When you’re an entrepreneur or small business owner, your business day never ends. You are constantly planning, sorting out cash flow, looking for new customers, marketing your product, motivating for finance, recruiting, training or getting governance structures in place. It can be all-consuming, like raising a child.
However, while many business owners plan for the future and dream about growth, they neglect to consider the continuity of that business past their own lifetime by including it in an estate plan, or when drafting a will.
“Succession and estate planning should go hand in hand in both personal and business capacity,” says Riaan Botha, head of Fiduciary Advice and Fulfilment at Absa Trust.
Absa Trust is South Africa’s biggest trust company providing advice in terms of estate planning, the drafting and safekeeping of wills, the administration of estates, and the establishment and administration of trusts.
“As a business owner, you need to ensure that there is a succession plan in place to deal with what should happen when you are no longer around. I’ve seen many cases where there was no estate plan or even a will in place,” says Botha.
“The worst situation in which I have been involved was where a company had to close down after the owner passed away, leaving 400 employees without a job.”
For entrepreneurs, the importance of a business plan is crucial and obvious. However, this must be accompanied by a personal and business financial plan to ensure continuity of the business after your demise. This will also allow for effective generational wealth transfer.
“A financial plan without an estate plan is a very ineffective plan,” says Botha.
According to the Fiduciary Institute of South Africa, a good estate plan should be flexible and have the objectives of minimising tax, providing liquidity for unexpected expenses, providing financial security, ensuring harmony in the surviving family, protecting business interests and assets, facilitating the administration of the estate and helping with succession planning.
Protect your business by establishing an effective trust structure
If you have just started a business, you should probably consider the establishment of a trust to hold the shares in the business to peg the growth of the business’s value in your estate (that you believe will grow over time), at the value at which it is transferred into the trust.
“Any assets that form part of the trust are not included as part of your estate and the growth of those assets can take place in the name of the trust and not in your personal capacity,” explains Botha.
He references a case where the owner of an IT business considered transferring the shareholding of his business to a trust, but never got around to it. When he passed away unexpectedly, his estate had to pay a very large lump sum to the South African Revenue Service in taxes and duties. Had the shareholding been held within the trust, his beneficiaries would have been left with a larger legacy and the finalisation of the administration of the estate could have been expedited.
Botha believes people have an incorrect perception that trusts are only for the wealthy.
“That is not the case,” he says, emphasising the fact that “there isn’t a one-size-fits-all solution when establishing a trust, as each person’s needs and objectives are different.”
Setting up an inter vivos or living trust is not expensive, nor does it have to hold many assets at the start. In the long run it can definitely assist an individual’s family and business partners to ensure that their death does not affect the continuity of the business and bolster the intergenerational transfer of wealth.
If you plan proactively and set up the trust early on, before your business has a high intrinsic value, the tax implications will be greatly reduced, and business continuity will be promoted.
“Tax laws have changed over the past couple of years, so yes, there might be tax implications when you transfer assets to a trust. That is why it is so important to start this process while you are still young to avoid those unnecessary costs,” says Botha.
Revisit your estate plan regularly
According to Botha, having a will in place is a very important part of your estate plan and probably the most important contract that you will draw up in your entire life. Reports cite that data from the Master of the High Court in South Africa shows that only 30% of the country’s population have wills in place.
Having a will and an estate plan is one thing, but keeping it up to date is incredibly important.
“You have to revise your estate plan as and when major things change in your life,” says Botha. This applies to business owners as well.
“If you acquire a new business or if there are changes to the shareholding of your business, you get married or divorced, you have a new baby or if one of your beneficiaries in terms of your current will passes away – your will should be revised to accommodate these changes.”
The big picture
Botha urges business owners to speak to their financial advisors about a holistic offering from their financial services provider to protect themselves and their businesses even after they are no longer around.
Products such as buy-and-sell insurance or key-person insurance can be used to assist a business to continue with operations when one of the directors or shareholders passes away. In the case of a buy-and-sell agreement, it allows the remaining shareholder(s) to buy out the shares or interest of the deceased and with key-person insurance, capital is injected into the business to be used to replace a key individual who has passed away in a business. “In this way, the impact on the business is minimised as there will be no involvement from the dependants of the deceased and [having such insurance in place will also] create liquidity within the deceased estate,” says Botha.
“As you work on your business plan for the business’s needs, you have to also work on your succession and estate plan.”
Brought to you by Absa Retail and Business Banking.
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