Maintain Value- Why we recommend Business Succession Agreements

Where a business is run by multiple owners, it is important to secure the ongoing viability of the business in the event that one of the owners passes away or suffers from a critical injury, disability or illness. A Business Succession Agreement is a useful tool to ensure the seamless transfer of ownership over the company in one of these unfortunate events.

The importance of a Business Succession Agreement is best explained through a hypothetical scenario. Let’s say that two owners named Cathie and Barney carried on a business supplying building materials to government builders. When Barney died, Cathie offered to purchase Barney’s shares in the company from his estate. However, Barney’s Will left everything equally between his two teenage sons, Bill and Bob. Unfortunately, the boys fancied themselves as business owners. Rather than selling the shares, the boys insisted on taking an active role in the business. After a year of indecision, arguing and stagnant growth, the business failed.

The failure of the business could have been avoided if Barney and Cathie had executed a Business Succession Agreement which transferred Barney’s interest in the company to Cathie as the continuing owner.   

Essentially, a Business Succession Agreement is a legally binding document which stipulates what happens to each owner’s respective interest in the company should they pass away or lose the ability to continue running the business. Typically, this involves allowing the continuing owners to buy the outgoing owner’s shares in the company. This gives the remaining owners certainty that their rights to continue on in the business while also ensuring fair value for the family of the outgoing owner whose interest has come to an end.

This Agreement also ensures that third parties do not have an unacceptable level of control or influence over the business, the estate cannot demand an unreasonable amount for the interest in the business, loans are not called in without proper funding, and the continuing business owners can protect the asset that they have worked hard to build up. 

The Agreement functions through a grant of an option in favour of the continuing owners to purchase the outgoing owner’s interest. At the same time, there is a grant of an option for the outgoing owner or their executor to require the continuing owners to purchase the interest in the business on set terms. The Agreement will also set out the mechanisms by which these options can be exercised and the time periods within which a valuation of the interest must occur and payment of that interest.

To fund these buy and sell obligations, the Agreement may impose obligations on the parties to maintain policies of insurance to provide all or part of the funds to purchase the outgoing owner’s interest in the business.

Ultimately, a Business Succession Agreement is only part of an overall strategy that must be formulated. It is imperative that the other documents that form part of the legal framework under which a business operates are reviewed carefully.  Therefore, Trust Deeds, Company Constitutions, Loan Agreements and other arrangements must be reviewed and, where appropriate, updated. It is our pleasure to assist our clients and their advisors in achieving these goals. Should you be interested in arranging a Business Succession Agreement, please contact Tony direct on (07) 3317 4312.

What happens to your super when you pass away?

While this may seem like a morbid question for a Monday morning, dealing with your superannuation is an important part of estate planning. After all, your super funds may represent a sizeable portion of your asset pool when you pass away.

However, unlike your other assets, your super death benefit is not automatically considered to be part of your estate. Your super therefore cannot be dealt with by your Will unless you have directed your super fund to leave the benefit to your legal personal representative (‘LPR’), otherwise known as the executor of your estate.

This is because your Will deals with the assets already owned by your estate such as your savings, property, shares and other personal items. Conversely, your super is held on trust by the trustee of your super fund.

We recommend executing a Binding Death Benefit Nomination form through your super fund to specify who you wish to receive your death benefit. This is a legally binding document which must be submitted to your super fund and updated every three years.

You can choose to nominate either your dependants or your LPR.

Nominating your dependants

Section 10 of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’) defines ‘dependant’ to include your spouse, children or a person with whom you have an ‘interdependent relationship’ with at the time of your death. An ‘interdependent relationship’ describes a close personal relationship between two people who live together and receive financial, domestic and personal support from each other. When you pass away, your super fund will distribute your death benefit to your dependants.

Nominating your LPR

Alternatively, you may nominate your LPR to distribute your super funds in accordance with the terms of your Will. This means that your super benefit forms part of your estate and may be distributed to your beneficiaries.

What happens if a Binding Death Benefit Nomination has not been completed?

If you do not give instructions to your super fund, or if your Binding Death Benefit Nomination is declared invalid, the trustee will have discretion to distribute your death benefit to either your dependents or your estate. Completing a Binding Death Benefit Nomination Form removes this discretion and ensures that your wishes are carried out.

At Perspective Law, we will submit a Binding Death Benefit Nomination to your super fund during the estate planning process. We have the experience to ensure that this form is completed properly to avoid any question of its validity.

Should you be interested in updating your estate planning, please do not hesitate to give us a call on (07) 3832 5555.

Advance Health Directive – Benefits to you and your family?

Life is full of surprises and not everything goes according to plan. The one thing we treasure is the freedom to make a choice about our life including our health care. As distinct from an Enduring power of Attorney, it is important to plan ahead for the possibility that you may no longer be able to make serious end of life decisions regarding your health care. What happens if you lose capacity to make health decisions on your own behalf?

A situation may arise where you suffer from an accident, dementia or a mental illness. It is absolutely vital to express your wishes for your future health care ahead of time, so that health professionals have clear directions about the types of treatment that you want to receive. Doing so can also relieve the burden experienced by your loved ones when making difficult decisions on your behalf. Every person we have spoken to that had to make that tough decision about continuing life support for their spouse felt terrible no what the decision made.

Certainty about your end if life health care can be achieved through an Advance Health Directive (‘AHD’), a binding legal document which spells out your future health care preferences. The  document under  ‘Your Directions’, is divided into three parts; life-sustaining treatment,  other health care and  blood transfusions. You can give binding directions in each category, so that a hospital or doctor knows exactly what you require.

An AHD allows you to give directions about life-sustaining treatments such as CPR, assisted ventilation and artificial nutrition (example naso-gastric feeding) which aim to prolong your life. To make a  decision, on whether you want this to be done, we recommend that you consider your age, state of health, your values and what quality of life means to you. You can choose to either choose yes or no to  particular treatment in different sets of circumstances to life-sustaining treatments, or even leave the decision with your attorneys.

The next part of the document allows you to give directions regarding both general and special health care. General health care relates to the majority of medical treatments, procedures and services for mental and physical conditions. Conversely, special health care includes procedures such as organ donation, experimental health care and participation in special medical research are options you can choose.

The final part of ‘Your Directions’ relates to blood transfusions. This includes the transfer of blood, red cells, platelets and/or plasma. You may stipulate the terms upon which you would consent to a blood transfusion or list the types of transfusions that you would accept. This section may also be useful if you have religious preferences that do not sanction the procedure.

Your doctor will need to explain the treatment options to you and witness your AHD to confirm that you have capacity to execute the document. During the appointment, your doctor will explain the medical implications of each health states and treatment in the context of your medical history. If you are terminal, palliative, unconscious or in a permanent negative state, you may consider treatments in a  different light and select different options.

It is also worth noting that an updated version of this document was recently released by the Queensland Government which allows you to appoint attorneys for health matters. This section does not need to be filled out if you have prepared an EPA.

If you wish to have an Advance Health Directive as part of your strategic estate plan to ensure that your wishes regarding your future health care are clearly recorded, please contact our office on (07) 3839 7555.

What is an Enduring Power of Attorney and why is it necessary?

An Enduring Power of Attorney (‘EPA’) is a legal document that allows you to appoint one or more trusted individuals to make decisions about your financial and personal (including health) matters should you lose capacity to make these decisions on your own behalf.

An EPA is a forward-thinking document. It plans ahead for a situation where you lose capacity to manage your own affairs and outlines your wishes for your care ahead of time. For example, an EPA would come into effect should you experience a medical condition (such as a stroke) , mental illness or accident that impairs your decision making or ability to sign (such as paralysis) . You are also able to specify the circumstances under which your attorneys may begin exercising their decision-making powers. Ultimately, the document enables your loved ones to manage your affairs in accordance with your needs and best interests. Most of the time it is needed so that access to bank accounts, access to insurance, access to superannuation member benefits and a sale of  property is required to support you. Financial institutions are very tough on proving what powers the attorney has been granted, so very careful thought must go into the drafting of the special conditions and what actions an attorney can take.

At the end of 2020, the Queensland Government introduced a new EPA form which separates your attorneys’ decision-making powers into two sections: personal (including health) matters and financial matters.

Personal (including health) Matters

The first section of the form relates to personal and health matters. This covers decisions about your general welfare, including the support services that you may require and decisions regarding your place of residence.

The section also relates to decisions surrounding your health care, enabling your attorneys to make decisions regarding any medical treatments and services that you may require. If you have specific wishes about your future healthcare, an Advance Health Directive may be completed with the assistance of your General Practitioner to supplement your EPA. We will discuss this further in our blog post next week.

Financial Matters

You may also enable your attorneys to assume responsibility over your financial affairs should you lose capacity. This may relate to access to superannuation, making claims on insurance policies, managing your businesses, paying your expenses, selling your property or making investments on your behalf.

It is also worth noting that the new EPA form allows you to require that your attorneys notify you, or another trusted person, of the content of any decisions made on your behalf. This is an extra layer of accountability to ensure that your attorneys are acting in your best interests.

We recommend preparing an EPA as part of your strategic estate planning to support your loved ones in carrying out your wishes in the situation that you lose capacity. An EPA can also provide you with peace of mind, as you can be confident that your needs have been planned for ahead of time.

At Perspective Law, we can insert tailor made clauses to further maximise the protection that an EPA can offer. For more information, please give us a call on (07) 3317 4312.