Organizing the transfer of one’s estate, particularly one’s business, in the event of future death is not an easy task.
However, it is an important step for the operator of a business or a commercial company. If it is not thought through by its leader, it can jeopardize the sustainability, or even the survival of the company, due to heavy taxation and conflicts between heirs. Improvisation becomes the number one enemy of transmission.
When no transfer was organized before the death of the manager, there are family, tax, legal, financial, and social consequences. A forced succession is often poorly received and very costly for the heirs.
Moreover, heirs each have their own reserve inheritance, that is, the assets and rights they must have at a minimum if they accept the succession, and which the operator of a hotel, restaurant, or café, or other businesses that owns real and movable assets must respect.
For example, if the estate consists of a company and assets worth 1,000,000 euros and the unmarried operator has 3 children, the inheritance share is ¾ (or 750,000 euros) or ¼ per child (or 250,000 euros); if he has two children, the inheritance share is 2/3 or 1/3 per child (or 333,333.33 euros), and if he has one child, the inheritance share is 1/2 (or 500,000 euros).
If there is a spouse, they are entitled to ¼ (i.e., 250,000 euros) in full ownership or the entirety of the assets in usufruct (the value of the usufruct depends on their age. Example: 30% from age 71, 20% from age 81, and 10% from age 91, as per the law, for the hereditary reserve.
If there is a specific provision, the rights of the surviving spouse may be extended. For example, a last-will and testament donation allows the surviving spouse to increase their share in the estate, with 1/4 in full ownership and the other 3/4 in usufruct.
The remainder of the amounts (available quota) can be used freely by the operator of a hotel, restaurant, café, or other businesses.
If, of course, the estate consists only of life insurance contracts, these contracts are in principle exempt from the succession, and therefore from the share of the inheritance and the rights of each heir (unless the premiums are clearly excessive in relation to the subscriber’s means).
The questions that will be asked of the heirs :
When a business or commercial company executive dies, his estate is opened. The assets he had, including his business or company operating a profitable trade, are part of the estate, meaning the total assets, rights, and values he owned at the time of his death that will be shared among the heirs who accept the inheritance.
The company (or company stocks), like other movable property, real estate, and bank accounts and securities, are included in the estate. Personal debts of the deceased will be deducted.
We will then discuss the net estate, which will serve as the basis for calculating the rights, particularly inheritance.
As soon as the shares are distributed among the heirs, a new reality becomes clear : the company will now be owned by multiple heirs. This could be problematic, especially when it comes to a SME that relied on the “head” and know-how of the company’s manager or the commercial company operating a hotel, restaurant, café, or other business ;
The heirs must ensure the continuity of the business before deciding its fate. Decisions must now be made by several people. A cascade of conflicts is then likely to arise since the heirs do not all have the same interests.
Some partners will want to sell the assets, particularly the business or company that operates the hotel, restaurant, café, or other business, while one (or more) heirs may want to remain at the head of the business or simply retain the shares they hold to maintain the family business. The question then arises of finding an agreement between heirs, which is not a simple thing.
If one of the heirs wants to keep the business, the question of buying out the other partners’ shares will then arise. If the heirs do not want to keep the business or company, they will have to sell it. In both cases, the question of the valuation of the assets, and more specifically the sale price of the company or commercial enterprise operating a hotel, restaurant, café, or other business, then arises.
1) The question of the valuation of assets of the company or commercial enterprise operating a hotel, restaurant, café, or other business
The valuation of assets of the business or commercial company operating a hotel, restaurant, café, or other business is crucial in determining the amount of the inherited share of assets and also the payment to be made. This is a source of conflict, because if the valuation of an asset is not at its true value, an heir can quite rightly indicate that his own inheritance share is not respected, and therefore sue the other heirs.
Example: If the operator, by will, bequeathed his business worth 500,000 euros to a child and an immovable property worth 1,300,000 euros to the other, the latter will have to pay a dowry of 100,000 euros to the first heir, because the hereditary share is 1/3 of 1,800,000 euros per child, or 600,000 euros.The heir who will receive the real estate will want to undervalue the company, while the heir who will receive the company will overvalue the real estate or underestimate the value of the company.
Another example : If the deceased’s assets are worth 1,800,000 euros, including the company valued at 1,000,000 euros. If there are 2 heirs, each heir is entitled to €900,000 in the absence of testamentary provisions. If one wants to keep the company entirely, he will have to pay the other 100,000 euros in compensation. This heir may tend to devalue the company in order to avoid having to pay this additional amount.
2) The tax implications of valuing assets owned by a business or commercial company operating a hotel, restaurant, café, or other business
Inheritance tax can be very burdensome, and heirs may not have the cash flow to pay the taxes that must be paid within 6 months of the death.
They will tend to value the assets and more generally the company at a low value, to pay less inheritance tax, especially when they want to keep the company.
On the other hand, those who do not want to keep the business will tend to overvalue it in order to try to avoid a significant capital gain (and therefore a significant capital gains tax) if they resell the business a few years after the operator’s death.
For example, if the company is valued at the time of death at 1,000,000 euros, and in 2 years it is worth 1,500,000 euros, the inheritance tax will be 146,598.55 euros. The capital gain if they want to resell the company will be calculated on 500,000 euros, at a capital gains tax rate of 30%, which is 15,000 euros in taxes.
If, on the other hand, the company is valued at 800,000 euros at the time of death, the estate tax will be lower, at 181,974.15 euros, and the capital gains tax: 700,000 euros x 30%, or 21,000 euros.
Thus, the valuation of the company is important ; in our example, the difference in taxation is 38,375.60 euros, 60 euros for inheritance taxes, and 6,000 euros on the capital gain, for a total of 44,375.60 euros.
Given that the heirs must pay the fees, this valuation is fundamental. This valuation of the operator’s assets and therefore of the company must be fair.
It should not be excessively diminished because, on the one hand, there is a tax risk of reassessment for inheritance tax and penalties incurred, but there is also a risk of having a capital gains tax if the company has increased in value after the succession and the heirs want to sell their shares.
It should not be increased, as there would be too large an inheritance tax to be paid by the heirs, and in the event of resale, there would be a risk of selling at a lower price.
3) Financial stakes
When the business or commercial company operating a hotel, restaurant, café, or other business is in the hands of the heirs, their interests are almost never aligned.
The consequence is often the same: important decisions are delayed or abandoned. She is not in economic difficulty, but she is in decision-making difficulty.
The business or commercial company operating a hotel, restaurant, café, or other business must continue to operate, pay its employees, suppliers, rent, and creditors in general, but it is immobilized. What should have been a seamless transition becomes a difficult situation for the heirs to manage, which can lead to the temporary or even permanent blockage of the company, and thus to a bankruptcy filing.
The executor knows that each child is first legally entitled to a tax deduction of €100,000 on the share they will receive.
Example : A business owner owns 100% of a SME valued at 1 million euros, and he dies, leaving four children. The company’s value is divided among them, with each receiving 250,000 euros. Each child is entitled to a deduction of 100,000 euros, which reduces the taxable base to 150,000 euros per child.
This base is then subject to the progressive inheritance tax scale. For each child, the tax is calculated as follows: 5% up to €8,072, 10% between €8,072 and €12,109, 15% between €12,109 and €15,932, and 20% beyond that up to €150,000. This results in an inheritance tax of €28,194 payable by each child.
If there is a will, each grandchild can benefit from a deduction of €31,865 per grandparent and each great-grandchild can benefit from a deduction of €5,310 per great-grandparent.
This means that if it is not organized, the transfer of a business following the death of the manager can be a very heavy financial burden, especially if it does not distribute profits to its heirs.
The heirs must therefore find the financing to pay these fees. If there are no securities or amounts available in the bank accounts that were transferred to them by the deceased, they can only pay with their personal funds or a credit. If they do not have personal funds or credit, they will have no other solution than to sell the asset or assets that were passed down to them, including the business.
4) Social issues
The death of a leader can be problematic for a company, especially if the company relied on the leader’s personality and expertise.
The leader’s children may be wondering whether they will take over the farm and what their status will be, will they be employees or not ?
Thus, the question of the fate of employment contracts and the future of employees after the death of the manager is important because, although employment contracts are generally continued with the company, a sale or reorganization decided by the heirs can lead to significant changes.
It is in everyone’s interest for the operator to address the subject with their children before their death and explain that it is possible to run a business differently than the previous generation, digitize, delegate more, work fewer hours while maintaining a balanced management of personnel.
* * *
In conclusion, not planning for the transfer of a business almost always leads to a painful succession where tensions and blockages take over and the risk of the business disappearing is frequent.
A single company can be passed down in continuity or plunged into a dead end even if it is solid at the time of the transmission.
Its continuation will depend on the degree of anticipation of the operator of the business or the commercial company operating a hotel, restaurant, café, or other business.
It is precisely to avoid these situations that the accompaniment of a business lawyer is important for the manager so that he can anticipate and organize his succession and avoid the disappearance of the company he has developed all his life.
He will help him transform a risk of disorganization and loss of value into a controlled transfer, serving the company and the family.
Moreover, the business lawyer will help the operator to anticipate his financial and tax situation because each situation is specific. He will advise the operator to define a strategy to be adopted during his lifetime so that equality is respected among heirs (if that is his concern), and to avoid them being crushed under the weight of taxation upon his death.
SELARL Petroushenko Law Firm
Tel: +33 (0) 156810580
Website: www.cabinet-petroussenko.com