Mon, June 24, 2024

Understanding succession planning

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It is statistically proven that wealth weathers away by the third generation. First and second generation entrepreneurs face numerous challenges while building and expanding their brands, and while overcoming these challenges is important for sustaining growth, planning for the future of the business and brand becomes equally important. Businesses that survive and thrive across generations, have done so because efficient succession and management planning took place at the right time. Generational degradation of businesses can be equitably managed in a professional manner, which not only benefits one’s successors but also the business, its brand and its employees.

Some core principles of succession and inheritance in the Nepali context are as follows:

Property: Property is understood to be both movable (shares, cash, etc.) and immovable properties (land, building, etc.). Complying with necessary registration requirements, efficient valuation of assets and liabilities, and a study of sectoral restrictions with respect to the area of business must be studied to prudently manage succession.
Property in Common (Sagolko Sampatti) Self-acquired Property (Neeji Sampatti)
  • All families in Nepal are presumed to be joint unless legal partition takes place.
  • Simply understood, the properties acquired by way of inheritance and proceeds thereof are known as property in common or sagolko sampatti.
  • A joint family consists of the following coparceners, that is, members with equal rights – namely, father, mother, son(s), and daughter(s).
  • Even if a daughter marries, she remains a part of the sagol with her parents and siblings (married or unmarried).
  • When a son or daughter marries someone, then conceptually, s/ he becomes a coparcener in two sagols; one with their parents and siblings, and another with their spouse and children (if any).
  • Earned as a result of knowledge, skill, effort, employment, donation, bequeath, succession, lottery, or gift, etc.
  • Acquired after separating from sagol with parents and siblings, or otherwise managing one’s accommodation at one’s own cost without legally separating from such sagol.
  • Property of women earned or acquired before marriage, or from the parental side (before/after marriage).
  • Acquired by women from husband with the consent of concerned persons of the husband’s parental side if such property was acquired from the husband’s parental side.
  • Any income generated by a spouse is also considered as joint property of their sagol with their spouse.
  • The right of a wife or husband in relation to their spouse’s share in the joint property with their parents and siblings is to the extent of their spouse’s share. This does not include any gifts (movable and immovable) given by the spouse’s side with the consent of the concerned members. Further, the husband’s right over his wife’s share in her parent’s sagol will only get triggered after her passing (as her heir). As such, during her life, the wife’s ancestral property will not be a part of her sagol with her husband and children.
  • A member or coparcener may even separate from the joint family. In this case, the person separating leaves the joint family and the others remain the coparceners of the joint family.
  • It is important to note that a partition or Anshabanda between a husband and wife amounts to a divorce and such a means of succession planning between a husband and wife should not be taken lightly, as it would essentially dissolve the marriage itself.

The following characterisations are also important:

Heirs: After a person’s passing away, the heirs will be considered in the following sequence – firstly the spouse living in an undivided family, secondly the children (and widowed daughter-in-law) living in an undivided family, and as further provided in the National Civil Code 2074.

The models of succession planning are as follows:

Partition or Anshabanda: This is the most traditional method of succession planning in Nepal. For this, an application is filed either before the concerned Land Revenue Office (Malpot) or before the concerned District Court, depending on the circumstances of the case. As a result, the parents and siblings take their equal share in the joint property. In the case of a separation, one coparcener takes his/her share from the joint property and the others remain in the sagol, as discussed above. Wills (Sheshpachhiko Bakaspatra): These function as a gift deed that becomes effective after the passing away of the concerned individual. While executing these deeds, it would be important to comply with all the necessary registration requirements, if any, and receive the consent of the heirs, who have a beneficial interest in the concerned property. Family Trusts: The concept of Guthis has always existed in Nepal, however, conceptually, family wealth management trusts have now been introduced by the National Civil Code 2074. These are characterised as private trusts that seek to benefit specified beneficiaries and are managed by trustees for the benefit of those beneficiaries only. These trustees can be family members. Ideally, the property of such a trust should be in the name of the trust itself, as otherwise its purpose would be defeated. Family Constitutions: A family constitution operates as a contract between family members. The subject matter of a contract cannot be vague, the contract cannot be against public policy, and a contract that provides for the transfer of immovable properties must necessarily be registered. Given the nature of family constitutions, it may be difficult to enforce them in Nepal against the established principles of contract law. Succession planning is a much-needed aspect of protecting business interests and conducting legal risk management of business operations. However, it is a complex subject given that one solution does not fit all and that the issues related to it are often multi-layered. Such structuring needs to be backed by considering professional advice, especially from the perspective of enforcement. READ ALSO:
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MAY 2024

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