Generational transition of the business in Italy

Inheritance law provides for rules that constitute stringent limitations in the planning of generational succession, also having regard to family businesses. Reference is made to the legal institutions that restrict and condition the choices of the entrepreneur in transferring during life, but with succession purposes, the family patrimony: the forced heirship, the prohibition of inheritance pacts and, in part, the testamentary regulation.

The legislative framework, characterised by the unavailability of the share reserved to forced heirs, by the limits placed on testamentary regulation and by the prohibition of inheritance pacts, makes succession planning operations particularly complex. Specifically, the rigorous and binding regulation protecting the rights of forced heirs limits the freedom of the entrepreneur in the management of the transfer of their patrimony, both through inter vivos acts (such as donations) and by reason of death (such as the will).

These restrictions represent an obstacle to the generational succession of such assets. To this is added the prohibition of preventively renouncing the action of reduction before the opening of the succession.

Especially as regards businesses and company shares, the will often proves inadequate to ensure business continuity for the following reasons:

• It can be revoked at any time by the testator.
• Testamentary provisions only have effect after the death of the testator, making it impossible to monitor whether they are actually respected.
• Even with an executor, control is limited to a maximum of two years.
• If the will does not respect the reserved shares for forced heirs, it can prove ineffective.

Therefore, although the will maintains a central role in inheritance law, many entrepreneurs are inclined to look for alternative instruments to transfer their patrimony.

For example, some recall the “mandato post mortem” and the “contract in favour of a third party”, which are often used atypically to transfer family wealth.

The mandato post mortem is a contract stipulated by the testator while alive, but which is executed by the agent after their death. This allows transferring the assets without having to use a will, as long as the mandate is revocable, that is to say the testator can annul it at any time.

In practice, these instruments allow organising the transfer of assets before death, but ensuring that the effects only manifest themselves after death, offering greater flexibility in succession planning.

Contribution is a method very used to transform an individual family business into a company, especially during the generational transition. Often family businesses start as sole proprietorships, but with time, the growth of the activity makes corporate management necessary.

Through contribution, the individual business can be transferred to a new company, allowing children to become partners and gradually participate in business management, while the parent maintains a predominant decision-making role until the children acquire full autonomy. This process helps to protect business assets from the personal events of family members and allows a safer and more controlled transition.

The contribution can also include the exclusion of certain assets, such as real estate, which can be leased to the new company, ensuring the parent an income as compensation for the work carried out up to that moment.

Furthermore, the contribution is useful to create a family holding. When multiple children take over the management of the business, conflicts and decision-making difficulties can arise. As we will see later, by transforming the operating business into a holding, management is centralised, allowing the company to operate without suffering interferences from family dynamics. If the entire business is contributed, the contributing company becomes a financial holding, which holds the share in the operating company, thus separating family problems from business ones and ensuring more stable continuity in the family business.

The contribution can be an excellent instrument to assign each heir a specific role in the family company. In the context of the generational transition, this allows giving each successor a share based on their abilities and on the contribution they can offer to the business, rather than only on the basis of the capital provided. Furthermore, the possibility of contributing works or services allows compensating successors economically based on the work they perform for the company, making the management of the family business more flexible and better responding to the individual needs of the heirs.

Thus, even those who cannot invest capital, but actively contribute with their work, can obtain an adequate share in the company.

The generational transition in family businesses, especially in Italy, is a common challenge, considering that many companies are small or medium and managed by the family. To address the difficulties linked to this process, the “family pact” was introduced as a useful instrument, which offers various advantages compared to other methods, such as donation.

Unlike donation, the family pact allows immediately excluding certain assets, such as the business or company shares, from future inheritance. This solves the problem of the uncertain valuation of the value of the business at the time of succession, given that the value of a business can change considerably over time. The family pact, in fact, allows establishing clearly who will be the successor of the business and how the other heirs will be liquidated, ensuring greater stability and certainty compared to donation. Although still little used, it is a very powerful instrument to protect the patrimony and ensure the stability of the choices made during life.

One of the reasons for the limited diffusion of the family pact could be the lack of broader regulations and judgments that better regulate it. However, practice has already overcome many of these difficulties, and the notarial profession has recently proposed extending its application also to other assets, such as real estate, in addition to businesses and company shares.