In family businesses, business succession is a critical issue that requires long-term planning and vision. As entrepreneurs face the challenge of passing on their businesses to the next generation, a common option is to make a living gift of part of their assets. However, while this can facilitate business continuity, it is essential to take the necessary precautions to avoid conflicts and ensure a smooth transition.
Using donations as a tool to anticipate business succession offers numerous advantages, but it also poses legal challenges that must be carefully managed. For this reason, we explore the main legal considerations when using gifting as a succession mechanism and how to ensure that the process is carried out without unpleasant surprises.
What does gifting involve in business succession?
A donation is the transfer of assets or rights without receiving consideration, and in the context of a family business, it allows the entrepreneur to anticipate the transfer of the business to one or more of their children or heirs. This practice is primarily used to avoid a lengthy and contentious succession process.
However, a donation is not considered a definitive transfer. The Civil Code states that donated assets are integrated into the estate and must be regarded as part of the inheritance when it is distributed, unless otherwise provided. This is known as collation, and its purpose is to ensure that all heirs are treated equally, preventing one from being unfairly favored by the donation.
What is the function of collation?
Collation serves an essential function: to prevent the gift from disrupting the equality among legitimate heirs. When a parent donates part of the estate to one of their children, the donated property is added to the total value of the inheritance and must be distributed among all heirs. However, the donor has the option to exempt one of the heirs from the obligation to collate. In this case, the child who receives the donated property does not have to include it in the inheritance partition.
This decision must be clearly outlined in the legal documents, either in the donation contract or the will, to avoid future misunderstandings. If the waiver of collation is not clearly stated, it could be interpreted that the donor intended to equalize all heirs, which may lead to disputes in the future.
How are valuations of donated assets made?
One of the most complex issues in corporate gifting is the valuation of donated assets. Specifically, when a company or part of a company is donated, the valuation can be influenced by many internal and external factors, such as market conditions or the work done by the donee.
The Civil Code provides that donated assets should be valued based on their price at the time of the inheritance partition, not at the time the donation was made. This can lead to disputes, especially if the value of the business has increased due to the work and effort of the donee. To avoid disputes, the value of the business or donated share should be established objectively and reasonably at the time of the gift, with provisions made for how that value will be updated to reflect any future changes.
How can potential conflicts be prevented?
While gifting can be an effective tool to ensure the continuity of the family business, it may also lead to disputes between heirs, especially if one heir is significantly favored. If the value of the donation exceeds the donee’s share of the inheritance, the donee will have to compensate the other heirs, potentially leading to new conflicts.
The role of the executor, appointed by the testator to carry out their final wishes and manage the inherited assets, can be crucial in avoiding disputes. The executor can intervene in the collation, helping to resolve discrepancies regarding the value of the donated assets and how they should be distributed. Therefore, it is essential for the testator to clearly define the executor’s functions and powers, ensuring that the executor is a person with business experience and capable of handling disputes efficiently.
In this way, donation as an instrument of business succession can be an excellent option for ensuring the continuity of the family business, but it is crucial to seek the right advice to avoid conflicts and ensure the process is carried out fairly and efficiently.
In that case, LEIALTA may be the help you need. Our legal team has years of experience in inheritance law and is ready to assist you. If you would like more information on how we can help, please do not hesitate to contact us. We are here to guide you through every step of the process.
