In conversation with my clients about estate planning and asset protection, it would be no surprise to you that there are a number of frequently asked questions that most business owners ask. I thought I would run you through some of these and the key aspects of the basics to Estate Planning and Asset Protection.
Why do I need a Will?
Not leaving a Will is at best irresponsible and at worst puts your hard-earned assets at risk, and could leave your family in a precarious position at a difficult time. If you own a business, you should carefully consider having a family trust structure set up, as it will provide protection beyond that offered under personal asset ownership.
Before instructing a lawyer to draw your Will, you should discuss with your partner what you think should happen to your estate when you die, as they may be left to face the consequences, and its worth spending some time thinking about this with your partner before you come to give instructions.
If you don’t leave a Will, your assets will be dealt with under Intestacy laws, and the time and cost to resolve your estate will be greater, leaving a headache and potentially less assets for your family.
Powers of Attorney – what are they and why do I need them?
While you are getting a Will, it is also a good idea to put in place Powers of Attorney, both medical and general, which would come into effect should you become incapacitated. A medical power of attorney can empower your family to give instructions regarding your medical treatment, which will give doctors the confidence to act in accordance with your wishes.
A General Enduring Power of Attorney can empower someone trusted to act in your place regarding your financial interests, if you become incapacitated. This would be invaluable in the event you were still alive but unable to act regarding your own affairs.
What is the best structure to own my business in when it comes to inheritance and asset protection?
A large percentage of family businesses are structured as sole traders or partnerships. While inexpensive to set up, these unincorporated structures raise significant estate planning issues. Not only do they create risk of unlimited liability, as the owners are personally liable for the debts of the business and the actions of any other owners, but they also create difficulties in transferring ownership of the business as a going concern.
As a sole trader or member of an unincorporated partnership, there are limited benefits in terms of income and tax planning, with the owners taxed on their share of the business income at the marginal tax rates. Also, a sole trader business cannot be passed on when you die, only the assets that remain after your debts are paid off can be passed on under your Will.
If you’re in a partnership, exactly how the executors or administrators will handle your interest will depend on the specifics of your partnership agreement. For example, the other partners may have the option to buy your interest before your executors sell or transfer it to anyone else.
If your business is set up in a company structure, you should be able to leave the shares in that business to your beneficiaries, which is a distinct advantage to the situation if you are a sole trader or in a partnership. Also, liability will be limited to the company structure, providing protection for your personal assets such as your home.
Whether or not you can pass on your company shares or business interests will depend on the business’ partnership agreement or articles of association. If there’s a shareholders’ agreement, this may also have an impact.
It’s important to check these documents before you make a Will or make any promises to an intended recipient. You should also think about how involved your family member will want to be in the business before making your Will. This will determine the best way to pass the business on.
Can I leave instructions for how to run my business?
Someone who inherits shares in a company will have some control over wider issues, but day-to-day decision-making of companies or partnerships will stay with the surviving directors or partners.
The best way to influence the future management of your business is to appoint other directors while you’re still alive. This is a large part of the succession planning process.
How can I protect my family if I’m carrying significant business debt?
Consider obtaining life insurance to cover the debt your business is carrying, so that if you die your family would not be left with your debt.
Many people opt to put their family home in the name of the spouse who is not a director of the business. This is a good idea where possible, as it will provide protection for the family home in the event the business collapses.
Should I set up a trust to own my business?
The ultimate form of asset protection is setting up a family trust, to hold the shares in your company so your family can benefit from your business without being directly involved.
The benefit of trust structures when it comes to estate planning, is that they minimise the risk to your estate of anyone challenging your Will, as trust assets fall outside of your Will and thus are unlikely to be affected if someone successfully challenged your Will.
The risk of leaving your business in your personal name or in a company owned by you personally, is that someone entitled to challenge your Will under a family provision claim may do so, and your succession plans may be thrown into disarray.
Family provision claims can be brought by parties such as widows, children, grandchildren and sometimes even carers and step-children. To help protect against a Will being challenged, a family trust structure can be established while you are alive to ensure that the underlying equity in the business is actually owned by the trust and not personally by you as an individual business owner.
Family discretionary trusts allow a person (the trustee) to hold assets on behalf of another person or a group of people (the beneficiaries). Trusts not only provide taxation benefits, but also asset protection. This is because assets held in a trust are not personally owned, so they are generally not available to creditors if a business fails or bankruptcy occurs.
In summary, everyone should have a Will. Powers of Attorney both Medical and General are like an insurance policy, that will save you and your family a lot of bother if something goes wrong. If you have a business, we generally recommend you run it through an incorporated structure rather than as a sole trader or partnership, as this will provide limitation of liability and make it easier to pass your business on if you wish to do so. If you want the ultimate protection, both in life and death, it is worth getting advice on setting up a family trust.
Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.