Succession planning: what it is, how it works and its benefits

Succession planning is an essential strategy for guaranteeing the continuity of family assets, reducing tax costs and avoiding conflicts between heirs. Many people believe that this process is only necessary for large fortunes, but in reality, anyone with assets can benefit from this planning.

In this article, we'll explain what succession planning is, how it works, the advantages of structuring an estate succession and the main tools used in this process.

If you want to protect your assets and guarantee your family's financial security, read on and find out how the CLM Controller Accounting can help you!

What is succession planning?

Succession planning is a set of strategies used to organize the transfer of a person's estate to their heirs safely, efficiently and with less tax impact.

Many people leave this decision until later and end up facing an expensive and time-consuming probate process. Without proper planning, heirs can have difficulties accessing assets, pay high taxes and even face legal disputes.

• Avoids bureaucracy and lengthy processes
• Reduces tax and duty costs
• Ensures that assets are distributed according to the owner's wishes
• Protects family assets from blockages and disputes

This planning can be done while you are still alive, ensuring greater peace of mind for the owner of the assets and their family.

How does succession planning work?

Succession planning involves a detailed analysis of the owner's estate, choosing the best structure for passing on the assets and formalizing the succession.

The main steps include:

• Survey of all the owner's property and assets
• Choosing the best form of asset transfer
• Assessing the tax impacts of succession
• Legal and accounting structure to guarantee security in the process

The most suitable structure for each case depends on the profile of the owner, the size of the estate and the objectives of the succession.

Key tools for succession planning

There are various ways of structuring family succession planning, ensuring that assets are transferred in the most advantageous way possible.

1. will

A will is a legal document that allows the holder to determine how their estate will be distributed after their death.

• Allows the division of assets to be defined in advance
• Avoids conflicts between heirs
• Can include beneficiaries outside the traditional line of succession

A will can be public (registered at a notary's office), private (made by the holder himself with witnesses) or sealed (written and sealed).

2. Living donation

A gift in life allows assets to be transferred to heirs before death, avoiding probate.

• It can be done with reservation of usufruct, allowing the donor to continue using the asset
• Reduces the impact of transfer tax (ITCMD)
• Ensures that the division of assets is carried out under the supervision of the owner

This strategy must be well planned to avoid anticipating taxes and financial restrictions for the donor.

3. Family holding companies

A family holding company is one of the most effective tools for organizing succession planning and protecting assets.

• Allows assets to be managed within a company
• Facilitates the distribution of assets among heirs by means of quotas
• Reduces the tax burden on inheritance
• Protects assets against legal disputes and creditors

In this model, the assets are transferred to a company and the heirs become shareholders in the holding company, ensuring more control and flexibility in the succession.

4. Life insurance

Life insurance can be an interesting alternative when it comes to estate planning.

• Guarantees immediate liquidity for heirs
• It does not enter the inventory and is not taxed by ITCMD
• Can be used to cover tax and inheritance costs

This option allows beneficiaries to have resources available quickly, avoiding financial difficulties in the transition period.

5. Private pension

Private pension plans are a safe alternative for complementing wealth succession.

• They allow direct receipt by the beneficiaries, without the need for an inventory
• They may have tax advantages in succession
• They allow you to customize how you redeem your funds

This is an excellent option for guaranteeing an agile transfer with less fiscal impact.

Benefits of succession planning

Succession planning offers several advantages for those who want to protect their assets and ensure peace of mind for their heirs.

1. Reducing tax costs

Traditional succession can generate high costs in terms of taxes and notary fees. With well-structured planning, these costs can be significantly reduced.

• Decrease in transfer tax (ITCMD)
• Reduced costs with lawyers and notaries
• Lower taxation on the transfer of assets

2. Agility in inheritance

Probate can take years to complete, preventing heirs from having immediate access to assets. With proper planning, the transfer takes place quickly and efficiently.

3. Heritage protection

The creation of a family holding company and other legal structures protect assets from creditors, legal disputes and possible financial problems for heirs.

• Separation of personal and business assets
• Greater security against seizures and foreclosures
• Control over the management of family assets

4. Guarantee of the holder's will

By structuring a plan, the owner can define exactly how they want their assets to be distributed, avoiding disputes and ensuring that their will is respected.

5. Fewer family conflicts

A well-planned succession avoids disagreements between heirs and guarantees a smooth transition of assets.

When to do succession planning?

Many people believe that succession planning should only be done in old age, but this is a big mistake.

• The sooner you start planning, the greater the benefits will be
• Allows the holder time to organize the succession in the best possible way
• Avoids hasty decisions and mistakes that can lead to high costs

So regardless of your age or the size of your assets, starting planning as soon as possible is always the best choice.

Different types of succession: which one to choose for your estate?

Succession planning can be carried out in various ways, and the choice of the best model depends on factors such as the type and size of the estate, the number of heirs and the objectives of the owner. Below, we highlight the main types of succession and their characteristics:

1. Legitimate succession

Legitimate succession occurs when there is no prior planning and the division of assets follows the rules established by the Civil Code. In this modality:

• |Assets are divided according to the legal order of succession (spouse, descendants and ascendants).
• Heirs need to go through the inventory process, which can be bureaucratic and time-consuming.
• There is no flexibility for the owner to determine how they wish to divide their assets.

2. Testamentary succession

Testamentary succession allows the holder to define in advance how they wish their assets to be distributed.

It ensures that the holder's wishes are respected, within legal limits.
It can include beneficiaries who are not part of the traditional line of succession.
It must respect the legitimate rights of the necessary heirs (half of the assets must go to children, spouses or parents).

3. Business succession

Business succession is a crucial issue for company owners who want to ensure business continuity after they leave.

• It allows the definition of successors for the management of the company.
• Avoids disputes between heirs over control of the business.
• It can be structured by means of a family holding company to ease the transition.

Each of these modalities has specific implications, and the best choice will depend on the owner's profile and existing asset structure.

Common mistakes in succession planning and how to avoid them

Succession planning can be highly advantageous when it is well structured. However, many people make mistakes that can compromise the effectiveness of this process. Here are the main mistakes and how to avoid them:

1. Postponing planning

Many people leave succession until later, which can result in a bureaucratic and costly inventory. The ideal is to start planning while you are still alive to ensure that everything is well structured.

2. Not considering the tax impact

Some strategies can generate high tax costs if they are not planned correctly. Relying on a accounting consultancy specialized can help reduce taxes and optimize succession.

3. Disregard the need for liquidity for heirs

A common mistake is not providing financial resources to cover costs such as taxes and legal expenses. The use of life insurance and private pensions can be an excellent alternative to guarantee liquidity in the succession.

4. Not updating planning

Changes in legislation and family structure may require revisions to planning. It is essential to carry out a periodic evaluation to ensure that the strategy remains aligned with the holder's objectives.

The impact of succession planning on family businesses

Family businesses face unique challenges when it comes to inheritance succession. Lack of proper planning can jeopardize business continuity and lead to conflicts between heirs.

1. Definition of managing and non-managing heirs

Not all heirs have the interest or ability to manage the company. One solution is to divide the succession between them:

• Managing heirs - those who will take over the management of the company.
• Non-managing heirs - who can receive profit sharing without being directly involved in the business.

2. Use of a family holding company

The family holding company is a structure widely used to organize succession in family businesses.

• Allows the distribution of company shares among heirs.
• It ensures that the management of the company remains with those who really have an interest in the business.
• It can reduce taxes and avoid disputes between successors.

3. Creating a family protocol

The family protocol is a document that establishes rules for the succession and management of the company.

• Define criteria for family members to join the business.
• Establishes rules for the distribution of profits and participation in management.
• It helps to avoid conflicts and guarantees the continuity of the company throughout the generations.

Well-structured family businesses can ensure a smooth transition and avoid disputes that could jeopardize their future.

The relationship between succession planning and asset protection

In addition to organizing the succession of assets, good succession planning can also act to protect assets, ensuring that they are protected against legal and financial risks.

1. Separation of personal and business assets

For entrepreneurs, setting up a family holding company helps to protect personal assets against possible company debts and liabilities.

2. Reducing risks in legal proceedings

The use of structures such as donations with reservation of usufruct can prevent assets from being blocked in legal proceedings.

3. Shielding assets from creditors

Strategies such as setting up property companies can prevent creditors from gaining access to family assets.

Protecting assets should be a constant concern, and succession planning can be an efficient tool for this.

How to choose the best tax regime for succession?

The choice of tax regime is a decisive factor in succession planning. Each strategy can have different tax impacts, and the tax analysis must be carried out very carefully.

1. transmission tax causa mortis and donation (ITCMD)

The ITCMD is levied on transfers of assets and can vary depending on the state.

• It can be up to 8% on the value of the property.
• Some strategies make it possible to reduce or postpone tax payments.

2. Taxation on living donations

The donation of assets can be a strategy to anticipate the succession, but it can generate ITCMD costs.

A donation with reservation of usufruct can reduce the tax base.

3. Family holding company taxation

The creation of a family holding company can reduce inheritance taxes, but it must be well planned to avoid excessive tax costs on profits and income distribution.

Consult a accounting consultancy is essential to finding the best tax strategy for each case.

How do you ensure that succession planning is carried out correctly?

Even with well-structured family succession planning, it is essential to adopt measures to ensure that it is carried out as expected.

• Notary formalization - Documents such as wills, donation contracts and corporate agreements must be registered to guarantee legal validity.
• Appointment of an inventory or succession manager - Choosing a trusted person to coordinate the succession can avoid conflicts.
• Keeping records up to date - Assets and beneficiaries should be reviewed periodically to avoid succession problems.

Proper planning ensures that the transition goes smoothly and that the heirs can enjoy the assets without complications.

The importance of succession planning for families with large estates

Family succession planning is essential for anyone who wants to organize the succession of their assets, but it becomes even more critical for families who have a large estate. This is because the lack of proper planning can lead to:

• Prolonged legal disputes between heirs;
• High tax burden on the transfer of assets;
• Risk of dilapidation of assets due to lack of efficient management;
•  Possibility of family businesses being sold to cover inheritance debts.

To avoid these problems, families with large fortunes can adopt strategies such as:

• Setting up a family holding company to manage assets and companies;
• Planned donations to reduce the tax impact;
• Creation of an estate fund to guarantee liquidity for the heirs;
• Clear definition of the roles of each heir in the administration of the estate.

The larger the estate, the more essential succession planning becomes, as a lack of organization can compromise the preservation of assets over the generations.

Succession planning for families with underage heirs

A very relevant issue in inheritance planning is the situation of families with underage heirs. In these cases, special care is needed to ensure that assets are protected until the heirs can manage them independently.

1. will with protective clauses

In a will, it is possible to establish rules on the administration of assets until the heirs reach the age of majority.

2. Appointment of a guardian or curator

The holder of the estate can appoint a guardian or curator who will be responsible for managing the assets on behalf of the minor heirs.

3. Investment of assets in investment funds

An interesting strategy is to define that part of the estate should be invested in investment funds to ensure that heirs have resources available in the future.

4. Creation of a family foundation

Some families choose to create a foundation to manage the resources and ensure the education and well-being of the heirs until they are ready to manage their own assets.

Succession for minor heirs must be planned in advance to avoid legal problems and guarantee the protection of assets.

Using life insurance as a strategy for succession planning

Life insurance is an efficient tool in succession planning, as it allows heirs to receive financial resources immediately and without the need for an inventory.

• Immediate liquidity - Life insurance ensures that heirs have the resources to pay taxes and cover probate expenses.
• Tax exemption - The value received from life insurance is exempt from ITCMD (Imposto sobre Transmissão Causa Mortis e Doação) in many states.
• Protection against legal disputes - As life insurance is not included in the inventory, it cannot be the subject of disputes between heirs.

Many families include life insurance in their succession planning to ensure that their heirs have the resources available to deal with the costs of succession.

The succession of investments and financial assets

In addition to the succession of property and companies, it is essential to consider the transfer of investments and financial assets in succession planning.

1. Private pension

Pension funds, such as PGBL and VGBL, are excellent tools for succession, as they allow beneficiaries to be named and do not enter the inventory.

2. Stock portfolios and investment funds

The holder can define strategies to transfer shares and fund quotas to heirs without generating excessive tax costs.

3. Setting up a family office

Families with a large amount of financial assets can set up a family office to manage their investments and guarantee the preservation of assets over the generations.

The succession of financial assets must be planned carefully to avoid losses and ensure that heirs have access to resources without unnecessary bureaucracy.

The impact of changes in legislation on succession planning

Tax and succession legislation is constantly evolving, and any change can significantly affect succession planning.

1. Possible increases in the ITCMD

Many states are discussing increasing the ITCMD rate, which could make succession more expensive if there is no proper planning.

2. Tax reforms and their impact on succession

Changes in the taxation of donations and inheritances could impact strategies such as the creation of family holding companies and early donations.

3. New rules on wills and donations

Changes in legislation could affect the validity of wills and the rules for donating assets during life.

To ensure that succession planning is always up to date and in compliance with the law, it is essential to have specialized accounting advice.

Benefits of family holding companies in succession planning

A family holding company is one of the most efficient strategies for organizing the succession of assets and reducing the tax burden.

• Ease of succession - A holding company allows the transfer of shares to heirs without the need for an inventory.
• Tax cuts - ITCMD can be reduced by structuring the holding company correctly.
• Asset protection - Assets are safeguarded within the holding company, avoiding legal risks.
• Control of asset management - The founder can retain control of the company even after transferring the shares to the heirs.

The creation of a family holding company should be done with planning and expert advice to ensure that the structure is efficient and advantageous.

The importance of accounting advice in succession planning

Succession planning involves complex legal, tax and accounting issues, requiring the guidance of specialized professionals.

O accounting office plays an essential role in this process, as it allows:

• Choosing the best succession strategy
• Reduce tax and bureaucratic costs
• Ensuring that all legal obligations are complied with correctly

A CLM Controller Accounting has experience in structuring family holding companies, tax optimization and succession planning for companies and families.

Do you want to ensure the safety of your property and avoid problems in the future? Get in touch with CLM Controller Accounting and find out how we can help you structure an efficient, safe and beneficial succession plan for your whole family!