STEP Journal: Mifsud Parker on Protecting Family Business Legacies

In “How to protect a legacy”, Mifsud Parker starts from a difficult reality confronting many family enterprises: founders commonly hope that the business they have created will remain within the family, yet intergenerational transition is one of the points at which family businesses are most vulnerable.

The article referred to estimates that a substantial proportion of family businesses do not survive into the second generation and that an even smaller proportion reach the third. Rather than treating those statistics as an argument for increasingly complex legal structures, however, the article focused on succession planning as a process involving people as much as assets.

That distinction is central to the article.

Business succession planning involves determining who will formally own the business, but it must also address management responsibility, operational authority, voting and delegation powers, investment policy and the expectations of different family members. Those questions frequently carry an emotional dimension because professional roles sit alongside parent-child, sibling and wider family relationships.

Mifsud Parker therefore emphasised the importance of bringing stakeholders into the process early. A senior generation may assume that children intend to continue running the business. Some children may instead have different professional ambitions. Others may wish to remain owners without participating operationally. Family members who appear reluctant to express expectations during initial discussions may later object strongly if the eventual plan does not reflect their interests.

The purpose of succession planning should therefore not be to frame the transition as one generation against another, but to establish what each stakeholder expects from their future relationship with the business.

The article also anticipated a strategic issue that has become increasingly significant for family offices and entrepreneurial families: differences in investment philosophy between generations.

Younger family members may place greater emphasis on sustainable or impact investment, technological disruption and emerging business models, while the senior generation may favour established investment strategies and preservation of the family's existing capital base. Those approaches need not be irreconcilable. Governance mechanisms, investment policies and predetermined assessment criteria can help families evaluate new investment opportunities without having to renegotiate fundamental principles each time capital is deployed.

The article consequently makes an important point about succession advice itself. The next generation must also develop confidence in the family’s advisers. Continuity of advisory relationships cannot simply be assumed. Advisers who wish to remain relevant across generations must demonstrate that younger stakeholders are being heard rather than treating them as future beneficiaries of decisions made exclusively by the current generation.

“Giving a voice to the next generation about the strategies and vehicles to be used is essential for this process to be a success.”

Dr Priscilla Mifsud Parker, Senior Partner, originally published in STEP Journal

That proposition is arguably the article’s strongest enduring insight. Structures protect assets most effectively when the people who will ultimately live with those structures understand and participate in their design.

Original Article in STEP Journal: How to protect a legacy

Published in the October 2019 edition of STEP Journal, the article considers family-business succession, next-generation participation, investment strategy and the role of trusts, foundations and private trust companies in preserving family wealth.

Read the original article: How to Protect Legacy

The article identifies a progression that remains useful when approaching family-business succession today: first understand the family, then define the governance, and only then select the appropriate legal structures.

A trust, foundation or company cannot resolve an underlying disagreement about who should manage the family business, whether it should remain within the family or how investment capital should be deployed. What such structures can do is translate an agreed governance strategy into legally enforceable ownership and decision-making arrangements.

Preventing fragmentation of ownership

One of the principal risks during generational transition is fragmentation.

Where shares in a family company pass directly to several heirs, successive generations can create increasingly dispersed ownership. Different family branches may then have competing commercial, liquidity or strategic objectives.

A trust can address this by allowing legal ownership of the family-business shares to remain concentrated in the trustee rather than dividing the shares themselves among beneficiaries. Beneficiaries may receive economic benefits without each becoming a direct registered shareholder of the operating company.

A foundation can perform a related long-term holding and governance function where its characteristics are better suited to the family's objectives.

The appropriate choice depends on the family's circumstances, jurisdictional connections, governance objectives and applicable tax and succession rules.

Trust deeds as governance instruments

The original article correctly highlights that the trust deed itself can perform a governance function.

It can define trustee powers, beneficiaries' rights and any reserved powers or governance mechanisms built into the structure. Where a trust owns a family business, however, the trust deed should not be considered in isolation from corporate governance.

The family may also need to address:

• appointment and removal of company directors;
• voting policy on major corporate decisions;
• employment of family members;
• dividend and distribution policy;
• sale or retention of the operating business;
• borrowing and reinvestment;
• acquisition strategy;
• conflicts between active and passive family shareholders; and
• the process through which future generations participate in decision-making.

A family constitution may complement formal legal documents by recording the principles against which those decisions are expected to be made.

Private trust companies and next-generation participation

Mifsud Parker also considered private trust companies as a means of creating greater family involvement within the trustee structure.

Under Malta's current framework, a company acting as trustee of qualifying family trusts falls within the specific regime for Trustees of Family Trusts under Article 43B of the Trusts and Trustees Act and is subject to registration with the Malta Financial Services Authority rather than the ordinary authorisation framework applying to professional trustees. The MFSA maintains dedicated rules and regulatory requirements for such trustees.

For a suitable family, the structure can allow selected family members and professional advisers to participate at board level while maintaining a formal fiduciary framework.

This can serve an additional succession purpose: younger family members can gain practical exposure to governance, investment oversight and fiduciary decision-making before responsibility passes fully to their generation.

A private trust company should therefore not be viewed simply as a mechanism for retaining family control. Its board composition, governance arrangements, independence, regulatory obligations and decision-making processes all require careful design.

Planning where no trust is used

The article also makes the useful point that families do not necessarily need a trust or foundation in every case.

Where ownership remains directly within a corporate structure, shareholder agreements, pre-emption rights and restrictions on transfers can help prevent shares leaving the family unexpectedly.

The correct structure is therefore not determined by choosing the most sophisticated vehicle available. It follows from the family's underlying objectives for ownership, control, participation, liquidity and succession.

Malta was among the first jurisdictions to implement a dual legislative architecture for blockchain and digital assets:

• The Virtual Financial Assets Act defines VFAs, establishes a classification regime and requires MFSA licensing for custody, portfolio management, exchange and advisory services.
• The Innovative Technology Arrangements and Services Act allows MDIA certification of distributed ledger systems and smart contract protocols, providing assurance as to reliability, governance and auditability.

These measures provide trustees with statutory certainty when administering cryptocurrencies and tokenised positions. Complementary income tax and VAT guidance from the Malta Tax and Customs Administration reduces ambiguity in reporting and recognising gains.

The Society of Trust and Estate Practitioners – STEP brings together professionals advising families on trusts, estates, succession, family businesses, family governance and private wealth.

Chetcuti Cauchi lawyers have contributed to STEP Malta over many years through branch leadership, technical committees, conferences and professional writing.

Dr Priscilla Mifsud Parker has held senior roles within STEP Malta, including service as Chairperson, and her professional work has consistently focused on trusts, estate planning, family-business structuring, private wealth and family offices. Her contribution to STEP Journal on protecting family-business legacies therefore reflects the intersection of her professional practice with STEP's broader focus on advising families across generations.

The firm's STEP contributions have also examined issues including the development of Malta's Family Business Act and, more recently, Malta's single-family-office framework. Together, these publications trace an evolution in private-client practice from the transfer of a family business, through governance of family wealth, to the modern family office as a platform coordinating ownership, succession, investments and family decision-making.

Dr Priscilla Mifsud Parker, Senior Partner – Tax, Family Office, Immigration, is a private client lawyer specialising in wealth structuring and preservation for business families and HNW individuals, with particular experience in trusts, succession planning and family-office structures. She has served as Chairperson of STEP Malta and contributes to professional discussion on fiduciary governance, family businesses and intergenerational wealth. Her work increasingly focuses on the legal architecture through which internationally active families coordinate family businesses, investment structures and succession across generations.

Our Families & Wealth lawyers advise business-owning families and family offices on the interaction between business succession, family governance and long-term wealth structuring.

Succession planning may involve much more than drafting a will or transferring company shares. Depending on the family, its assets and its jurisdictions of connection, the work may include:

• mapping existing family and corporate ownership;
• identifying the objectives of senior and next-generation stakeholders;
• planning management and ownership succession separately where appropriate;
• reviewing shareholder and voting arrangements;
• developing family constitutions and governance frameworks;
• establishing or reviewing trusts and foundations;
• designing Private Trust Company structures;
• aligning family-office governance with succession objectives;
• coordinating estate, tax and residence planning across jurisdictions; and
• reviewing existing structures as the family and its priorities evolve.

For internationally active families, succession planning should also be coordinated with advisers in every jurisdiction materially connected with family members, businesses and assets.

The objective is not merely to preserve ownership of a family business. It is to create a framework within which ownership, responsibility, investment strategy and family participation can move from one generation to the next without unnecessary fragmentation or conflict.

[question]How can a family business be protected when ownership passes to the next generation?[/question]

[answer]Effective succession planning should coordinate ownership, management, governance and the expectations of family members. Trusts, foundations, shareholder arrangements and family governance mechanisms may help maintain continuity and reduce fragmentation depending on the family’s circumstances.[/answer]

[question]Why should the next generation be involved in family business succession planning?[/question]

[answer]Future owners may have different professional ambitions, investment priorities and expectations from the senior generation. Early involvement allows those differences to be identified and incorporated into governance arrangements before ownership or leadership changes take place.[/answer]

[question]Can a trust prevent family business shares from being divided between heirs?[/question]

[answer]A trust can allow shares to remain legally owned by trustees for the benefit of family members rather than being divided directly among individual heirs. Whether this is suitable depends on succession, tax, governance and cross-border considerations.[/answer]

[question]What is a Private Trust Company in family succession planning?[/question]

[answer]A Private Trust Company is a company established to act as trustee for family trusts within the applicable regulatory framework. It can allow greater family involvement in trust governance while preserving fiduciary oversight and continuity across generations.[/answer]

[question]What role does a family constitution play in succession planning?[/question]

[answer]A family constitution can record agreed principles on governance, ownership, family participation, investment and decision-making. It complements legally binding documents by creating a common framework through which different generations understand how the family intends its business and wealth to be managed.[/answer]

[question]When should a family business begin succession planning?[/question]

[answer]Succession planning is generally most effective when started well before a transfer is expected. A longer planning period allows the family to prepare future leaders, address differing expectations, refine governance and implement legal structures gradually rather than during a crisis.[/answer]