Real Estate Investor Magazine South Africa July/August 2019 | Page 61

ESTATE PLANNING
The importance of
estate planning for
business owners
Ensuring the continuity of your business
BY JOHAN STRYDOM
W
hile most people acknowledge the importance
of comprehensive estate planning as a vehicle for
protecting the financial wellbeing of their loved
ones if they pass away, the same care is seldom taken by
business owners in terms of planning for the continuity of
their company should they die.
This type of failure to plan for the business continuity,
or the appropriate disposal of your interests in a business
can create massive headaches for any business partners
who survive you and for your spouse or partner after
you are gone. It is not only these immediate individuals
who can be negatively impacted by a failure to plan for
business continuity. If your company employs people or
has suppliers who depend on it, they can also experience
significant financial problems if you don’t have the right
plans in place.
While a comprehensive business continuity plan that
forms part of a broader estate planning process, requires
close attention of a qualified financial adviser, there are a
number of essential aspects that you must consider if you
own or have a stake in a business.
The first and most important aspect of effective
business continuity planning is to identify and appoint
someone who has the necessary skills, experience and
acumen to immediately take over the day-to-day running
of the business if you pass away suddenly. Too many
business owners simply leave the business, or their share
of it to their spouse or life partner. While this may seem
like a logical and easy estate planning decision, unless
that partner has been actively involved in managing the
business alongside you, it is likely to cause them and your
surviving business partners, untold headaches.
If your spouse or partner has not been involved in your
business while you are alive, it is unrealistic to expect
them to get involved in it after you die. Furthermore, the
person you leave your share of the business to may find it
very difficult to accurately calculate the fair value of that
share should they want to dispose of it. Simply stating in
your will or estate planning instructions that your spouse
gets the business could severely jeopardise their chances
of getting the sale value you would have liked them to
receive.
It would be advisable to consider entering into an
agreement with any business partner you have in which
the future ownership of each of your business interests,
and the method of calculating or valuing those interests,
is clearly spelt out in a legally binding contract. This should
also be supported by the form of financing arrangement
which will provide sufficient capital for the buy-out of
your business interests should you pass away. An example
is a life insurance contract with an annual escalation for
each business partner. This is however dependent on the
ownership structure as it may require a more complex
legal and financial arrangement which can be drawn up
with your financial adviser.
Secondly, it is very important to consider any current or
future financial liabilities you have to the business, such as
outstanding debit loans and anything the business owes
you in the form of credit loan amounts. In both cases,
the executor of your estate will be tasked with settling
these amounts, and you need to ensure that you have
the means in place to settle debit loan balances without
these payments negatively impacting on the people who
depend on your estate after you die.
If you have a credit loan account with your business,
the executor will recover this money from the business to
add to your deceased estate. Unless you and your business
partners have made appropriate arrangements to cover
these amounts should any of you pass away, the business
could suffer massive financial strain.
Sureties present a similar risk and if you have stood
surety, in your personal capacity, for a business finance
facility or credit purchase, it’s very possible that the
creditors involved in these transactions will require
immediate and full settlement of the outstanding amounts.
Your loved ones cannot afford for such surety payments to
come out of the money that is rightfully theirs as part of
your estate. It is imperative that you have separate facilities
in place to fully cover any such financial responsibilities.
While the above list of business considerations is by no
means exhaustive, it highlights the complexities that must
be considered by any business owner when doing their
estate planning. Failing to include careful and thorough
business continuity or disposal plans as part of your
personal estate planning has the potential to severely
diminish the value of an asset that you have most likely put
your heart and soul into over the years. On the other hand,
spending time and effort on effective business continuity
planning is an investment that could deliver excellent
returns for the people you care about most.
RESOURCES FNB Fiduciary
SA Real Estate Investor Magazine JULY/AUGUST 2019
59