As a business owner, your main concern is working hard to make your business successful. You know you have employees who depend on you and clients who rely on your services or products. You pour your life into keeping your business profitable and sustainable, but will it be able to carry on if you are not there anymore?
According to Marteen Michau, Head: Fiduciary and Tax at Sanlam Private Investments, business owners sometimes overlook – or are unaware of – the repercussions their demise can have on their businesses.
“If you as a business owner hold shares or member interests in your own name, this shareholding or members’ interest are treated as assets in your estate for the purposes of estate duty and capital gains tax. The shareholding and/or interests will have to be valued at the time of your death to be included in your estate at market value. The inclusion thereof in the estate administration process can have a direct impact on the continuity of your business,” she warns.
Should you be the only director or the director with signing powers on your business accounts, your unexpected passing can disrupt the business’s ability to make business transactions, such as paying salaries, reimbursing suppliers or repairing equipment.
Perhaps you bequeathed your business interest to your wife or a family member who have no interest in taking on the responsibility of running a business. Your heir might choose to sell to one of your partners or your management who may not have the available capital to buy the business. This could put business operations – and crucial cash flow – on hold until a buyer can be found or your partner/s and/or management can secure financing. The same applies if you specified in your Will that the business should be sold outright, she says.
Disruptions of this nature could have detrimental consequences. Depending on the delay, savings could dwindle, bills left unpaid, operations could come to a screeching halt and employees may be left stranded.
To avoid the disruptions mentioned above, a trust could offer a good solution. If your business interests are held in trust, current and future assets can be protected and continuity is ensured. The business and your shareholding do not form a part of your estate on death, does not have to be sold and there would be no disruptions with the interests having to pass to another person who may not have been involved in the business before. If management or family members who are involved in the business and who you would like to succeed you, are nominated in the trust deed as potential trust beneficiaries after your death, it can be business as usual after your death with the minimum disruptions. These beneficiaries then do not need to find capital to buy shares or interests in the business.
Should you prefer that your business interests be sold on your demise to a preselected buyer, who is often your business partner, you can arrange your affairs in such a way that the buyer insures your life for an amount equal to the sale price of the shares/members interest. A buy and sell agreement will be entered into in terms of which the buyer undertakes to buy your shares/members interest for an amount equal to the market value at date of your death and the executor of your estate or the trustees of the trust are obliged to sell the shares to the buyer. This option is widely used where the wife or children of the business owner do not have an interest in the business and would rather be left with cash instead of an actual interest in the business.
If you are the heartbeat of the business, your death would have a major impact on the business. It is recommended that businesses that depend heavily on the involvement of certain key-individuals should insure the lives of those key-individuals to minimise the financial impact that the death of such an individual will have on the business.
A last thing to consider, and considered very carefully, is who should replace you as trustee after your passing. “There is value in bringing a corporate trustee on board, even if you have appointed a spouse or family member as co-trustee. A corporate trustee can provide stability when individual trustees leave office and can offer an independent viewpoint regarding the management of trust assets as well as the knowledge of the administration process and record keeping that is necessary”, says Marteen.
Proper estate planning can give you the peace of mind you need to do what you do best – run your business.
Speak to your financial adviser about any of the above or contact SPI Fiduciary and Tax at email@example.com