Is your business prepared for life after death?

March 21 2017

Is your business prepared for life after death?

Although many of us don’t want to consider this question, it is very important as most owners want their business to survive them. New Zealand has a large number of family businesses, and in Hawke’s Bay many are family farms, which pose particular problems of their own when answering this question. Here’s the plan.

Minimising disruption is priority one

You’re probably aware you need an up-to-date will and Enduring Powers of Attorney (EPA) to manage any unexpected events, but you can do much more to ensure your business continues to operate normally.

Nominate someone you trust to act for you and in the best interests of your company. This person should have an EPA and be familiar with how your business is run, essential even as a contingency plan for sickness or an accident.

Review your company structure

Usually the best structure is a company where you are the main shareholder, with two directors, or at least an alternate director. A second director can take care of daily operations in your absence. If you’re unable to make decisions, the person who holds your EPA can exercise your shareholder voting rights and appoint a new director in the interim.

The same applies if you were to die. The executor of your estate will take care of your shareholding and appoint a new director if required. As part of your planning, make sure your family and employees know who to contact if anything like this happens. They also need to know who holds the EPA and who is named in your will. You should also appoint someone to be a backup to the person holding your EPA.

Choose your executor carefully

If you operate your business in your own name, your business becomes part of your estate when you die. Your executor must step into your shoes and must be able to carry on all of the work you were doing.

If your business is run through a company, which is usually the best approach, then your executor will manage your shares in the company. Your shares, not the business itself, are part of your estate. In this case, your executor needs to select the right person to run the business. As part of your planning, you should document any ideas about who that person might be or what qualities they need. This will help to preserve the company’s capital, reputation and integrity.

It’s usually best to put this information in a letter of wishes or another informal document rather than your will. Circumstances change and what seems like a good idea now may prove impractical later.

Your will needs to give your executor enough powers to continue to run your business, such as the power to borrow money if required, or the power to sell the business. Consider if you want your partner or a family member to inherit your business, of if you want the executor to sell the business so your family receives the proceeds.

Should you keep your business in the family?

New Zealand is built on small family businesses and so it’s natural to feel strongly about passing your business on to future generations, but locking it in a trust and expecting it to last for 80 years isn’t always realistic. As the ‘shirtsleeves to shirtsleeves’ proverb tells us, what you earn can be lost.

Inevitably, some or many family members will want to go their own way with their share of the inheritance. Our will lawyers often advise that it’s best to let the family negotiate a buy-out. This is where a member or members of the family who have a passion for the business buy the others out.

How to prevent a family feud over the farm

Fights over the family farm are one of the most common examples of bitter litigation in New Zealand. Traditionally, parents arranged to give the farm to one son, expecting he would carry on the farm. Naturally, they didn’t want him to start off with too much debt.

These days, daughters are just as likely to want to take over the farm. More importantly, other family members are likely to be unhappy if they are effectively cut out or receive only a small share of your estate. In the past, structures such as trusts were used to attempt to prevent possible claims after death.

Now, trust lawyers suggest having a company own the farm. This allows company shares to be sold progressively, at a fair value, to any family member keen to carry on farming. In turn, this creates cash flow to provide for the other members of the family.

Talking to a trust lawyer is the first, best step

We hope this overview gives you an idea of what you need to do to ensure your business survives you. Even though it’s a hard subject to talk about, do talk to one of our trust lawyers about it. Your family, employees and their families will thank you for considering their future.

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