own shares, which represented 55% of capital.

One of his first questions was whether or not to link ownership and leadership of the business: Caroline and Timothy would probably not wish to deal with a “sleeping partner” such as Charles, especially given the fact that Charles had left the business with some bitterness…

Another option would be to give Charles some real estate, and to give shares to the other two. Splitting the real estate from the operations had been done by other family businesses for similar purposes. Maybe Charles should even be encouraged to trade his 5% stake against some real estate.

Linking ownership and leadership of the business

Thomas then wondered if the business should be further split: real estate to Charles, “bank” to Caroline, supermarket operations to Timothy. However, the fact that David Jr. (Caroline’s husband) owned 10% of the shares, and that the management fund also owned 10% of the shares meant that the matter needed to be closely examined.

At this point, Thomas also realised that he needed to better understand the consequences of the latest inheritance laws – they had recently changed and he was not sure what his wife Martina should receive should he die before her.

He also needed to think about Louis, his eldest son from his first marriage, who never received shares from the business but was entitled to a share of the inheritance. Their relationship had been distant for many years, but they had grown closer recently and Thomas wanted Louis to be part of the plan. Thomas decided that he needed to discuss these issues with his trusted advisor, and picked up the phone.

What decision did Thomas make?

Thomas’ trusted advisor confirmed that 20% of Thomas’ inheritance would go to his wife (e.g. 11% of equity). He also had the freedom to distribute a small amount of his estate to whomever he decided (some of his children, a charity, anyone else); and the rest had to be split equally amongst his children.

The advisor also recommended that Thomas ask his children how they saw the future of the family business. Thomas took the time to meet each of them individually and check their motivations. Each of them expressed the wish to become or stay a shareholder in order to be able to pass on some shares to the next generation.

Thomas decided to split his shares equally between his children and called a meeting with them and his advisor for support. Louis and Charles were happy with the amounts they were to inherit provided their children would be considered for employment. Timothy did not like the idea that his sister and her husband would ultimately own one third of the business.

Ownership succession planning

After some discussions, David Jr. agreed to sell 3% of his shares to Timothy. This arrangement would allow Timothy to have a veto right for key decisions (at least 25% of shares in their country), like Caroline and David.

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