The Principles Behind Good Business Succession Planning

By John Godfrey | More Articles by John Godfrey


If you own or are a part-owner of a business, then an exit strategy is important. Selling the business is not always an option or eventuality and death delivers the need for an outcome.

This can be an important part of estate planning and what is the framework of a business succession plan. It is more than likely that this will be entwined with a SMSF and the need to handle retirement or death. This can be complicated so legal, accounting, tax, financial advice professionals are likely to be involved.

It is only the shares that the deceased has in the company that form part of the estate. On death the Executor must do everything possible protect the value of the estate by protecting the value of the company in which the shares are held.

The business assets of sole traders and a partnership form part of a deceased partners estate in proportion to their ownership. On the death of a partner the partnership ceases to exist. There needs to be an agreement between the partners to allow a serving partner to take a discrete portion of the assets. An Executor has a fiduciary duty to maximise and protect the value of the business.

Businesses are faced with disruption and uncertainty with the death of a part owner. The objective has to be a trouble-free succession which is best achieved by the existence of a Business Succession Plan. A traditional compulsory buy and sell agreements it likely to have adverse tax outcomes and this has led to use of a buy and sell option arrangements. There are Capital gains tax outcomes that need to be managed. These agreements have 2 parts – a call option when the remaining business stakeholders can demand that the deceased’s estate sell the deceased business interests to them and a put option where the deceased estates demands that the remaining stakeholders purchase the business interests.

For a transaction to take place there must be a reliable form of funding available to the other shareholders which insurance normally provides as the source of funds to afford the purchase of the deceased owners interest. This avoids the need to borrow money, liquidate assets or deplete business reserves.

There are numerous ways to own the insurance policy, each with their own tax consequences depending on the type of policy. The plan may include trauma and TPD policies as trigger events.

Premiums paid for life insurance policies owned for business succession planning purposes are generally non-deductible to the business. However, the proceeds of these policies are generally income tax-free. They are also exempt from CGT if the proceeds are paid to the insured, the original beneficial owner of the policy or a third party that acquired an interest in the policy for no consideration.

An executor of a deceased estate needs to be aware if there was a business succession plan to ensure the payment is made to the estate or directly to the beneficiaries and as the ‘legal personal representative’ of the deceased is bound to honour the terms of the agreement and transfer the business interests to the surviving partners.

John Godfrey

About John Godfrey

John Godfrey has over 50 years of financial services experience. This has involved banking, accounting, stock broking, investment banking, lending, fund raising, financial advice, trusteeship, and adviser training.

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