Business Owners – Ensuring your and your family’s future financial security – the importance of effective Estate Planning for your Business

By June 1, 2020 May 17th, 2022 Blogs, Business, Uncategorized

June 2020

Business Owners – Ensuring your and your family’s future financial security – the importance of effective Estate Planning for your Business

Key Take Aways

  • Business owners should have in place as a minimum an up to date Will, a Power of Attorney and either a Buy-Sell Agreement or a Shareholders Agreement. These will protect you and your family’s income in the event of disability or death.
  • An up to date Will is essential if you want to ensure your estate, including your business, is dealt with according to your wishes.
  • If you don’t at least put a Will and Power of Attorney in place, you are jeopardising the continued operation and value of your business.
  • Having in place either a Buy-Sell Agreement or a broader agreement, for example a Shareholders Agreement, will enable the value of your business to be quickly realised in the event of disability or death, ensuring the continued financial security of you and your family.

Reasons why estate planning is important for your Business

While estate planning generally is incredibly important for most individuals, business owners have an additional layer of reasons they should at least have in place a Will and Power of Attorney, when considering what will happen to the business after they are no longer around – either by death or disability.  The most important result will be the impact on your family income, but there are many other related impacts from the death or disability of a business owner that make planning that much more important.

Employees, payroll, suppliers, contracts, etc. will still need to be paid, but will there be anyone practically, or legally, capable of ensuring the business continues to operate and the bills are paid?  Unless you have an effective estate plan in place, you are jeopardising the continued operation and value of your business.

In addition, depending on the structure within which your business operates (e.g. company, trust or sole trader) there may be other consequences.  For example, if you are the Appointor under a Trust structure, then putting in place a Power of Attorney will ensure decisions as to the appointment of the Trustee of the Trust can continue to be made in your name, in the event you become incapacitated.

Here are four estate planning tools business owners can implement to make sure their family is taken care of and their business continues to run if they suffer a disability or they die.

General Power of Attorney

When a business owner is incapacitated or deceased, the legal authority to transact on behalf of the business may be left to no one.  Sole Traders are especially vulnerable to this issue.  If you think through the practical ramifications of this issue, it can be substantial: there’s no one to operate the bank accounts, renew the lease, extend supplier contracts, deal with human resource issues and employees, etc.  If this happens the business can quickly fail.

Having in place a General Power of Attorney can allow the business owner to appoint a “key person” within the business or within the owner’s family to take control of the business, in the event of the incapacity of the business owner.  A General Power of Attorney is flexible, and it can be drafted so that it only operates in respect of the Business or for a specified purpose, or it can have no limitation.  One downside of a General Power of Attorney is that it does not continue to operate if you become incapacitated through unsoundness of mind. To cover that scenario, you need an Enduring Power of Attorney.

An Enduring Power of Attorney

An Enduring Power of Attorney continues to operate even if you become “unsound of mind”. Like a General Power of Attorney, it can be unlimited in nature or it can have specified limitations that will continue to apply if you lose you mental facilities. Because an Enduring Power of Attorney continues to operate if you lose your mental capacity, it must be properly explained to you by a qualified legal practitioner and the legal practitioner must complete a valid certification as part of the Enduring Power of Attorney.

Both a General Power of Attorney and an Enduring Power of Attorney must be registered with the appropriate lands entity in the state where the land is situated (e.g. in New South Wales the NSW Land Registry Service), in order to allow the appointed attorney to sign on your behalf for transactions involving land (leases, sale and purchase, etc).

Buy-Sell Agreement

If the business is the main source of income for the business owner, or, more importantly, the owner’s family, making sure the business is set up to provide an economic benefit for the owner’s family is incredibly important. A Buy-Sell Agreement allows two or more people to agree to purchase each other’s business interests in the event of an agreed-upon event – usually death or disability. The Buy-Sell allows for two very important things:

  1. The family of the deceased/disabled owner can receive an economic benefit for the owner’s efforts; and
  2. The business itself can continue to run with minimal interruption (depending on the industry).

The Buy-Sell essentially creates a legal obligation and an exclusive right for one to buy the other’s business interest, thereby creating some certainty for business succession. This can also be used within businesses with two or more owners, or between separate business owners in the same or complimentary industries or markets. Generally speaking, if set up correctly and life insurance on each owner is put in place, the buy and sell can be funded with life insurance. This is a more limited arrangement than a Shareholder Agreement. A Shareholder Agreement will deal with additional matters than just a sale and purchase arrangement.

A Shareholders Agreement

A Shareholder Agreement is generally applicable to a business that is owned through a company and, in addition to the buy- sell arrangement, provides for a range of other matters that are agreed between the shareholders of the company. For example, it can deal with the policies for the day to day operation of the business, the policy adopted by the business for financial matters including a dividends policy, and other matters such as arrangements for offering the other shareholders the right to purchase shares in the event one shareholder wishes to sell their shares in the company (as distinct from a sale arising from incapacity or death).

It’s important to put a Plan in Place before it is needed

Estate planning is much more important for business owners than they probably realise.

You will only need such a plan when something goes wrong and it will be too late to put them in place at that time.

As the saying goes “If you fail to plan, then you plan to fail!”

Contact Us

If you are a business owner and you’re ready to get an effective estate plan in place, contact Craig Higginbotham on (02) 8920 0475 to get the process started.  We can provide a specific plan based on your particular circumstances and business structure.  It may turn out to be the best business investment decision you make.

Craig Higginbotham
1 June 2020


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