Succession Planning – Doesn’t begin with just making a Will.

Scenario 1:

‘Robert’ is 45 and a director of his own property investment and management company in Melbourne.  He has just walked out of a meeting in Collins Street after midday on a Monday.  He’s in a rush to meet a friend over lunch about a new property acquisition and decides to quickly cross Collins Street.  Robert is on his phone and does not pay attention to the oncoming 109 tram to Box Hill, which he unfortunately runs out in front of to his demise.  Robert leaves behind the following:

• Three children under 10 years of age;
• A wife, who is not working and has chosen to stay at home to look after their children;
• Three trusts, one of which operates his property investment company;
• 15 employees;
• A mortgage on his home to the value of $900,000.00
• Various Business liabilities of approximately $5,000,000.00;
• Assets, held personally and in trusts to the value of approximately $15,000,000.00.

What happens next?

Scenario 2:

‘Thomas’ is a self employed plumber.  His business is doing well and he employs 6 plumbers, an apprentice and has an office manager.  Thomas has a good reputation in the construction industry and he and his team are regularly engaged to work on apartment blocks, residential development sites and some industrial and commercial construction sites.  Thomas is the ‘face’ behind the business.  One day, when working on a commercial site, Thomas is cutting a difficult section of drainage pipe.  His angle grinder slips and digs deep into his leg, severing a major artery.  Unfortunately for Thomas, medical help doesn’t arrive in time and he passes away.  Thomas leaves behind the following:

• Two children, one is 12 and the other is 18, who is doing the apprenticeship with his father, Thomas;
• A defacto partner of eight years. The partner is not the biological mother of the two children;
• One family trust, which operates the plumbing business. There are four plumbing contracts on the go as at the time of Thomas’ passing;
• A mortgage of $250,000.00 on the family home;
• 8 employees;
• A small holiday home on the coast he inherited from his father.

What happens next?

Everyone believes they are indestructible, until they’re not.

Many family trust and business structures do not plan for the death, or succession of a family member.  When it happens, estate taxation issues, debts and liabilities, cause havoc with the day to day operations of such businesses. This generally leads to major restructuring, costing many thousands of dollars in taxes, duties and professional fees.  Whilst most trust / business structures provide sound financial and tax planning when beneficiaries are alive, some tend to come unstuck when beneficiaries pass.  The surviving family members are left to clean up the fall out, usually at great expense.

Under a Will, the executors for the estates of both Robert and Thomas have the right to deal with their estates as at the date of death.  However, access to and management of, any bank accounts, property titles and company shares, cannot take place without the executor first obtaining a grant of Probate from the Supreme Court.

When an executor obtains a grant of Probate from the Court, they legal right to deal with the personal effects and assets of the deceased.  The process to obtain a grant of Probate can take anywhere between 3 and 8 weeks after the date of death.  During this time, bills need to be paid, salaries need to be paid and businesses need to be run.  Any delays in payments or cashflow may run the risk of businesses being severely impacted, or even closed down.

Aside from your Will and Powers of Attorney, succession planning is also ensuring that you have a management plan in place for your business and investments from the moment you pass away.  Whilst making a Will is important and should always be updated every 5 to 8 years, so too should your succession planning strategy.  Some of the issues to consider in this regard may include:

• If you have lost capacity to make decisions regarding financial affairs, who is to take over those responsibilities in relation to the operation of the business / investments? Your personal financial Power of Attorney limits the attorney to only deal with your immediate personal financial affairs, not the financial affairs of a business, trust or company.
• How is the transition of any directorships effected on your death? If you are a sole director / shareholder of a business, how is this dealt with when you have either lost capacity, or pass away?  How is the business to be kept running in the interim, until Probate is granted?
• What is to happen to the business upon your passing? Is it to be sold / wound up?  Is it to pass to a family member / business partner?  Is there an agreement in place?
• Is your involvement in the business all-encompassing and consuming, and that its operation solely depends on your existence?

The issues described above are only the tip of the iceberg in terms of succession planning.  Family businesses, which sometimes operate through a family trust, can be adversely affected by delays in obtaining a grant of Probate and seeking the appropriate accounting and business advice.  The very existence of some businesses may depend on certain assets not being sold.  In some cases, if there are not enough liquid funds in the trust / business to discharge the entitlement, the trustee of the trust may be forced to sell off key assets of the business, effectively forcing the business to be wound up.  This could be averted, or at the very least, have less of an impact, if careful consideration was given towards succession planning.

If you believe that these issues may have some impact on your business and personal situation, call us to discuss how we can help in relation to your succession planning needs.