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When starting a business, many business owners don’t think about what will happen to their business and their assets once they die or lose capacity. Businesses of all sizes should be thinking about their succession plan in order to protect the future of their business and what may arise when they are not around or become incapable to act.

Buy-Sell Agreements

A Buy-Sell Agreement is a legally binding agreement between business partners or co-owners that outlines what will happen to and within the business when the owner dies or can no longer run the business due to loss of capacity.

Buy-Sell Agreements can determine:

  • Who can buy your share of the business when you can longer run it;
  • Under what circumstances your share of the business can be sold; and
  • What price will be paid for your share.

As a business owner, if you don’t have a buy-sell agreement in place then it can put your business and your business partners/co-owners at risk. Your business partner(s) may be happy running a business with you but upon your death, if your spouse or family member become involved on your behalf, this can create unwanted issues.

The sale in the event of death or lack of capacity is often tied to an insurance policy to help fund the transfer of the business interest.

That’s why it’s important to have a buy-sell agreement in place, with an executed plan ready to go so that the people involved know what will happen when the worst occurs. This will provide security for the future of your business, your business partner(s) and your family.

Family Trusts (also known as discretionary trusts)

Many people have a business owned either totally or in part by a Family Trust, therefore it is important to have a plan in place as to who will take control of the trust when you pass away. In order to make sure your Family Trust is drafted correctly, your family Trust Deed must be reviewed. You need to ensure that you have someone to take over if the trustee can no longer act and you want to be sure to choose someone you trust.

If you die, the assets owned by your Family Trust cannot be distributed by your Will.

From a succession point of view, the following things should be looked at:

  • The future of the trust;
  • Who can make decisions regarding the trust;
  • Who will benefit from the trust;
  • How do the beneficiaries benefit from the trust;
  • Can an attorney acting under an enduring power of attorney act for the trustee or appointor upon loss of capacity; and
  • What happens to the trust when you pass away.

It is important that your trust deed covers these matters to help your family deal with the trust in the future.

When making your Will, you will need to consider who you want to get your trust assets and get advice from a specialist estate planning lawyer to ensure your trust deed and Will achieve your desired purpose.

Testamentary Trust Wills (TT Will)

Another document that can help protect your hard-earned assets is a TT Will. Testamentary Trust Wills have a variety of benefits, the most common being that it can protect your assets and can have tax reducing benefits.

Asset Protection:

The trustee of a TT Will holds the title to the assets of the trust for the benefit of the beneficiaries.

Under a TT Will, the trustee owns the assets within the trust, not the beneficiary themselves (as opposed to in a standard Will where the beneficiary owns any assets gifted to them). Because of this, a TT Will provides greater asset protection from any potential creditors of a beneficiary.

If creditors are after any beneficiaries listed in your Will, the assets held within the TT Will are protected as they are owned by the Trustee and not the beneficiaries, therefore any potential creditors cannot easily recover any monies owing from a beneficiary. Similarly, if your spouse was to re-marry or if one of your children went through a divorce and property settlement, the inheritance from a TT Will is protected and cannot as easily be accessed in a Family Court dispute.

Tax Benefits

The income generated within your estate under a TT Will is distributed amongst the beneficiaries each year by your Trustee. When income is distributed to beneficiaries of a Trust, it can be split between beneficiaries in the most tax effective way, taking advantage of the parties different tax-paying thresholds.

Overall with a bit of planning, the beneficiaries can together pay less tax!

Self-managed superannuation funds (SMSF)

Many people do not realise that their SMSF does not form part of their Willed estate and that you cannot put clauses in your Will to distribute assets held within a SMSF. If you hold assets inside a SMSF, it’s important to ensure that you have a valid binding death benefit nomination in place within the fund to direct the trustee where your assets should be paid.

When you pass away, you automatically cease to be a trustee of the SMSF. That’s why from a succession perspective it is important that your SMSF is correctly constituted so that there is someone to take over when the time comes. An executor of your Will does not automatically get appointed as trustee of your SMSF unless it is specified in the deed of the fund.

It is important to have a death benefit nomination in place as this controls the process for your trustee when you pass away as it tells them where to pay your balance in your SMSF and any entitlements that are attached to it. If this is not planned for then the decision lies on the trustee as to what to do with the entitlements.

Once you create a succession plan, it’s important to regularly review your plan, specifically when circumstances change. Lynn & Brown Lawyers have an estate planning team with commercial experience who can help you with your business succession planning.

About the Author: This article has been co-authored by Ida Jogic and Steven Brown. Ida obtained her Bachelor of Laws at Murdoch University in 2020, after graduating from a Bachelor of Criminology. She is currently a law graduate for the Estates team and is due for admission in 2022. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.

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