Owning a small business, company or trust adds additional layers of complexity to estate planning. Ensuring that your business interests are handled smoothly should you die or lose capacity will be crucial for your business operations to continue and for the protection of your assets.
Impact of death or loss of capacity on different business structures
Sole traders
As a sole trader, you and your business are legally the same entity. This means that if you die or lose capacity, your business operations can be severely affected.
- Upon death: Your business assets and liabilities become part of your estate and are managed by your executor who can choose to sell the business, continue operations temporarily, or wind it down, depending on what is most beneficial for your estate and beneficiaries.
- Loss of capacity: If you lose capacity and have an Enduring Power of Attorney (EPA), your attorney can manage your business affairs. Without an EPA, a guardian or administrator appointed by the Victorian Civil and Administrative Tribunal (VCAT) may need to take over.
Partnerships
In partnerships, the business succession depends on the partnership agreement.
- Upon death: The partnership agreement usually outlines what happens if a partner dies, such as having remaining partners buy out the deceased partner’s share, dissolving the partnership, or admitting new partners.
- Loss of capacity: The partnership agreement should specify procedures for a partner losing capacity. An EPA can also appoint someone to manage the incapacitated partner’s interests
Companies
A company is a separate legal entity, and its operations can continue even if a director dies or loses capacity. However, proper planning is essential to ensure smooth transition and continuity.
- Upon death: The company’s constitution and shareholder agreements typically outline procedures for transferring shares and appointing new directors. The deceased’s shares become part of their estate, and the executor will transfer the shares according to the Will or according to intestacy laws.
- Loss of capacity: If a director loses capacity, an EPA can authorise an attorney to act on their behalf. Without an EPA, the company’s constitution may provide guidance, or the shareholders might need to appoint a new director. A company may also have a Company Power of Attorney.
Trusts
Trusts are commonly used for asset protection and estate planning. The management of a trust depends on the type of trust and its governing documents.
- Upon death: The trust deed typically outlines what happens when a trustee dies. A new trustee is appointed according to the terms of the trust deed or by the beneficiaries. For discretionary trusts, the appointor (who has the power to appoint and remove trustees) plays a critical role.
- Loss of capacity: If a trustee loses capacity, an EPA can authorise an attorney to act as trustee. If there is no EPA, then a new trustee may need to be appointed, either according to the trust deed or by application to the court.
Steps to secure your business interests in the event of death or loss of capacity
Create a Will
Ensure your Will is up to date and includes clear instructions regarding your business interests. Specify who should inherit your business and under what conditions.
Establish an Enduring Power of Attorney (EPA)
An EPA allows you to appoint someone to manage your financial and business affairs if you lose capacity. Choose someone you trust and who understands your business operations.
Review partnership agreements and company constitutions
Ensure these documents include provisions for the death or incapacity of a partner or director. Clear guidelines can prevent disputes and ensure smooth transitions.
Update trust deeds
Review and update your trust deeds to include mechanisms for appointing new trustees or managing the trust in the event of your death or incapacity. Ensure the appointor's role is clearly defined and assigned.
Succession planning
Develop a comprehensive succession plan for your business. This plan should include:
- identification of potential successors;
- training and development programs for successors;
- a clear timeline and process for transitioning ownership and management.
Consult professionals
Work with estate planning lawyers, financial advisors and accountants to ensure your business and personal estate plans are aligned and legally sound. These professionals can provide valuable advice and help implement effective strategies.
Get help from an estate planning lawyer
Proper estate planning is essential for ensuring the continuity and stability of your small business, company or trust in Victoria. By creating a Will, establishing an Enduring Power of Attorney, and reviewing key legal documents, you can safeguard your business interests and provide for your loved ones.
Consulting with professionals can help you navigate the complexities of estate planning and develop a robust plan that reflects your wishes and secures your legacy.
Contact David Davis Lawyers
Phone: 03 9014 1299
Email: admin@ddavis.com.au