August 2010 by Alan Rosendorff, Rosendorff Lawyers www.rosendorff.com.au

Whilst the term “Business Will” is a relatively new one, the concept is not.

What a “Business Will” is designed to achieve is perhaps better described by the term “Business Succession Agreement”. This term gives an insight into only one part of the process of planning for the future of a business, and for how an unexpected death, injury or illness might affect the business and its owners.

Where a business is owned by a family or by one or more people, there is always room for a Business Succession Agreement as part of a business succession plan. A good succession plan will consider:

• what happens in the event of an “owner” or other key person being unable to actively contribute to the business, because of death, injury or illness;
• what happens if it becomes a problem for a key person to remain involved – for example because of relationship breakdown or financial meltdown;
• what happens if one of the “owners” simply wants out;
• who can buy who out when, and how (often narrower Business Succession Agreements are called “Buy/Sell Agreements”); and
• how buy outs are to be funded, and how payout amounts are to be agreed and paid.

The Business Succession Agreement is merely the document which reflects what the “owners” have agreed to do in each of these, and other, situations that may arise. The issues that arise for each business and each business owner, and how they will deal with each of those issues, are never the same.

However, there are some common issues that all businesses can plan for – namely death, disability, illness and a breakdown of the business relationships. Some businesses can also have the luxury of identifying successors, so that the founders can retire and a “new generation” can take over.

Although these issues are readily identifiable, far too few business owners plan for them, often with the result that relationships (and possibly the business itself) are damaged beyond repair in a fight which could have been avoided.

Depending on the industry, and the owners of the business, one of the simplest and most cost effective arrangements that can be put in place is an insurance funded Business Succession Agreement. Whilst this is a bit of a mouthful, all it means is that the key people in the business are insured against death, disability and illness for an amount which is usually roughly equal to the value of their share in the business. If they die or become incapacitated, they can claim on the insurance and be paid out the proceeds, allowing co-owners of the business to take over at minimal cost, and without short changing the exiting owner.

As there are several taxation traps associated with insurance funded buy outs, and the planning can be quite complex, it is important to involve a lawyer skilled at these types of Agreements, as well as your accountant and financial planner.

Clearly there are a number of issues that are important in regard to Estate Planning. Of primary importance is the creation of an estate plan which incorporates preparing and signing a valid Will. However by making a Will you are exercising your legal right directing to whom and in what manner your assets should be distributed upon your death and who should look after your affairs.

In addition, you should give thought to:-

• Who to appoint as your Executors and Trustees.
• Who to appoint as guardians of your infant children.
• What assets you can dispose of by your Will and what assets you cannot (such as those owned by Family or Discretionary Trust).
• What liabilities you need to provide for by your Will.
• Who you wish to benefit from your Will and how the interest of competing parties can be satisfied.
• Whether your wishes can be challenged.
• Your funeral arrangements.
• The powers and directions you should give to your Executors and Trustees.
• Where to keep your Will and who should know where it is kept.
• The benefits of having an Enduring Power of Attorney and a Medical Treatment Power of Attorney.

Although Death duties were last heard of in Australia many years ago, more people than ever are today planning their estates to avoid the impost of a tax on death. The difference between effective and poor planning could cost your family tens of thousands of dollars in their inheritance. Yet the solutions are easy to implement.

What you are really trying to stop is capital gains tax being paid at the date of death. The other thing to do is plan to minimise tax. A good example of this is to sell inherited items (if you need the cash) in years when income from other sources is low – thus reducing the capital-gains tax load.

Testamentary Trusts are one of the greatest planning tools available to every taxpayer and their advantages far exceed the tax relief and include:-

• Protection of pension entitlements for surviving spouses and Beneficiaries.
• Income tax advantages to Beneficiaries of a Will.
• Capital gains tax advantages to Beneficiaries of a Will.
• Protection of Beneficiaries against creditors and bankruptcy.
• Control of assets against spendthrift Beneficiaries.

The main benefits of a testamentary trust fall under Part III Division 6AA of the Income Tax Assessment Act 1936 whereby assessable income of a trust estate is accepted trust income and therefore those amounts distributed to minors are not subject to the penal rates. That is a capital gain of a certain sum distributed to a minor from a Testamentary Trust would be subject to no tax as a result of the averaging provisions that apply to capital gains.

Rising divorce rates have complicated relationships — and the process of dividing assets between children, de factos and former partners.

Legislation enacted in Victoria can overturn the provisions of a will if the claimant can show that:

• a legal or moral obligation arises from the deceased; and
• where there is evidence of financial need.

To cater for this, it is appropriate to draw a will in such a way that the surviving partner is able to occupy the family home until such time as the first of certain events occurs. Typically these events are:

1. if they wish to leave;
2. if they get remarried; or
3. if they die.

In this event, they have a “lifetime” interest subject to these caveats.

If a child or a dependant wishes to claim a portion or a greater portion from a deceased estate then the rights are assessed under the Family Provision Act and the value of the assets and needs of the parties to the claim will be assessed.

Eligibility of claims under the legislation depends on a “moral or legal obligation” of the deceased to the claimant. Therefore, the issue for a surviving partner or child is one of needs.

There is no hard and fast rule and every case is assessed on its merits.

The courts have a tendency to find that de facto spouses have recognisable claims to a deceased estate.

To enable appropriate assessment of your requirements and to ensure accurate advice, your advisers will require the following:

1. A full breakdown of your existing structures with diagrams identifying ownership and the process of distribution if trusts are concerned.
2. A copy of all trust deeds and constitutions for incorporations.
3. A copy of any property, shares or insurance policies.