As fun as business may be, it is important to consider how a business may transpire should the reins be passed on within the family – Estate Planning helps ensure your best interests are taken care of.
If you’re self-employed, or the owner of an unlisted business, then it’s something that you no doubt take pride in, and want to make sure is preserved over the long term. That’s why it’s critically important that you write it into your will so that you can be sure that, after you pass on, your business is looked after and remains an asset to your family.
What you need to know about writing your business into your will
If you’re a sole trader or the sole owner of a business (with 100 percent of the company), then writing the business into your will is quite simple. It becomes much more complex if you’ve got a partner or shareholders and therefore own less than 100 percent of the company because while your shares can be passed on, you need to consider the impact that would have on the company.
Take for example a situation where you have a 50/50 split with a partner, and you have three children. If you pass away and split your shares evenly with your children, then your partner suddenly has controlling power over the company. Of course, giving the shares to just one child might not be a great idea either, for the harmony of the family, so you’ll need to consider exit provisions as part of your will.
The other thing you need to consider is whether your spouse or children want to take over the business in the first place. Children are in the habit of wanting to branch off and live their own lives, and your spouse might not have the interest or capabilities to run your business.
In these cases, it’s important to think about just who would be next in line to take over the business, and how your family might still benefit from it into the future. After all, a failed business ceases to benefit the family, and most people look for someone in the family to train to replace them as the owner of the business, to ensure it becomes a multi-generational venture.
Who you should talk to about writing the business into your will?
New Zealand doesn’t have an inheritance tax, but to make sure that the business can be fairly distributed as part of the overall will, it’s important to get the business properly valued.
You should talk to a solicitor that specializes in will and estate planning and that also has experience in handling the transfer of businesses. That solicitor will likely not be able to conduct a valuation of the business themselves but will know of accountants or other specialists that can conduct such an audit.
The solicitor, however, will also help talk you through the implications of your decision – are you potentially going to disrupt the business down the track in the way you bequeath it? What might the business look like after a generation or two? These are the important thought processes that a good solicitor will help walk you through.
Additionally, if you co-own the business with others, be that through partnership, or a corporation structure, you’ll likely want to get your solicitor to help you, and your co-owners, develop a buy-sell agreement, which will control what will happen to your ownership interest in the business in the event of a death.
In many cases, co-owners will want to have the option to buy your share of the business, rather than have that control over the business go to someone they’re not necessarily familiar with or want to work with.
What happens if you don’t get your business into your will?
If you pass away without having drafted a will, then the state basically decides where each of your assets goes. It has a specific order that is set in stone for this; if you have a spouse then all assets will move to him/her. If not, it goes to your children, and so on and so forth down the family chain, based on their inherent closeness to you.
The state is completely arbitrary about this, and therefore completely fair, but in the context of a business, this might not be the ideal solution. For example, the business might end up in the hands of your spouse or children, who don’t want it or have the capabilities to run it, rather than a more distant relative that you’ve been training to take over.
Or your share of the business could be split in order to fairly distribute it among multiple people, and that could have disastrous implications for the health of a business that has previously been a partnership or sole traders.
Ensuring your business is cared for after you pass
You should make sure that you have a will for all your assets, however, the ongoing health of your business absolutely requires one. You want to make sure your family is looked after by having the right person (or people) take over, and you want to see the business continue to thrive. Make sure you keep this part of the will regularly be updated, too, as the value of the business and its assets will shift from year to year.
