Succession process to ensure the continuity of the family business

11 Dec 2023

The succession of the Family Business has always been one of the most controversial elements when it comes to organizing the succession of the entrepreneurial Family. The main problem is related to its continuity in the new generations; the planning of such continuity of the company and its preservation in the family sphere is not limited to the transmission of the shares, but also affects the management and control of the company, and the avoidance of its division or fragmentation that can damage its preservation and even lead to its disappearance.

If we analyze it from a logical point of view, it is the testator himself who best knows the heirs or legatees, and, in turn, the Family Business and the value of the assets it possesses, so it seems obvious that he is the most indicated to determine to whom to leave the Company, facilitating that it does not leave the family.

The article 1.056 of the Civil Code refers to the partition of goods by parts of the testator and in its second paragraph it empowers him to carry out the partition of his goods in such a way that the Family Business is preserved at the time of the succession, by means of the indivision of this one or by means of the control of the company, whenever the legitimate one is paid in cash to the other interested parties.

In the succession there must concur forced or legitimate heirs, whatever the kinship with respect to them (ascendants, descendants or widowed spouse). This provision is necessary in the will, so it does not fit in intestate succession.

“Article 1.056

1. When the testator makes, by an inter vivos act or by last will, the partition of his property, it shall be carried out insofar as it does not prejudice the legitimate rights of the forced heirs.
2. The testator who, for the preservation of the company or in the interest of his family, wishes to preserve an economic exploitation undivided or to maintain the control of a capital company or group of these, may make use of the faculty granted in this article, arranging for the payment in cash of his legitimate share to the other interested parties. For this purpose, it will not be necessary that there is sufficient cash in the inheritance for the payment, being possible to make the payment with extra-heiritary cash and to establish by the testator or by the accountant-partidor designated by him deferment, as long as this does not exceed five years from the death of the testator; any other means of extinction of the obligations can also be applied. If the form of payment has not been established, any legitimated beneficiary may claim his legitimate share in assets of the estate. The provisions of Article 843 and of the first paragraph of Article 844 shall not apply to the partition thus carried out."

Family Business Succession Liability Subject of Succession

The taxable person must be:

The testator himself who has forced or legitimate heirs (ascendants, descendants or spouse).
The heir or heirs favored with the succession of the Company or the control thereof.
The other interested parties in the succession, that is to say, legitimaries who have the right to one-third of the strict legitimate, of improvement or of free disposition.

It is important to emphasize that the testator gives priority to the interest of preserving the Family Business over the interest of the beneficiaries in the succession.

The beneficiary or beneficiaries will have to pay in cash to the other interested parties the quota of the strict legitimate share.

Object of the Succession

The object is the Family Business itself as an economic exploitation or the transmission of the shares or social participations in order that the control is not divided or lost for the preservation of the Company or in the interest of the family.

In the event that the other interested parties -legitimaries- demonstrate that such economic exploitation does not exist at the death of the testator, the adjudication will have to be declared null and void and a partition of the inheritance will have to be carried out in accordance with the rules established in the Civil Code.

Mode of execution of the testamentary disposition

From the wording of the article it is clear that it can be done "inter vivos" or by acts of "last will":

a) By will: By any of the forms admitted in the Civil Code (holographic, open or closed will or special wills, military or maritime wills or wills made in a foreign country).
b) By inter vivos acts - Such a division of the business assets would be a mortis causa act whose effectiveness would be deferred at the time of the death of the deceased with the opening of the will. It must be supported by a previous, simultaneous or later will.

Payment to beneficiaries

The payment of the share of the reserved portion must be made in cash, not being necessary that there is sufficient cash in the inheritance for the payment; such cash can be extra-hereditary, that is to say, with money coming from the assets of the beneficiary beneficiary.

The amount of the reserved portion to be paid by the beneficiary cannot be fixed unilaterally. On the other hand, the testator may determine the value in the will itself.

Is it possible to make a deferred payment? The answer is yes, as long as it does not exceed five years from the death of the testator. Such deferral will carry the corresponding interest.

As we have been able to verify, article 1.056.2 of the Civil Code empowers the testator to carry out the partition of his assets in such a way as to preserve the Family Business when facing one of the most important moments that such businesses must undertake. The succession through the planning of the continuity of the Family Business, so it is necessary to count on a good advice that can solve all the doubts in one of the most important moments of the whole process.

You can contact our Family Business lawyers here.