Passing the torch: Family succession planning

Christmas is a time for family reunions — a moment to celebrate traditions, revisit shared goals, and reflect on legacies. For those with family businesses, these gatherings often spark deeper discussions about preserving wealth and maintaining harmony across generations.

One way families prepare for succession planning is by coming up with a family constitution. This document serves as a moral and operational guide for managing not only family-owned businesses, but general family affairs as a whole. A family constitution generally covers several key areas, including the family’s values, mission, and vision. It also outlines governance structures and decision-making processes for family affairs. Additionally, it includes succession plans and qualifications for leadership roles to prepare for a seamless transition to the next generation. Finally, it contains conflict resolution mechanisms that provide structured approaches for resolving disputes.

Yet, while invaluable, family constitutions are neither legally binding nor sufficient on their own.

A family constitution is not enforceable in courts of law. It is akin to the Constitution’s preamble which, according to jurisprudence, is not considered a source of rights or obligations. The preamble merely serves as an introductory statement that declares the general and guiding principles of the nation’s organic law.

For a family constitution to have legal weight, it must be accompanied by formal documents such as:

• Shareholder agreement: This document defines ownership rights, voting power, corporate management policies, dividend policies, and share transfer restrictions.
• Trust agreement: This document serves as a tool to manage and safeguard assets while ensuring they are utilized in line with the goals and values outlined in the family constitution.
• Corporate charter documents: Integrating family governance principles into the company’s articles of incorporation and/or by-laws ensures that family principles are legally enforceable within the corporation.
• Wills: This is a legal mechanism for distributing the decedent’s assets according to their wishes. However, probate proceedings to validate the will can be costly and time-consuming, often involving significant legal fees and administrative delays.
• Deed of extra-judicial settlement: This facilitates the transfer of a decedent’s estate among heirs without court intervention, provided there is no will, and all heirs agree to the distribution plan.

Each type of document serves a specific purpose, from formalizing ownership rights and safeguarding assets to ensuring the smooth transfer of wealth and organizational responsibilities. The family must carefully evaluate its unique circumstances and objectives to determine the most suitable combination of these instruments. By doing so, the family will be able to align their shared values and goals, as indicated in the family constitution, with defined legal rights and obligations embodied by such legal forms.

Beyond these considerations, another crucial aspect of succession planning is the tax implications of the transfer of wealth to the next generation.

Under the current tax rules, payment of the correct taxes is a prerequisite for the issuance of a Certificate Authorizing Registration (CAR) by the Bureau of Internal Revenue (BIR). The CAR is a document that authorizes the transfer of legal title over the properties to the heirs. Without this document, the transfer of title over shares of stock and real estate cannot be legally completed. This may potentially cause complications in the administration and future dealings involving the estate because the assets are left under the decedent’s name.

The Tax Reform for Acceleration and Inclusion (TRAIN) Law, implemented in 2018, simplified tax rates for Capital Gains Tax (CGT), estate tax, and donor’s tax, aligning them at 6%. For disposals of shares of stock not listed in the stock exchange, a 15% CGT is due on the net capital gain.

There is an ongoing estate tax amnesty program which allows heirs to settle unpaid estate taxes covering decedent/s who died on or before May 31, 2022. With the signing into law of Republic Act No. 11956, the period for availment of Estate Tax Amnesty has been extended to June 14, 2025. Families with unpaid estate taxes may consider this as an opportunity to minimize any unpaid taxes due the government and avoid any further imposition of penalties.

In addition to the alignment of tax rates under the TRAIN Law and the estate tax amnesty extension, the recent signing of Republic Act No. 12001 (June 13, 2024), otherwise known as the “Real Property Valuation and Assessment Reform Act”, has made compliance increasingly straightforward by streamlining the valuation of real property throughout the country. By providing a uniform framework for property values, potential issues (i.e., discrepancies in the valuation of property) that could lead to tax disputes and/or penalties are minimized.

Given these positive reforms for taxpayers, the author urges families to comply with the prescribed tax rules rather than attempt to circumvent them when planning for property transfers. Compliance ensures not only smoother transitions but also the avoidance of potential legal and tax disputes that could result in substantial penalties and delays in the transfer of assets.

This holiday season, as families gather to celebrate the most joyous time of the year, it is the perfect time to reflect not only on the legacy of the past, but more importantly, on the dreams and aspirations for the future. A family constitution provides a strong foundation for governance, but without the necessary legal instruments and proper tax compliance, its principles may falter under the weight of excessive costs and potential liabilities. By integrating the family constitution with binding legal forms, as well as strategies that are aligned with Philippine tax law, families can preserve their wealth and harmony for generations to come.

As you share meals and stories this Christmas, consider giving your family the gift of foresight. With the right planning, the success of today can become the foundation of your family’s future.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.