A key concern for many families while preparing their Will and Testamentary documents is the discussion surrounding how they might ensure the needs of their children will be met in the event of their unexpected death or illness. Indeed, this is a critical discussion that must happen, particularly when the clients have very young children. While most clients in this situation come to us ready to discuss these arrangements (having nearly always discussed this prior to the meeting), the same can’t be said when addressing business owners in the process of preparing their estate plan with regards to planning for the succession of this business.
In fact, most business owners, who come to us for the purposes of estate planning have thought little (if at all), about what might happen to the business should they die unexpectedly, or, become incapacitated and are unable to run the business.
Consider the following scenario:
Eva and Jim are married. Jim, an Accountant, has built a large, successful accountancy firm while Eva managed the family and occasionally assisted with general operations of the business. They have two adult children, Tim and Sophie. Tim is in the process of undertaking an Economics Degree at university and Sophie is in the process of completing her Bachelor Degree in Medical Science. Tim is currently working at his part-time at his parent’s accountancy firm and plans to undertake post-graduate study in the future. It is assumed that Tim will eventually take over the business when Jim retires at 65. Sophie plans to work in the field of medical research and has no interest in the family business.
At face value, assuming that everything happens as it should, Eva and Jim’s plan sounds like a great one. However, for couples in this situation, careful attention to estate planning is crucial to ensure that should something unexpected occur, a contingency plan is in place to deal with this. Indeed, even if everything evolves as it should and Jim reaches retirement age at 65, careful estate planning operates to ensure a smooth transition of the business to their son.
Commonly, business owners appoint their spouse or their children to act as executor of their estate without adequately considering whether they are the best person to run the business in the immediate period following their death. Ideally, in the case of Jim and Eva, their business will fall into the hand of their son when Jim retires at 65 and by this time it might be assumed that Tim will be appropriately skilled and qualified to manage the demands of the business. However, should this not occur, if Jim was to die before this time (or become incapacitated), the choice of Tim as executor could be a disaster.
A skilled estate planner will be able to devise solutions to ensure that the client’s intentions are fulfilled even in the event of unfortunate circumstances. This may involve the creation of a company trust, so that for an interim period, the control of the business falls into the hands of someone who can ensure seamless management of the business until such a time as the owner is able to do so. In this situation, while appearing similar, there is a distinct difference between ‘ownership’ and ‘control’.
Furthermore, depending on how the business is set up, this will determine whether the business can be transferred to a beneficiary via a Will. Indeed, if the business is owned by a company or a trust then they are not the property of the client, and as such are non-estate assets.
It also follows that careful consideration should be paid to other children who may not wish to have any involvement in the business. In the situation described above, the daughter Sophie, intends to pursue a career outside the family business. Jim and Eva would be wise to consider separate estate provisions for their daughter so as to prevent the possibility of eventual litigation.
While this article serves to identify a few of the things that business owners must consider when preparing an Estate and Succession Plan, it should be highlighted that this type of Estate Plan has the potential to be deeply complex. With this in mind, business owners are encouraged to seek specialist advice when preparing Testamentary documents so as to cover every possible scenario.