Protecting your family’s financial security, your business’s stability, and your employees’ livelihoods
Owning a business often leaves little time to contemplate what may happen in the future. While day-to-day management and growth take centre stage, considering the long-term effects of unforeseen events is crucial. A well-thought-out estate plan ensures that your business and loved ones are protected, regardless of what occurs.
Why is estate planning essential for business owners?
Many business owners tie a significant portion of their wealth to their business. Without an estate plan, you risk jeopardising everything you’ve worked for. Your family’s financial security, your business’s stability, and employees’ livelihoods could all be at risk.
Having a robust plan achieves two vital goals:
• It provides a smooth transition of leadership or ownership.
• It simplifies complex processes for your loved ones during turbulent times.
Securing your legacy
A clearly defined estate plan not only provides financial stability for your family but also ensures the continuity of your business. Whether you want the company to be managed by trusted partners, sold, or wound down, documenting these wishes will prevent uncertainties and unwarranted disputes.
Key elements of estate planning for business owners
1. The importance of a Will
Your Will is the legal foundation of your estate plan and ensures your wishes are honoured.
Without a Will:
• Intestacy laws apply, which can divide your assets between close relatives, often without reflecting your specific wishes.
• Family members with no business knowledge might inherit shares, leading to potential operational disruptions or forced sales.
• The business could be broken up if partners are unable or unwilling to buy out family members.
Through a well-drafted Will, you can dictate precisely how your business is handled upon your death. For instance:
• Leave instructions for a chosen successor or business sale.
• Allocate shares in a way that avoids disputes between family members and business partners.
2. Lasting Power of Attorney (LPA)
While many business owners prepare a Will, few know the importance of a Lasting Power of Attorney (LPA). An LPA allows you to assign a trusted person, known as an attorney, to make critical decisions on your behalf if you lose mental capacity due to illness or accident.
Without an LPA:
• Your accounts (even joint accounts) may be frozen.
• You would cease to qualify as a director of your company.
• A court-appointed deputy would take months to gain authority, incurring additional legal costs.
With an LPA in place:
• Your attorney can act swiftly, ensuring business decisions are made without delay.
• Financial support remains accessible to your family during times of crisis.
Tip: Appoint someone you trust and who understands your business. For complex businesses, consider creating a business-focused LPA alongside a personal LPA.
3. Using trusts for asset management
Trusts are powerful tools for managing business assets and mitigating risks. A trust allows you to retain control over your business while safeguarding the interests of beneficiaries.
Benefits include:
• Protecting your business income without passing control directly to beneficiaries.
• Ensuring continued operations if you become incapacitated or retire.
• Safeguarding your business assets from being sold or improperly managed.
For example, trustees (such as co-owners or family members) can manage the business, ensuring continued income for the family without their involvement in daily operations.
4. Cross-option agreements for multiple owners
If your business has multiple shareholders, managing share ownership upon death is crucial to avoiding unwanted complications. A ‘cross-option agreement’ ensures shares go where you want them to go.
Here’s how it works:
• Shareholders agree in advance that surviving shareholders can buy the deceased’s shares.
• Life insurance policies fund the purchase, providing beneficiaries with income without disrupting the company’s structure.
This creates a seamless transition and avoids bringing external shareholders into the business.
5. Addressing family specific dynamics
For family-owned businesses, estate planning becomes more complex.
Challenges could include:
• Unequal interest among your children: One may wish to run the business while others prefer financial inheritance.
• Continuation of family support: Ensuring your spouse or partner is provided for while enabling your children to inherit.
• Bloodline protection: Preventing assets from leaving the family, for example, through divorce.
Tailored planning can resolve these dynamics. For example, giving operational control to an interested child while distributing income from the business to others can strike a balance.