Business Succession and Estate Planning Issues

I am not as young as I once was, as Groucho Marx said, “I intend to live forever, or die trying”. Business succession is a big issue for many current business owners as they get on in years and look at ways to exit or step back from their business after many years of hard work and building a successful enterprise. It does take thought, and proper planning and advice to step back or out of a business. The options, and process needs to be considered and discussed with your business partners, advisors and family as everyone’s position is unique. Everyone will give you their opinion, but in the end, you do need to make the decision that best suits you. Just as we suggest having a business plan when you go into business and then plan each year for the year ahead, you also need to document a “business exit plan”.

There is a myriad of options such as sale of the business, winding it down and shutting the doors, selling to a competitor, management buyout and also bringing on private equity or public listing. Giving control of your business to your children may not be an option, so just as you would prepare and do your homework when buying your business, you do need to do the same and plan for exit or retirement.
This takes a team which includes your accountant, lawyer, financial and business advisor and tax advisor. Without proper planning you could be paying far more tax than is necessary and you need to know your tax liability for each scenario before you lock in an option.

A discussion about business succession will necessarily include a discussion about estate planning and vice versa. This is often overlooked by advisors. It does take time and money but its money well spent (says the lawyer!) The discussion will cover a myriad of legal issues including company law and shareholder advice, buy/sell agreements, tax issues, super fund issues, asset protection, and estate planning which includes your will and powers of attorney (Medical) and (Financial). Often it takes a negative event in the family or in the business to trigger action but then it can be after the event so it is better to plan ahead and get the “house in order”.

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;
4. resolving existing issues in the business and putting in place a strategic plan;
5. looking at ways to grow the business through franchise or licensing;
6. resolving investor and minority shareholder issues.
7. 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 any review of a client’s affairs we need to consider asset protection and setting up a “firewall” to protect personal assets from the business risk as much as possible. Directors carry personal liability under personal guarantees to banks, landlords or suppliers. Directors can also be personally liable for insolvent trading, failure to pay PAYG, and tax and superannuation obligations to employees. 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 the ATO a lot more tax than you need to.
It also means you may not maximise the value of your business when you sell or exit after many years of hard work.

The start of the process requires a complete understanding of the client’s current personal family structure, corporate structure, assets and liabilities as well as family dynamics, all of which can be quite complex these days. Once we understand the business structure, we then look at the personal aspects. 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, in a fixed order, as set out in the Administration and Probate Act 1958 and the order of distribution to your spouse and children which may not be how you wish to benefit your loved ones. Without a will there can be disputes 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. Inheritance rights also apply to domestic relationships, regardless of gender, where they are registered as domestic partners or have lived domestically and continuously for a period of two years immediately before the person’s death. Making a will also limits the risk (it does not completely remove the risk) that your will may be contested. If you elect not to benefit, for example one of your children as much as the others, the reasons should be spelt out in your will or a supporting statement of intention. Most people who own a home and have some super fund savings have built a reasonable amount of wealth so there is a considerable assets and value to deal with. Using a newsagent’s proforma will kit, is asking for trouble and likely to end up causing grief.

Often a financial advisor will insist you need a testamentary trust, but what is it and do you really need one? A testamentary trust is an express trust created under a will and does not come into existence until the testator (the person who makes the will) dies. The property is then “settled” in and on the trust which sets out the beneficiaries. It can include superannuation benefits and life insurance proceeds and can be “fixed” or “discretionary” as to the payment of income or capital.

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 following are circumstances where you may consider establishing a Testamentary trust in your will:
i) you have a spouse or child with a drug, alcohol or gambling addiction;
ii) or they have a mental or physical disability;
iii) they are simply not good at managing their affairs or have poor judgement;
iv) they are easily influenced and vulnerable if they had access to significant wealth;
v) they are in a volatile relationship or marriage and if they inherit substantial wealth those assets are open to attack under Family law proceedings;
vi) your spouse or children are involved in high-risk business ventures or activities with risk of litigation from third parties or creditors.

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 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 in 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. These powers of Attorney must be made when you have capacity not after an event such as illness or accident or dementia sets in. 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 at the time you make your will check if you have completed a binding death benefit nomination form (“BDBN”) – otherwise the trustee of the Fund (if 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”) is fine if you have only one beneficiary, (usually a spouse), who is also a co-trustee as the nomination guides the trustee but is not binding on the trustee, who retains control and discretion of distribution. A Binding Death Benefit Nomination (“BDBN”) is a specific direction to the trustee to who and in what proportion, the benefits are to be paid. The Trustee must follow that direction, they have no discretion. Most 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 SMSFs it can be a non-lapsing BDBN. A SMSF will, may contain a death benefit rule (“DBR”) whereby the member directs the Trustee how to pay their death benefits and in what form. This 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 specialist advice from your financial advisor, accountant and lawyer. They will be thrilled to hear you have taken the step to put these important matters in place. So, start the process, don’t procrastinate and do some business exit planning and ensure you get your estate planning in order at the same time.

Robert Toth / Special Counsel / Sanicki Lawyers
Accredited Commercial Law Specialist
robert@sanickilawyers.com.au
Mobile: 0412 673 757