1. Introduction and legal foundation

To illustrate the questions that arise, this discussion is based on the following case study: Mr Sample is married and has two adult children. He is the sole associate of his company, Sample Ltd, which he established shortly after his marriage. His wife helped him build up the company and did secretarial work while bringing up their children. The assets of the spouses mainly comprise the business and a single-family dwelling. The daughter has been working for Sample Ltd for several years and can easily imagine taking over the company, while the wife and son are less interested in such a step.

If Mr Sample should die without a corporate succession plan and without any testamentary dispositions, Sample Ltd with all its assets and liabilities will pass to Mrs Sample and the two children by universal succession. They will form a community of heirs.

Within the community of heirs the principle of unanimity applies until the division of the estate. If Mrs Sample and the two children cannot agree on the manner in which the business should be continued, there is a substantial risk that regarding the business operations of Sample Ltd a deadlock occurs, that the company loses in value, and that its continued existence is jeopardised.

Before the Sample community of heirs can proceed with the division of the estate, the matrimonial property must be divided. If the Sample spouses did not enter into a marriage contract, they are subject to the statutory matrimonial property regime of joint ownership of acquired property. As all the assets of the spouses in this case are acquired property, Mrs Sample is first entitled to half of the assets under matrimonial property law.

The other half of the assets forms the estate of Mr Sample. By law, Mrs Sample is entitled to half of the estate and the two children are each entitled to one-quarter of the estate. Seen overall, Mrs Sample can claim three-quarters of the assets.

If the daughter wants to take over Sample Ltd, she most likely will not have sufficient funds to buy out her mother and her brother. As her father's estate primarily consists of Sample Ltd, she will also be unable to make these payments from her inheritance. If the heirs cannot agree to continue Sample Ltd as a community of heirs, they will be forced to sell some of its divisions or even the whole company in order to finalise the division of the estate.

The following structuring options show how this unsatisfactory situation can be avoided or adapted.

2. Structuring options under matrimonial property law

With a marriage contract the spouses can adopt a different matrimonial property regime or individually adjust the statutory matrimonial property regime of joint ownership of acquired property, for example by modifying or totally excluding the 50-50 division of acquired property.

In our case study, the Sample spouses can conclude a marriage contract to adopt the matrimonial property regime of the separation of property or to determine that all the acquired property should fall to the estate of Mr Sample in the event of his death. This would reduce Mrs Sample's claim to half of the total assets, which would indirectly benefit the children.

3. Structuring options under inheritance law

Under inheritance law, the most appropriate tool for succession planning is a last will. However, the testator remains at all times bound by the mandatory protection of statutory inheritance entitlements.

In our case study, Mrs Sample's statutory entitlement is half and those of the children three-quarters of their statutory succession shares (Mrs Sample's share equals half of the estate and the children's shares amount to one-quarter of the estate each). In his last will, Mr Sample can restrict the inheritance of his wife and his son to their statutory entitlements and give the available remainder of his estate to his daughter as the successor at Sample Ltd. He can also issue an instruction on the division of his estate by way of a testamentary disposition according to which his daughter should primarily receive shares in Sample Ltd and Mrs Sample and his son should primarily receive the real estate.

In practice, however, this approach cannot always be recommended without reservation. On the one hand there is a risk that the heirs might become embroiled in a dispute regarding the valuation of the company and thus the amounts of the statutory entitlements, and on the other hand the surviving dependants often feel offended if their inheritance is restricted to the statutory entitlement.

It is recommendable for all the family members to amicably agree on the allocation of the shares in the family company by way of an inheritance contract certified by a notary public. The parties are free to decide the content of the inheritance contract. For example, some heirs can waive all or part of their statutory entitlements (against payment or free of charge), the testator can determine which assets should be allocated to which heirs, usufructs can be established for specific assets, and it is even possible to include matrimonial agreements if the spouse is also involved in the inheritance contract (combined marriage and inheritance contract). Ideally the family members will also agree on the value of the company or at least on a method for calculating the company's value. Including all family members in the succession planning process will ensure its acceptance.

The Sample family in our case study can therefore agree in a combined marriage and inheritance contract that, upon the death of Mr Sample, his wife should receive the single-family dwelling or a usufruct to the house, in return for which she waives the remainder of her statutory entitlement, the daughter should receive all shares in Sample Ltd, while the son waives his statutory entitlement against payment of a specific amount at the time of the conclusion of the contract. Alternatively, the son can be given a partial payment plus a minority interest in Sample Ltd. To avoid disputes among the siblings, it would be advisable in this case to also conclude a shareholders' agreement.

4. Corporate succession during the owner's lifetime

It is naturally also possible to transfer the family company to a descendant during the father's lifetime. In this case, too, measures under matrimonial and inheritance law are needed to avoid later disputes among the family members.

Usually the transfer of the company to a descendant against payment of an appropriate purchase price presents no difficulties, as long as the transaction complies with the dealing-at-arm's length rule. If the company is transferred free of charge or against payment of a price that is too low, Art. 626 of the Swiss Civil Code must be observed. According to this provision, gifts made by the testator to a descendant must be brought into hotchpot when the estate is distributed. If Mr Sample should transfer all or part of Sample Ltd to his daughter free of charge during his lifetime, she must bring this gift or the gifted part thereof into hotchpot when the estate is distributed and make equalisation payments to her mother and brother (hotchpot obligation of statutory heirs). If she has managed to improve the fortunes of Sample Ltd since she took over the company and the value of Sample Ltd has improved substantially, this could have serious consequences as hotchpot must be based on the value of the gift at the time of succession.

It is important to know that the testator has the option at any time to exempt his heirs in writing from the hotchpot obligation. Even in this case, however, care should be taken that the lifetime gift to a descendant does not violate the statutory entitlements of the other heirs, as in such a case the latter could challenge the violation of their statutory entitlements with an action in abatement upon the succession.

In our case study, where there are no assets in addition to the property that could be given to the son and Mrs Sample in settlement of their claims, the transfer of part or all of Sample Ltd free of charge to the daughter during the owner's lifetime is therefore hardly possible if the son and wife do not waive their statutory entitlements.

5. Summary

In summary it should be said that statutory marriage and inheritance law is not geared to facilitate succession to the family business. There are provisions of marriage and inheritance law that could sink the corporate succession plans if no preventive measures are taken, both in the case of a transfer during the owner's lifetime and after his death. It is therefore recommendable to seek a tailor-made solution based on contractual agreements for the succession to a family company as early as possible with the involvement of all family members and the help of an expert in marriage and inheritance law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.