Attwood Marshall Lawyers Wills and Estates Lawyer, Xara Coassin, joins Robyn Hyland on Law Talks on Radio 4CRB to discuss the importance of business succession planning for sole traders, companies, and partnerships.
One important aspect of estate planning is addressing what happens with your business, whether you are a small operator who wholly owns a business, a co-owner in a partnership, a director or shareholder in a company or a trustee, appointor, or unitholder in a unit trust. Business succession planning is just as important as having a Will. If you have worked hard to build up your business assets, it may all be lost unless you have a succession plan in place.
Many of our clients do not understand what assets are owned by their business entity, companies or trusts. Clients sometimes mistakenly think that they personally own properties, cars, machinery, and other assets which are in fact owned by a company they are the director or shareholder of or a family trust that they control.
They wrongly believe they can use their Will to transfer these assets to their loved ones when they die. This misunderstanding can have dire consequences when these assets are in fact held by companies and trusts controlled by business partners, and the deceased’s family members are dismayed to find that they have little or no control over these assets.
The structure of the business you run affects how it should be dealt with in an estate plan. A sole trader’s business is different to a limited liability company, but the principle is the same, and that is to protect your business and make sure that those who stand to gain from the value of your business, such as close family members, are the beneficiaries.
A sole trader is an individual running a business. It is the simplest and cheapest business structure. If you operate your business as a sole trader, you are the only owner and you control and manage the business in your personal capacity. You are legally responsible for all aspects of the business and are personally liable for debts and losses.
If you are a sole trader who 100% owns their business, estate planning is a relatively simple exercise because you can pass the assets and value of the business on to your chosen beneficiaries in your Will. This is because your business is owned by you in your personal capacity.
In situations where a sole trader’s successors have no interest in running the business after the owner’s death – the estate plan should address how the business is to be sold or wound up.
A partnership is a group or association of people who carry on a business and distribute income or losses between themselves. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.
A partnership is relatively inexpensive to set up and operate.
In partnership structures, it’s advisable to have a legally enforceable partnership agreement in place that sets out the equity in the business of each partner and what should happen in the event of one partner’s death or incapacity. This agreement can incorporate what is called a ‘buy-sell’ agreement and facilitates the other partners buying the share of the deceased (or incapacitated) partner (usually through insurance proceeds) rather than end up working with a new partner who is unfamiliar with the business or who has different intentions for the business.
Depending on the terms of the partnership agreement, the proceeds of the sale (life insurance) can then be distributed to the deceased partner’s beneficiaries. Alternatively, the agreement may simply pass on the deceased partner’s share of the business to his or her successors. In the absence of this agreement, then the Partnership Act of the relevant state or territory will apply.
Company Structure or Trust
A company is a type of business structure that is a separate legal entity from its owners.
It’s a complex business structure, with higher set-up and administrative costs because of extra reporting requirements and higher-level legal obligations.
As a separate legal entity from its owners, a company can sue and be sued and incur debts. The company’s owners (the shareholders) can limit their personal liability and are generally not liable for company debts.
If your business is run via a company structure, it will be important to have a shareholders’ agreement in place to determine what happens to the ownership of the company in the event of your death or incapacity. As a director with shares in the company, you can pass these shares to your beneficiaries through your Will (but not the assets of the business, such as a property, which is owned by the company).
A shareholders’ agreement, however, should also include a buy / sell agreement to deal with the situation where your fellow directors or shareholders wish to buy your share (again this is usually set up with an insurance policy covering both death and Total Permanent Disability), as well as how voting rights and the right to receive dividends and capital work in terms of succession.
If you own your shares via a family trust, control of the shares in the company is passed following the mechanisms in place in the Trust Deed (which is why it is imperative that the Trust Deed be reviewed by an estate planning lawyer). Shares usually have voting rights that can remove and appoint the Company Directors. So, it’s important to consider who will gain control of the family trust.
Business assets held in a family discretionary trust are considered non-estate assets and so, cannot be disposed of via a business owner’s Will. Instead, control of the trust is passed on either via the Will or by a Trust Deed – depending on the terms of the Trust deed itself.
Another important issue to consider is if you are a director of a company and lose capacity, if you do not have a Company Enduring Power of Attorney in place, your business will be interrupted until a replacement can be put in place. This is especially important if you are the sole director – it can take up to a few months to appoint a replacement director depending on the circumstance. A Company Enduring Power of Attorney can remove this lag time and ensure your Company can continue operating without any interruptions.
Plan for your business succession
People are often surprised about the extra issues they did not realise they had to consider to successfully plan for succession when owning a business. It is often only when we are having those initial conversations with our clients about their family dynamics, the assets they own and how they own them, including businesses, and their estate planning objectives that we uncover the need for certain tools and strategies to be put in place to ensure that their wishes can be fulfilled if the unexpected does happen.
We recommend that you review any Trust deeds and your company documents to identify any potential succession planning issues early – and put in place the documentation required to ensure a smooth transition to your intended beneficiaries and that your business is not interrupted.
Many people get overwhelmed when thinking about doing their estate plan. We often hear our clients say how surprised they were by the process and how much simpler it was than what they were expecting. Even if you have the most complex assets and business structure, when you get advice from an experienced estate planning lawyer, they can help you identify the best strategies to put in place without overcomplicating the matter.
Attwood Marshall Lawyers – helping you plan for the future and protect your business
We have a dedicated team who practice exclusively in estate planning. When you handle matters like this day in and day out you very easily can identify the best tools to use to achieve the client’s goals. As estate planning lawyers we want to help our clients maximise the legacy they are leaving to their loved ones.
It is often the case that many people underestimate how much wealth they hold in superannuation, life insurance policies, and other non-estate assets, and not everyone understands that these assets simply cannot be dealt with just by writing a Will.
If you own a business, have an SMSF, or want to setup a family trust, it is important to work with a seasoned lawyer that specialises in Wills and estate planning. An estate planning lawyer can give you that extra peace of mind that all your ducks are in a row and everything has been considered properly.
To discuss our estate planning services or book an appointment, contact our Wills and Estates Department Manager, Donna Tolley, on direct line 07 5506 8241, email firstname.lastname@example.org or free call 1800 621 071 at any time.
Keeping your hard-won assets in the family – family trusts and ensuring assets transfer to the next generation
‘Tis the season to ensure your most basic legal requirements are in order – there is still time to get your Will and EPOA done before Christmas!