Business Succession and Estate Planning – 5 things business owners need to think about…
“… in this world nothing can be said to be certain, except death and taxes.”
Benjamin Franklin, 1789.
1. A structured succession plan:
Your business legacy is important, and preparing for the future does not have to be overly complicated (or morbid).
But it is crucial to implement a succession plan now if you would like your business to carry on following your retirement or death. Current research carried out by Family Businesses Australia and KPMG suggest that 65% of family businesses don’t survive into the second generation, and around 20% fail when the business passes to the third generation.
A structured succession plan not only allows for survival of your business, it can encourage expansion, promote prosperity and preserve the working relationships for those left to run the business (especially important in family businesses).
2. Your current business structure – taxation and asset protection:
Sole-trader and partnership structures are common in family businesses and small businesses, however are not always ideal when considering succession.
Unfavourable aspects of these structures:
- Difficulty in transferral of businesses to successors;
- Unlimited liability of owners (which could destabilise/end the business); and
- Limited benefits in terms of income and tax planning – owners will be taxed at their marginal tax rate.
Family discretionary trusts are often used to mitigate the above difficulties in estate planning. A family discretionary trust allows the trustee to hold assets (i.e. the business and business-owned assets) on behalf of the beneficiaries. Benefits of these structures include:
- Tax benefits – trusts are able to obtain 50% capital gains tax discount for assets held for at least 12 months;
- Tax losses can be brought forward in the trust to offset income in future years;
- Asset protection (assets are not personally owned so not easily available to creditors);
- Assets are considered non-estate assets and therefore not disposed of in a Will;
- You hold discretion on how the business and assets in the family trust is transferred – and you may particularise via legal contract, or a memorandum of wishes and reasons;
- You may still be alive when the business and assets are distributed; and
- Family trust structures are more difficult to access if the unfortunate occurs and there is a challenge to your Will after your death.
Structuring your business as a company also offers ease in succession as the structure assists with asset protection and income planning:
- Assets are owned by the company – not you – so they are not governed by a Will; and
- You are able to leave shares in the company that owns the asset/s to beneficiaries in your Will.
However if you own the business personally, then succession does need to be addressed in the Will (i.e. to whom you leave your company to) and is therefore a little more vulnerable to possible challenge/family provision claim.
3. Buy/sell agreements and insurance:
If you set up buy/sell agreements for your business these will take precedence over a Will because the business will be transferred according to your wishes, pursuant to contract.
Buy/sell agreements are useful because:
- They allow surviving business partners to buy the other out in case of death or incapacity;
- They can be linked to insurance – one business partner may hold an insurance policy on the other business partners’ life, providing the money to buy out the other partner; or both business partners have own life insurance policies as part of their share/payment into the business and the insurance premiums can be paid from the business.
4. Assign roles and responsibilities:
- If you can plan for a smooth transition and transfer of business ownership, it will support business solvency and continued operations, and avoid potential family conflict and estate challenges.
- Pay attention to the unique characteristics of your business, and who would be best placed to take over the ownership or running of the business. Leaving management with a person not competent is likely to result in the sale of your business.
- If it is a family business, some family members may be unable or unwilling to take on the business, and some family members may have more invested in the business, either personally or financially – take these things into account.
- Consider if an exit plan and potential sale of the business is a better option in your circumstances – this may be both for you (financially), but also for those inheriting the business or the business value.
5. The transition of your wealth during your lifetime:
You will need to carefully consider the value of your business, the value of your estate, and how much each business owner will need from the business in order to fund retirement.
A proper wealth extraction strategy is necessary to balance the interests of your self (as a business owner), other exiting business owners, other family members, and continuing operators of the business, all without putting the succession of the business at risk.
If you would like a little help coming up with the right succession plan or structure for you and your business, please give Sinclair + May a call. We would be happy to advise; and help you invest in the future of your business.
This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation.
Published Aug 5, 2018
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