Estate Planning for Business Owners

Business owners usually hold very little in their own name. The value sits in shares, in a trust, in a self managed fund, in the premises, and in money the business owes them. A will reaches only the first of those directly, which is why estate planning for a business owner is mostly a question of control rather than a question of gifts.

Control against beneficial ownership

The distinction runs through everything on this page. Owning a thing and controlling it are different, and on death they can separate immediately:

• Shares pass, directorships do not. Your shares form part of your estate and go where the will says. Your position as a director simply ends. If you were the only director, the company can be left with nobody able to act, including nobody able to sign cheques or pay wages, until the position is regularised.
• Trust assets do not pass at all. The trust owns them before and after. What matters is who becomes trustee and who becomes appointor.
• A corporate trustee adds a layer. Control of the trust may depend on control of the trustee company, which depends on its shares and its directors, which are governed by its constitution.

A plan that gives the shares to the right person but leaves the directorship or the appointorship unresolved has answered the easy question and left the hard one.

The company

We look at the constitution and the share register, not at assumptions. The provisions that matter are the ones dealing with transmission of shares on death, any pre-emptive rights, whether directors can refuse to register a transfer, and how directors are appointed. Where there is a sole director who is also the sole shareholder, the legislation provides a mechanism for the personal representative to appoint a director, but relying on it means relying on probate being granted first, which takes time the business may not have.

Where there is a shareholders agreement, it usually overrides the informal understanding between the shareholders, and frequently contains a buy-sell mechanism nobody has looked at since signing.

The family trust

If the business or the premises is held in a family trust, the estate plan turns on the deed. The questions are who can be appointed trustee and by whom, whether there is an appointor and how that role passes on death, whether the deed permits succession to be nominated by will, and whether the beneficiary class still includes the people you intend to benefit.

Many deeds are silent on appointor succession, in which case control can end up somewhere nobody chose. Where the deed does permit nomination, that nomination has to be made in the way the deed requires, which is not always by will.

Loan accounts

Loan accounts are the most commonly overlooked asset in a business owner's estate, and often the largest. Money you have lent to the company or the trust is a debt owed to you, and it forms part of your estate. Money you have drawn from the company may be a debt you owe, with its own tax consequences.

Two practical points. First, a loan payable to the estate is only as good as the borrower's ability to repay it, so a will that leaves the business to one child and the loan account to another may be dividing a real asset and a theoretical one. Second, an unpaid present entitlement or a Division 7A loan does not disappear on death, and the plan needs to deal with it rather than discover it.

Business premises

Premises are frequently held separately from the business, often in a trust or a self managed superannuation fund, and leased back. The estate plan has to deal with the lease as well as the ownership: whether it continues, on what terms, and whether the person inheriting the premises and the person inheriting the business will still be able to work together.

Superannuation and insurance

Superannuation is not an estate asset unless it is directed to the legal personal representative. For a business owner it is often the most liquid part of the picture, which makes it the natural source of funds to equalise between children, to repay debt, or to fund a buy-out. Whether to direct it to the estate or to a dependant directly is a question with a tax answer as well as a practical one.

Insurance sits alongside this, particularly where it funds a buy-sell arrangement. Who owns the policy, who receives the proceeds and how those proceeds are applied should match what the succession documents say. Often they do not.

Bringing it together

A business owner's plan generally needs the will, the trust deed and its succession arrangements, the company constitution and any shareholders agreement, the superannuation nomination and the buy-sell arrangement to say consistent things. Our work is usually as much about reconciling those documents as drafting new ones.

This page is general information. It is not legal or tax advice, and your own documents will change the answer.