Natalia Demina told the Sobaka.ru magazine about the complexities of inheritance in the absence of planning and how to minimise key risks when transferring a business to heirs

According to Skolkovo’s statistics, over 70% of successful businesses in Russia fail to survive one or two years after the owner’s death. Among the most widespread reasons are a high degree of personalisation of business and lack of a strategy for transferring assets to heirs.

Natalia Demina, head of Private Wealth practice at Maxima Legal, specifically for Sobaka.ru magazine spoke about the complexities of inheritance in the absence of planning as well as shared recommendations that mitigate key risks when inheriting a business:

About the context

There are a lot of high-profile inheritance cases in Russia. Why were the children and spouse of Maxim Ageenko, co-founder of the St Petersburg-based appliance manufacturer Redmond, stuck in court for many years after his death? Why weren’t his heirs allowed into the business? Why were the heirs of Dmitry Buravlev, co-founder of Cinelab, unable to gain access to the company?

These situations occurred due to the owners’ lack of succession planning. They did not even look at the charters of their companies and did not know that the deceased founder’s share passes to the successors only if the remaining partners agree. And the partners do not want to continue doing business with the heirs pay the actual value of the share. And all the courts are flooded with lawsuits to challenge its value.

The first wave business owners, as a rule, don’t have a will or a prenuptial agreement. Such a businessman has a number of assets: stakes in companies, a portfolio of securities, real estate in Russia and abroad. There are also collections of cultural valuables such as watches or paintings. Their heirs are a wife, children from several marriages, and often illegitimate children as well.

About the most common difficulties of inheriting different types of assets

The biggest problem that arises is splitting an inheritance into shares: in a collection of watches, paintings, other artistic treasures, real estate, a company. Assets are very difficult to divide equally.

Another problem is that the heirs are not aware of all of the businessman’s assets, especially abroad. If there is a misunderstanding about Russian assets, you can find out about them through the notary, send different requests, it takes some time, but it is possible to get this information after the death of the owner. And it is practically impossible to fidt it abroad. As a result, the capital (money in Swiss or Austrian bank accounts, real estate) remains unclaimed, because the owner has not thought about the will, and has not even informed his/her successors and relatives about his/her assets.

In practice, it is very common for a wife to be unaware of her deceased husband’s overseas bank accounts. She was usually busy either with her children or her own small business and was not immersed in her husband’s affairs. As a result, after his death she does not even know where the documents with his contracts and account numbers lie. This happens very often.

About an inheritance of securities and investment portfolios

When we prepare a will for a client, we work through the problems that may arise in the event of his or her death over his or her various assets. Securities and investment portfolios are very complex.

First, how can we divide an investment portfolio of shares, bonds and mutual funds between heirs? This is impossible. Therefore, the people named in the will have a shared ownership of the securities portfolio. And all the heirs (and there are often tense relations between them) need to agree on a certain step – to keep it in an investment fund or to sell it. This is a problem in the absence of concerted action.

Second, a trust management of an investment portfolio is terminated in the event of the owner’s death. The management is frozen for 6 months, the duration of the probate period. This often leads to a drop in the value of the securities as they are not managed by anyone.

Thirdly, banks themselves do not understand what to do in such a situation. Our clients who plan the succession of securities (and there are some who do think about this in their lifetime) write in their will that in the event of their death, one heir or some professional participant, such as a trustee, will sell them and distribute the proceeds to the heirs.

But, unfortunately, even the Private branches (to serve VIP clients) of all the major banks we work with honestly say that they are unlikely to be able to implement the scheme. “It is logical, fair, so stated in the will, but the practice is not ready for it. For now, such issues will be dealt with on a case-by-case basis,” lawyers from major banks in Moscow tell us.

Some ways of minimization key risks in the transfer of a business to heirs

Preparing a good will. We are not talking about the template version at the notary, where it is written “all of his property, wherever it is, I leave in equal shares to his wife and children”. A will should be carefully prepared and includes what exactly and who inherits.

Draw up a prenuptial agreement. It will help protect the interests of the surviving spouse.

Preparing the business for inheritance (in case the heirs are willing to continue the business), including checking the company’s bylaws. If necessary, make changes to eliminate the risk of the heirs being prevented from managing the business.

Resolve issues of inheritance of cultural property, advise on the procedure for inheriting one’s foreign assets. Duplicate a will, including in the country where the property is located, to take account of local regulations and make life easier for heirs.

Make a lifetime disposition of a minimum share of the company to the eldest son and wife to ensure continued control of the company after the owner’s death.

Prepare instructions to the heirs on how to run the business.

To read the full article (in Russian) please see the Sobaka.ru magazine >>>