Estate planning is the process by which a person makes a ‘road map’ on what should happen to their assets once they die or become incapacitated. Once you die, these wishes are generally expressed in a valid will, but estate planning also encompasses things such as how your superannuation and your debts are dealt with once you pass.
One important aspect of estate planning is addressing what happens with your business, whether you are a small operator who wholly owns his or her own business, a co-owner in a partnership, a director or shareholder in a company or a trustee, appointor or unitholder in a trust.
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 assets and make sure that those who stand to gain from the value of your business, such as close family members, are the beneficiaries.
It’s advisable to consider both business succession planning and how the enterprise will be included in your estate as soon as you open the doors. The future is, after all, uncertain. But even if you’ve owned or part-owned a business for many years, it’s a wise course of action to discuss with an expert legal professional as soon as possible how you should approach an estate plan that deals with your business assets and interests. In doing so you can ensure the value of the business is maintained and avoid potential conflicts among successors about what to do with it after your death.
What are the key things to consider?
Sole traders: If you are a sole trader who 100% owns your business, estate planning is a relatively simple exercise in which you can pass the assets and value of the business on to your chosen beneficiaries through your will.
As an unincorporated sole trader, however, your personal liability for any debts of the business is unlimited and this fact needs to be addressed in an estate plan. There are also limited tax benefits in that a sole trader is taxed on their income from the business at their marginal tax rate.
In some situations – where a sole trader has a specialist skill or his or her successors have no interest in running the particular business after the owner’s death – the estate plan may address how the business should be sold. It’s important to note that a capital gain from such a sale can’t be split between family members, and a capital loss will impact the personal assets of those beneficiaries.
Partnerships: 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. This agreement is sometimes called a ‘buy-sell’ agreement and may facilitate the other partners buying the share of the deceased partner rather than end up working with a new partner who is unfamiliar with the business. The proceeds of the sale can then be distributed to the deceased partner’s beneficiaries via his or her will. Alternatively, the agreement may simply pass on the deceased partner’s share of the business to his or her successors. In the absence of the agreement, then the Partnership Act of the relevant state or territory will apply.
Companies and trusts: If your business is run via a company structure, it will be important to have a shareholders’ agreement to determine what happens to the ownership of the company in the event of your death. 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 are owned by the company). A shareholders’ agreement, however, will also deal with the situation where your fellow directors or shareholders wish to buy your share, 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 is passed following the trust deed. Many family businesses are run through a discretionary family trust, a structure that offers both tax advantages and asset protection in the event of a beneficiary becoming – for example – bankrupt or experiencing other pressing cash flow problems.
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. This offers the business owner a layer of protection in that the trustee will determine how beneficiaries receive any value from the business following the trust deed.
Many business owners will also use a trust structure because if they passed on business assets through their will, they may become the subject of a family provision claim from someone who claims they should have been more adequately provided for in the deceased owner’s will. This claim is considerably more difficult to pursue if the business assets are held in a family trust structure.
Dividing assets between family members
There are a couple of other important reasons for early consideration of what will become of your business, both now and after your death.
By considering transferring ownership of the business to a successor before you die, apart from peace of mind about the future of the business, you may be able to take advantage of capital gains tax concessions that otherwise may not be available.
A compelling reason for dealing with the business in an estate plan is in the situation where one or more children of the owner work in the business, and another one or more children of the owner have no interest or involvement at all. Where the business remains a viable one after the owner’s death, the child or children involved in the business may be presented with an onerous burden of raising funds to buy out a sibling’s share of the business left to them in the owner’s will. A well-drafted estate plan can mitigate some of these circumstances by ensuring other assets of the same value as the interest of the non-interested sibling/s are passed on to them, such as a life insurance policy, for example.
In conclusion
Estate planning advice for business owners can become quite complicated, particularly where there are multiple beneficiaries and/or the involvement of blended or second families. It’s important to consult with experienced legal practitioners such as Big Law, as well as expert accountants and financial advisers, to make the right decisions.
Each business is different, particularly family-owned businesses, and the estate planning solution needs to be customised to reflect this fact. At Big Law, we have more than a quarter of a century’s experience advising business owners on the best way to plan for successors and future generations. Call us today for an initial discussion with our friendly team on (07) 3482 6999 or [email protected].
