Your guide to estate planning essentials for SMEs

The world was given a valuable lesson in estate planning when the musician, producer and entertainer Prince died in 2016. His six siblings, heirs to his massive fortune, were shocked to find that he had neglected to leave a will, and, years later, are no clearer on how the hundreds of millions of dollars at stake will be divided. The only ones to benefit so far have been the lawyers and administrators appointed to untangle the mess.

Unlike Prince, most of us don’t have to worry about how to distribute such a vast amount of money and assets on our death. However, most of us also don’t have a will in place to spell out our wishes with regards to our estate. The reasons for this are varied, with the main one being we just don’t want to talk about death.

Regardless of the value of an estate, having both a will and clear directions for the future of the business can mean the difference between leaving behind a valuable or a worthless asset, as well as making sure grieving family members are spared the burden of lengthy legal processes.

What's in a will?

Recent research from Deakin University shows that almost 45 per cent of individuals in Australia and 55 per cent of Singaporeans do not have a will in place. Research co-author and professor with the department of accounting at Deakin Business School, Dr Adam Steen, says the findings are consistent with previous studies and clearly show that people don’t like to think about death or disability.

“The research shows that, irrespective of country and culture, people put these things off, and it’s something that financial experts, such as CPAs, can add a lot of value to their clients by offering good quality advice,” says Steen.

Worthwhile investment

When drafting a will, off-the-shelf and kit wills present an attractive option because of their simplicity and cost-effectiveness, but experts caution against them, with good reason.

Monica Ross-Maranik, consulting principal at Keypoint Law, says taking the DIY will option is only good for lawyers, not will-makers, because so many wills end up in litigation.

“I have had to litigate throughout my career as a solicitor over issues where people thought they’d save a little bit of money and do a home-drafted will. I have not seen one yet where they got it right. Every single one has problems,” says Ross-Maranik.

Super careful

When it comes to the distribution of assets, superannuation may present a problem for many people.

Your intended superannuation beneficiaries may include a spouse or de facto, children or someone financially dependent on you at the time of your death. However, as superannuation does not automatically become part of your estate, says Ross-Maranik, legal help may be required to untangle the maze of who controls super distribution and who can actually benefit from it.

“It absolutely defies belief that people assume that their super fund – or an asset, business or trust assets – will go through their will. The fact is, a lot of assets don’t go through your will, no matter how carefully it is drafted.

“Additionally, if you have a trust, you may or may not be able to control who governs the trust through your will – it depends on the trust structure and documents.

“Most people don’t realise that, unless you do something proactively about where your super ends up on your death, it will be determined by the fund trustees,” says Ross-Maranik.

The lack of estate planning on behalf of small business owners outlined in Deakin research is concerning and could severely compromise business continuity, says Steen, especially if the owner of the business passes unexpectedly.

“On top of the number of people indicating they don’t have a will, a significant proportion of those also indicated they owned a family business. However, less than 40 per cent of Australian and just over 50 per cent of Singaporean business operators indicated they knew what would happen to their businesses if they became incapacitated or passed away,” says Steen.

Accountants and business advisers can play an important role in helping their clients plan for the future, Steen says. While a conversation about death or disability is one many people don’t want to have, such a conversation forms an essential part of their client’s business risk plan.

 

"I think there's a real place in the market for accountants, financial planners and lawyers to work jointly on these things, because lawyers can't give tax advice and accountants can't give legal advice."

 

“The main benefit of an estate or business succession plan is that you are taking away the stress and anxiety from family members who are already dealing with the grief of someone dying suddenly,” Steen says.

“If there’s a clear roadmap of what to do and how to do it, then the business won’t just suddenly cease to exist and impact the remaining family members and employees.”

Ian Raspin FCPA, managing director of BNR Partners, works with accountants and lawyers to guide them through tax issues for deceased estates. He says it is fairly common for businesses to be underprepared in estate planning, with devastating consequences.

“One example is an elderly sole practitioner who had a nice little business that was worth quite a bit of money. When he died suddenly, there was no succession plan in place, and his clients soon started rolling out the door. What was a profitable business became worthless, because there was no plan to run it without him, despite the best efforts of those who were left,” says Raspin.

Raspin agrees that accountants have an important role to play in estate planning, primarily because of their knowledge of the business.

“They know the family dynamics, the history of the assets and have a long-term relationship already in place,” he adds.

“I think there’s a real place in the market for accountants, financial planners and lawyers to work jointly on these things, because lawyers can’t give tax advice and accountants can’t give legal advice. It can save a lot of grief, and thousands if not tens of thousands of dollars, depending on who they are dealing with,” says Raspin.

“I see too many wills and estates where generalist legal practitioners have been involved, and that creates all sorts of issues in and out of the courts – it’s just absolutely horrible.

“CPA members should be forming good relationships with legal practitioners that specialise in this space. Don’t see it as a threat to your practice, but rather see it as a way better servicing your clients.”

Insuring for the future

While wills and estate planning are one component of protecting personal and business interests for the future, several other important considerations should be factored in as well.

Benjamin Martin, senior technical manager with insurer AIA Australia, says one such consideration is business overheads insurance, which can safeguard a business for the short term in case of a temporary illness or injury.

“As well as having some personal income protection, business owners should also look at putting in place some income protection for the business, in case they are injured and can’t work. Business overheads insurance will provide an injection of cash flow into the business that will typically come off the back of an injury or an illness to the business owner.

“It helps the business keep its head above water and continue to be able to meet those fixed business overheads and operating costs, such as wages and rent,” says Martin.

Another thing to consider is linked to the business succession plan and what happens to the equity in a business when a partner or owner dies unexpectedly or can no longer operate the business due to illness or permanent disability.

“A very sensitive discussion tends to materialise between the surviving family members of the deceased business owner and the surviving business partners.

“A partner in a GP practice, for example, may suddenly die and leave their equity interest of A$3 to A$4 million in shares, which may pass to their spouse or estate, who has no ongoing role in the practice.

“They would probably seek to sell these shares back to the practice, but without a fully-funded business will, or what is colloquially known in the industry as a ‘buy-sell insurance agreement’, there is a risk that the surviving spouse or estate may end up not receiving fair value consideration for the shares when they eventually decide to cash them in.”

Like a will, a buy-sell agreement is a legally binding document that can protect those left behind.

“A financial adviser can put in place life and permanent disablement insurance policies as the underlying funding mechanism for these buy-sell agreements,” says Martin.

“We don’t see enough planning in this space, because no one ever likes to think about what will happen when things go wrong.

“But if we don’t plan ahead and put some type of fully funded blueprint in place, then it can have devastating effects, particularly for our loved ones that are going to inherit those shares over time.”