Business Succession and Estate Planning Issues

Business succession is a big issue for many current business owners as they get on in years. It takes time and strategic planning to step back or out of a business so you can make informed decisions and keep control of your assets and wealth.

You need to consider the issues and formulate a plan to protect you and your family. This involves discussing matters that may be a wee bit uncomfortable with your spouse or partner, your business partner/s and your accountant and legal advisor.

When going into business you develop a business plan, that is, a written plan with financial data projections and objectives and the same should apply when you look to exit your business as there are many options.

You could sell the business to your partners, look at divesting the business to your children, a management buyout, sell to a competitor or on the open market or just shut shop and sell the assets.

Getting the right legal and tax advice is critical to ensure the right steps, maximise your return and minimise your tax obligations.

A discussion about business succession will necessarily involve a discussion about estate planning and vice versa. This is often overlooked by advisors.

It does takes time and money, but it does need an overall holistic approach as once the business is sold there will be issues around tax, superannuation, asset protection and estate planning.

It is something many people don’t want to think about, yet we plan for a holiday and often the trigger is an unexpected family event that will force clients to take action to get their “house in order”.

Failing to get the right advice when setting up a business or exiting out of one, can have serious tax consequences and could mean paying a lot more tax than is necessary and you may not maximise the value of your business when you sell or exit after many years of hard work.

This can cover many aspects from:

1) planning for an exit from a business or company;

2) setting the business up to be an attractive target in the future;

3) bringing in equity partners to fund growth; or

4) it could be a management buyout or dealing with an existing financial crisis.

Carrying on a business involves risk and potential personal liability and therefore risk to personal assets.

As part of reviewing a client’s financial and personal situation we need to consider asset protection and setting up a “firewall” to protect personal assets from the business risk.

Directors carry personal liability under personal guarantees given to banks, landlords or suppliers and can also be personally liable for insolvent trading and failure to pay PAYG Tax and superannuation obligations to employees.

The start of the process requires a complete understanding of the clients’ current personal family structure, corporate structure, assets and liabilities as well as family dynamics, all of which can be quite complex these days.

We need to know the “warts and all” family history for example prior marriages, a de facto or cohabiting partner, children from a prior marriage or current relationship, infant children with special needs.

If you die without a Will you die “intestate”, and your estate will go via a fixed order set out in the Administration and Probate Act (Vic) which may not be how you wish to benefit your loved ones.

Without a Will there can be dispute and confusion as to who should apply for administration of the estate. The benefit of making a Will is one of control, you decide who to leave a benefit to and in what proportion and the executors and trustees you appoint must abide by your wishes.

Regardless of gender, domestic partners who have lived continuously for a period of two years or more immediately before the person’s death have standing and rights to contest a Will.

Making a Will limits the risk (it does not completely remove the risk) that your Will may be contested. If for example you do not wish to provide for a child, the reasons should be spelt out in your Will or a supporting statement of intention.

Often a financial advisor will insist you need a testamentary trust, but what is it and do your really need one?

A testamentary trust is an express trust created under a Will and does not come into existence until the testator (person who makes the Will) dies and the property is” settled” in and on the trust. It can include superannuation benefits and life insurance proceeds and can be “fixed” or “discretionary” as to the payment of income or capital established.

Most people have complex financial and personal affairs these days and incorporating a Testamentary trust in your Will sets up a “firewall’ (as with business planning) to help protect the substantial wealth built over a lifetime from being dissipated or being attacked in the hands of your spouse, partner or children.

The reasons to consider a Testamentary trust for a beneficiary may be as follows:

a) a spouse or child has a drug, alcohol or gambling addiction;

b) they have a mental or physical disability;

c) they are simply not good at managing their affairs or have poor judgement;

d) they are easily influenced and vulnerable if they had access to significant wealth;

e) they are married or in a relationship, so any inheritance is open to attack in the Family Court;

f) they are involved in high-risk ventures or activities with risk of being sued by third parties.

A Will comes into effect on death, but a more likely event is that you may be involved in an accident, suffer a stroke or mental health issue that affects your ability to deal with personal domestic or financial affairs.

At the time of making a Will you should ensure you also complete an Enduring Power of Attorney (Medical Treatment) and (Financial). Due to changes to the Victorian legislation, you can now nominate multiple decision makers where someone no longer has capacity and also elect a support person to assist communicating and interpreting medical decisions.

Only one decision maker can act at a given time and if you do not make a formal appointment the Act will automatically assign a family member who is in a “close and continuing “relationship.

You can also have a legally binding Advance Care Directive (ACD), which sets out your specific instructions and values in relation to future medical treatment, which binds your medical attorney and healthcare professionals.

If you have a SMSF you should check your Deed and seek advice at the time you make your Will if you have completed a binding death benefit nomination form (“BDBN”) otherwise the trustee of the Fund (where it is an Industry Fund) has an unfettered discretion to determine to which dependants the death benefit is paid and in what proportions.

A Non-binding standard (“Death Benefit Nomination”) nomination may be suitable where there is one beneficiary, (usually a spouse), who is also a co-trustee as the direction gives guidance to the trustee, but is not binding on the trustee who retains control and discretion as to the distribution.

A Binding Death Benefit Nomination (“BDBN”) allows a member to direct the trustee to who and in what proportion, the benefits are to be paid. Most public offers and Industry Super Funds offer members a BDBN which is binding on the trustee and provides maximum control.

For industry superfunds the BDBN must be renewed every 3 years however for SMSF’s it can be a non-lapsing BDBN. A SMSF will contain a death benefit rule (“DBR”) whereby the member directs the Trustee how to pay their death benefits and in what form, which can provide estate planning certainty by leaving specific benefits to dependents and non-dependents and allow specific assets of the fund to be directed to “specific beneficiaries”, similar to a specific bequest in a Will.

There is a lot to consider and there is no substitute for seeking appropriate specialist advice.

So, what to do first? Don’t procrastinate – and seek legal advice and get your Wills and Powers of Attorney in place.

Your accountant, financial advisor and family will be thrilled to hear you have taken the steps to put these important matters into place.

Contact:

Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist

robert@sanickilawyers.com.au | Mobile: 0412 67 37 57