Date post: | 14-May-2015 |
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Economy & Finance |
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Succession PlanningYour Business’ Will
Prepared by: Graeme Horsley
Senate Group 27 June 2014
Needs analysed: a structured portfolio
Buy & Sell Agreement
Succession Planning
• Large part of Estate Planning
• Succession Planning includes: Personal Planning
o Planning for the division of the personal estate after death
o Provision for estate administration costs and settlement of debts upon death
o Ensure that there is sufficient liquidity
o Provision for dependants and beneficiaries Business Planning
o Protection of business assets
o Continuity of businesses
o Securing the future of employees
The most vital tool in succession planning is your will
Your business also needs a will to ensure smooth continuity
Importance of a business will
• Who will take over the shares of the deceased owner ? An inexperienced heir?
A competitor?
A speculator?
• Will the dependents get a fair price for the shares? What is the impact of the death of the shareholder on the value of the
business?
How will the business be valued
Fire Sale
Is creditworthiness affected?
• Will there be sufficient funds to purchase the shares? Will the surviving owners be able to afford the shares?
Importance of a business will
• Will there be sufficient income during liquidation? How will the income of the beneficiaries be influenced by the
liquidation of the business?
Will the business be able to sustain its employees during this time?
Will the estate be delayed due to the process of finding a buyer or liquidating the business?
• WILL the surviving owners have sufficient capital to start again?
• WILL the beneficiaries be forced to sell personal assets to support the business or to supplement their income?
Business Will
• It is an agreement: Between the shareholders/members/partners of a business entity
Obliges them to sell their interest on their death/disability to the survivors and
Obliges the survivors to purchase the interest from the deceased estate
• Funding of the agreement is essential• What separates B & S from MOI and Shareholders agreements
How does it mitigate the risks?
• The Agreement provides for: An acceptable buyer
o The surviving members will purchase the deceased’s interest
o Protects their business interests
o Prevents unwanted outside influence
At an acceptable price
o Purchase price or Valuation method is predetermined
With sufficient cash
o No need to raise capital
o Funds are readily available
o Dependents have capital to invest for income
Tax Implications
• Income Tax No income tax relief on premiums paid by shareholder
The proceeds are received tax-free
• Estate Duty If structured correctly it will not add to your estate duty concerns
3 “P”
At time of death must be “Partners”
“Purpose” of the policy is to buy each other out
Sometimes the partners over insure and elect to keep the “change”
Life assured must not pay “Premiums” on his own life
Other interesting points
• What if the shareholder is the only shareholder? Can enter into a buy and sell arrangement even if all the parties are
not co-shareholders ex. An employee
May be tax implications that must provide for
• What happens if the business is terminated? Cede the policies back to the life insured
• Preferably only insure for death and disability• If you can’t make sure the agreement is adjusted
• Off the shelf agreements can cause problems
• Sometimes tired benefits are unavoidable
• Terminal illness benefits
• Partner with someone who can provide unique agreements
Other mistakes that lead to opportunities
• An unsigned agreement or no agreement
• Shareholders agreement or the MOI contradicts this agreement
• Important since the New Companies Act has been enacted
• The policies are in place but owned by the business or have beneficiary nominations
• Premiums are claimed as a tax deduction
• Client will have to resubmit tax returns
• Penalties
• Company pays premiums and not accounted for properly
• Estate Duty Implication
• Shares are over/under-valued and the policies’ values are incorrect
• How does the buyer fund the shortfalls
• Donations Tax
• What value will the executor use to calculate CGT and Estate Duty
Death of the Shareholder
Parties A B and C equal shareholders in the business
owning life assurance in proportion to the respective
shareholding
Death of the Shareholder
Party C dies /becomes disabled and exits the business
Death of the Shareholder
Party A and B become the new equal shareholders in the
business
Increase cover (now 50:50)
Any Questions???