Protecting your legacy

Death is a subject most of us prefer to avoid, but the more you plan for it while you’re alive, the less impact it will have on your business and family later

Benjamin Franklin aptly stated: ‘in this world nothing can be seen to be certain, except death and taxes’. Since you may not receive advance warning of your impending death, it is a good idea to begin planning what will happen after you die – sooner rather than later.

If you own a business, it is even more important, because it’s quite likely that a significant portion of your wealth – and possibly your family’s income source – is tied up in it.

Where there’s a will…

Dying without a will can be messy, expensive and time-consuming for those left behind. Therefore, the first step is to ensure you have an up-to-date will that accurately reflects how you wish your assets to be divided upon your death. It is an absolute minimum.

Your will should also deal with the appointment of trustees and executors, the transfer on death of personal chattels, guardianship of children, burial or cremation directions and, if there is an existing trust, the appointment of people who will continue with the power of appointment of trustees under that trust.

We often focus on the business assets, which may be owned by a company or partnership.

Your will should cover all your personal assets and liabilities, including some that are often overlooked such as:

• Personal debts.
• Life insurance policies.
• Advances to friends, family, trusts or companies.
• Property, including holiday homes.
• Shares.
• Cars, boats and personal items including jewellery.

Your will may be the most important document you ever sign. Make sure you have a valid will, review it regularly and take legal advice if your circumstances change.

Business succession

It’s common for business owners to want their interests in a business transferred or made available to family members after they’ve passed on. Sometimes this is desirable, but it’s not always realistic or in the best interests of the business (and therefore the family).

It’s important to establish if the intended recipient actually wants to receive the business. Even if the business is successful and a son or daughter is interested, care is needed. A common problem is that a business is left to someone and the business represents the major asset of real value.

This creates problems if there are other siblings or relatives who are effectively disinherited. Major rifts may arise. If you personally own the business (or shares in a holding company), there may be family protection claims, which can divide a family.

One possibility for dealing with this is for the business to be owned by a company and the shares in that company owned through a trust. Shares can then be transferred or sold to family while you’re alive, so that on your death the ‘successor’ is already a significant shareholder in the company.

While this structure may not prevent difficulties between family members, it can be used to minimise the risk of litigation. If the shares are owned by a trust with a sound structure, it will be more difficult for a disgruntled family member to attack.

If minimising family disharmony is important – and in most cases it is – one option is for a cash payment or a life insurance policy to be taken out, to make some provision for the family members who will not benefit from the business.

Time to trust

Trusts provide advantages in terms of confidentiality, protection of assets against creditors and greater freedom for distribution of assets. For business owners, the protection trusts afford against creditors is a real and viable benefit.

In recent times, some of the traditional advantages of trusts have been eroded (such as enhancing your eligibility for rest home care subsidies and tax advantages).

However, you can still use a trust for effective succession planning. A trust is still the most effective mechanism to ensure the transfer of assets to family members is undertaken in a controlled and secure manner.

Your will and trust should be supported with a memorandum of wishes providing an informal direction from you, as the settlor of the trust, to help the trustees make decisions and take into account what you would have wanted to happen. While not a legally binding document, it’s a good way to ensure trustees are able to take your wishes into account when making decisions.

Enduring powers of attorney

Consider what would happen if you’re overseas or struck down by illness – would someone be able to step into your shoes in those circumstances?

Enduring powers of attorney are not just for older members of our community and should be completed by people of all ages as an essential part of your estate planning and common sense business practice.

Victoria Pfahlert

Victoria Pfahlert is a Senior Associate at Saunders Robinson Brown and has an extensive background in dealing with complex commercial matters, including the interpretation of contracts. For more information call (03) 377-4470 or email victoria.pfahlert@srblaw.co.nz