The 10 % rule
An entrepreneur dies intestate, without a will. His family-owned company forms a major part of the estate. His heirs argue over the use or the allocation of the family business. Shall the company be sold at market price or shall one co-heir take it over and run it?
Challenges
Someone must manage an undivided company after the death of the entrepreneur. Should several heirs inherit the estate, they form a community of heirs. Co-heirs as joint owners of the property must act together. They decide unanimously. This may be an obstacle if there is no comment consent.
Heirs must divide the estate among themselves. The heirs can freely agree on the division. They have equal rights to estate property. Anyone can take over the company. Ideally, the heirs come to an agreement.
According to the prevailing doctrine, a company is a legal entity, a special object. The law states that things that belong together cannot be separated from one another if an heir objects to such separation.
If there is some dissent on the issue, an heir my file an action, asking for a court-ordered division of the estate. The judge divides the estate into equal parts. He forms as many lots of the estate as there are heirs. These lots are distributed among the heirs either as agreed or by drawing lots.
Sometimes it is impossible to divide the estate into equal parts. The 10 % rule applies to avoid excessive compensation payments. Thus, the lots may not differ more than 10 % in value from an heir’s statutory share of the estate.
The 10 % rule and the judges’ lack of allocation authority are legal hurdles on the path toward company succession. According to federal court case law (cf. decision of the Federal Supreme Court of Switzerland 143 III 425), the judge has no authority to assign any object in the inheritance if the heirs do not agree.
The family business is often the main asset. If the heirs disagree about division or allocation, the company must be liquidated or sold and the proceeds divided.
Planning options
Will or contract of succession
An entrepreneur or testator may determine his successor. He may make a revocable will or conclude an inheritance contract with all the heirs involved. You may allocate your family business to a successor in accordance with a division provision. In that case the 10 % rule is not appliable. However, compensation payments may be due.
An entrepreneur may expressly regulate that he wants to privilege the successor and treat the heirs unequally. He allocates the available quota respectively the disposable part of the estate to the successor, respecting forced heirship rules.
Legacy or advance bequest
A legacy or advance bequest allows for the extraction of the business from the hereditary mass. Thus, the successor receives the company directly.
Bottom line
Assign your business to one person as heir or legatee, so that the 10%-rule does not apply.