Inheritance law for business owners: what entrepreneurs need to know

On 1 January 2023, the Federal Council enacted the first part of the revised inheritance law. The aim was to align inheritance law with the population’s current needs by reducing the compulsory portions. The revision enables testators to freely dispose of a larger part of their estate, which gives entrepreneurs welcome flexibility when planning their business succession.

Oliver Pscheid: The revision of the inheritance law that has already come into force reduces the compulsory portion that descendants can claim and eliminates those of parents. This finally gives testators more freedom in choosing how to distribute their estate. The changes are extremely important for entrepreneurs, as it is often difficult in practice to divide up a company and at the same time to treat descendants equally.

The second pillar of the revision, which did not pass, would have introduced an effective company inheritance law. This would have simplified the intra-family transfer of a company during a person’s lifetime or in the event of inheritance. The aim was to streamline succession processes, strengthen the stability of Swiss SMEs and to secure jobs.

Even though the second revision failed, the intensive debates in the National Council and Council of States emphatically showed how important a clear succession plan is for entrepreneurs, their successors, and their companies.

Oliver Pscheid: We have also observed that many entrepreneurs struggle with this topic and postpone addressing the question of business succession.

There are many reasons for this. Many business owners say that they do not have enough time to plan their succession. Sometimes they have difficulty finding a suitable successor. They often do not have a clear vision of how the company should continue after they are gone. We notice this is particularly true when the business is not passed on within the family. Finally, we also regularly observe that entrepreneurs find it difficult to part with their company or to step back from it. Succession planning is an emotional topic, which is understandable.

Oliver Pscheid: In succession planning, a distinction must be made between ordinary and unplanned succession. Ordinary succession refers to a situation in which a company is handed over while the owner is alive and fully capable of making decisions. If ordinary succession is not mapped out sufficiently early, this may mean, for example, that no suitable successor can be found in the short term or even that no successor can be found at all. In extreme cases, a company may have to be completely dissolved and liquidated when the owner retires.

In the case of unplanned succession, the company must be handed over due to an unexpected incapacity or after the death of the entrepreneur. This is often a difficult situation that leads to great uncertainty within the company, weakens the business and can have negative consequences for employees and customers. To avoid this, every business owner should have a contingency plan on hand and keep it up to date at all times.

Oliver Pscheid: A contingency plan covers arrangements in the event an entrepreneur is suddenly incapacitated. Here we are mainly referring to incapacity or death. 

A really good contingency plan regulates rights of representation as well as specific provisions for unplanned business succession. It should be drawn up as early as possible. Young entrepreneurs – especially those with families – should also appoint key people they can trust at an early stage and create solid structures that will take effect in the event of an emergency handover. This can be ensured, for example, by appointing a strong board of directors or a management team that is empowered to act.

Divorce can also threaten the survival of a company. So, it is advisable to have a clear plan for this eventuality too – usually by means of a marriage contract.

Oliver Pscheid: If a company is sold and not transferred without charge to the descendants, the financial situation of the entrepreneur usually changes considerably. If the bulk of the assets were previously tied up in the company, these are now freely disposable after the sale.

As a bank for business, we provide entrepreneurs with comprehensive advice and support them throughout their entire professional career and beyond. For the abovementioned reasons, we attach great importance to a contingency plan for the worst-case scenario, the planned succession and the possibility of a future sale – even if the entrepreneur intends to stay in the company for a long time and has not yet begun to think about a handover or sale.

We support entrepreneurs with succession transactions, whether through M&A support or by financing the transaction. The question that arises is what to do with the assets from the sale. We show our clients suitable forms of asset structuring that rely on proven models. “Liquidity Longevity. Legacy.” is our usual wealth strategy. This means securing short- and medium-term liquidity requirements as well as providing for old age and ultimately the passing on of assets.

Oliver Pscheid: Absolutely. Comprehensive advice should not be limited to banking-related topics but should also include legal and tax aspects as well as liquidity and pension planning. At UBS, we have qualified specialists who cover a broad range of topics. This expertise allows us to find tailor-made solutions for our clients.

Oliver Pscheid: Notwithstanding the fact that the latest proposed revision of inheritance law did not pass: Early advice on succession planning is crucial, as an amicable arrangement within the family is also favored under the new law. In this way, the wishes, needs and expectations of those involved can be identified and considered at an early stage. This is in the interests of everyone involved and of the company, whatever may happen.