The typical components of an estate plan might include a will, an enduring power of attorney, and an appointment of enduring guardian, however for business owners, business succession planning is also a critical and often overlooked part of the estate plan.
For business owners, it’s incredibly important to consider what will happen to your business when you die. Would your business actually be able to continue on if you died? Could it be sold? Will your family continue to run your family business? This will differ depending on the size of the business and number of employees, as well as the structure of the business, but it can also largely depend on whether you have taken the time to prepare an estate plan that covers business succession planning.
What is business succession planning?
Succession planning for a business will typically include things such as:
Understanding the needs of the business, including whether it is a saleable asset and how control might be passed to another person on death
Understanding any restrictions on the transfer of business ownership
Understanding the structure in which the business is owned, and preparing an estate plan that takes into consideration the needs for passing of control based on the unique circumstances of your business structure.
Succession planning for sole traders
As a sole trader, your business may not be able to run without you, however it still may have value if it were to be sold, and as a result it warrants consideration in your estate plan. In circumstances such as these, the speed at which your estate is able to access your business records and list the business for sale may be crucial in ensuring that there is no loss of goodwill, or that your business doesn’t crumble into nothing while you wait for the court to make a grant of probate.
Company succession planning
If you have a trading company, depending on how you own the shares in the company, you may not be able to gift your business in your will. Many business structures such as companies or trusts are considered separate legal entities and can have their own governing documents that determine what happens in case of a death. A careful analysis of your structure and its associated documents is required to determine whether or not those structures will form part of your estate asset pool.
In the context of corporate succession planning, it is important to consider whether there are additional directors who will have the authority to run the company in your absence. Documents such as company power of attorneys can be prepared to delegate authority in times when directors may have passed away or lost capacity.
Shareholder agreements also need to be carefully considered, as these documents may have provisions within them preventing or restricting the transfer of the business shares or assets to third parties. This means that your family may not be able to inherit your shares in your business. Shareholder agreements may also include specific buy out procedures, valuation mechanisms, or other directions regarding control and the transfer of the business. Where there are multiple shareholders in a corporation, and one of them passes away, the others may have trouble being able to carry on the day to day business, or may have issues if a family member takes control of the deceased person’s shares.
Succession planning for trusts
Unit trusts and discretionary trusts are also common structures for businesses. These entities and the passing of control is governed by the trust deed. The terms in trust deeds vary wildly depending on their purpose and who prepared them. Often the deeds will have conditions around the change of a trustee, or the change of an appointor, which will need to be reviewed in light of your business succession plan and your estate plan as a whole.
Insurance
Insurance is another key consideration in the business succession plan. Certain insurers offer buy/sell or key person insurance policies to enable partners to use the proceeds of the insurance policy to buy out the shares of a deceased business partner, avoiding the need to sell the whole of the business where a single partner dies.
Why succession planning matters in estate planning
For many business owners, their business might make up a large portion of their net worth. Without a clearly defined succession plan, a business may face uncertainty, legal disputes, or even collapse.
The benefits of putting together a business succession plan as part of the estate planning process include:
Ensuring continuity of the business, or if preferred, planning for the sale of the business or its assets
Passing control of the business to the person of your choosing
Clearly setting out your intentions
Reducing the risk of disputes
Maximising tax effectiveness
When you should prepare a business succession plan
It’s important to prepare a business succession plan as early as possible. By getting the structure correct from the outset, and understanding what will happen to the business if you pass away, you give yourself peace of mind and certainty. We often find that once clients have gone through the exercise, they understand their own business structures on a much deeper level, and it empowers them to make informed decisions when setting up new entities or entering into new business ventures.
Speak to an experienced estate planning lawyer
At Thornton + King, our specialist estate planning team have decades of experience dealing with complex business succession planning and estate planning for high net worth individuals. We regularly review business structures including company documentation and trust deeds, in order to ensure that our clients’ business succession planning objectives are met. We are also able to liaise directly with your accountant or financial planner to ensure that the process is as smooth as possible for you. To learn more, give us a call or submit an enquiry now.
