Finding a crystal ball that predicts the future is not an easy task. Whilst the search continues, there are some things in life that are not ‘if’ scenarios but ‘when’ scenarios (the major one being death) and there are circumstances that are so common, that a crystal ball is not needed to realise the importance of considering the risk of those circumstances and the devastating effect they might have on your estate planning (the top contenders being disability, separation and divorce).
In Issue 21, ‘Failing to Plan is Planning to Fail: Business Succession Planning’ we looked at the importance of business succession planning to maximise the chance of a successful transition. In this issue, we discuss two more ‘what if’ events that should be considered.
Disability and Death: The disability or death of the business owner (or controller) are key issues that must be addressed and planned for in the succession planning process.
Specific questions to be addressed when contemplating the ‘what if’ of death or disability include:
- who can take on the primary roles in the business?
- who knows the critical information about the business?
- how will the medical expenses and ongoing care of the business owner (or controller) be funded if they are unable to work in the same capacity (or at all)?
- how will the value of the business be maintained if it is sold (either to a third party or a business partner)?
- how will ‘fairness’ in the distribution of assets to the next generation be achieved?
- what are the expectations of family members (including the surviving life partner or spouse, their children who are involved in the business and the children who are not)?
It is not just the business owner’s (or controller’s) death or disability that should be planned for. The premature death or disability of any person who is a party to the succession plan can have a drastic and detrimental impact on the business if it has not been contemplated or adequately planned for. Too often in succession and estate planning, there is one option provided for: the usual case being ‘the business will pass to Person B on the death of Person A’. But what if Person B dies first?
Potential options/strategies that can assist with planning for the ‘what if’ of death or disability include:
- the development of an operational guide to the running of the business, including key business relationships, clients, advisors, contracts, documents and day to day activities;
- the development of a strategic plan with a description of the personal and business goals and expectations of the business owner (or controller) and each successor;
- a training and development plan for the successor(s);
- taking out insurance policies like total and permanent disability (TPD), death cover (life insurance) and income protection;
- for family businesses, a distribution plan that sets out the transfer of assets during life (if applicable) and the distribution of assets on death that is discussed with all relevant family members;
- the development of a contingency plan to provide what is to happen in the event of the disability or death of the potential ‘successor’; and
- a buy/sell agreement that details how (and upon what terms) one business partner/shareholder can buy out the other partner’s interest in the business should specific ‘what if’ events like death or disability occur.
Divorce and Separation: Despite the fact that both marriage and divorce rates are dropping, it remains the case that almost one in three first marriages will fail — on average, after 12 years. For this reason, the divorce or separation of the business owner (or controller), their business partner and/or of their children is another key issue that must be addressed and planned for in the succession planning process.
The impact of a divorce (or the breakdown of a de facto relationship) on a business can be disastrous, and can result in the forced sale of the business or its assets and, in the most serious cases, even result in the business becoming insolvent. The challenge often lies in working out if each party can be provided for upon separation, without forcing the sale of any of the business assets.
Specific questions to be addressed when contemplating the ‘what if’ of divorce or separation include:
- what non-business assets does each party have?
- how will the business be dealt with in the event of separation or divorce of one of the business owners?
- is it possible to provide for all parties in an equitable way?
- are there particular ownership structures that will reduce the impact of divorce? Who should be the Trustee? Appointor? Shareholder? Should the spouse be involved?
- is there a risk of separation or divorce that should be accounted for? This is particularly relevant where a pre-death transfer of the business and/or assets is being contemplated.
Potential options/strategies that can assist with planning for the ‘what if’ of divorce or separation include:
- financial agreements that comply with the Family Law Act 1975 (Cth). These can be put in place before, during or after a marriage or significant relationship. If done properly, the provisions of the financial agreement can determine how the property of the parties, including business assets, is divided in the event of a separation; and
- proper structuring of the business to reflect the personal circumstances (and contemplated ‘what if’ circumstances) of the business owner (or controller) and each family member.
How Can We Help? If you are still looking for that crystal ball, and do not have answer to the above questions, perhaps it is time to make an appointment with one of our lawyers, Kimberley Martin, David Bailey or Casey Goodman to begin the process of securing your future, and the future of your business.