Bus Success 2009 2

Business Succession Planning Presentation

Business Succession & “Buy/Sell” Agreements

Alex Tees , Solicitor, Estate Planning Adviser

Guardian Legal Services

Important disclaimer

No person should rely on any part of the contents of this presentation without first obtaining advice from a qualified professional person. This presentation is given on the terms and understanding that the author is not responsible for the results of any actions taken on the basis of information in this presentation, nor for any error in or omission from this presentation. The author hereby expressly disclaims all and any liability and responsibility to any person, whether a purchaser, recipient or reader of this presentation or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this presentation.

Contents – Business Succession

• 1)Business Succession Agreements ( “Buy/Sell” )• 2)Put and call –v- Mandatory Agreements• 3)Trigger Events• 4)Valuation Issues – Value of the Business• 5)Funding options• 6)Using Superranuation ?• 7)Who pays the premiums ?• 8)Tax Deductibility of insurance premiums• 9)Insurance–How much is enough ? Key Person too ?• 10)Questions


Business Succession Agreements

Can be used for all types of business interests i.e:

Company

Unit trusts

Partnerships

Joint Ventures


“Business Succession Agreements”

“ Buy and Sell Agreements “

Primary function

Determines what happens when one Principal/Partner in the business dies, becomes disabled or leaves (by compulsion)

(as opposed to a Shareholder Agreement to govern voluntary retirement from a Business)

- Sometimes both combined =More Complexity !



Benefits of Business Succession/Buy/Sell Agreements

Protects remaining principals in the business from having to deal with the prospect of the deceased’s beneficiaries,(spouses/children) who may know little about the business.

Can avoid costly litigation and/or valuation disputes.

Ensures succession with minimum disruption to business operations.(NB : provided each Partner has a effective Will !)



Can be drafted to provide for :

Flexibility as to how interest is to be transferred

When transfer is to take place

The value to be given (How to determine the value)

The amount to be paid(NB :include debts/guarantees)

Collaboration - Should Involve and Include :

Clients Accountants , Life Risk Consultants


Mandatory vs Put and Call Agreements

Cap’ Gains - ‘Main distinction lies in CGT tax treatment :

Uncertainty, practical complications and adverse consequences suggest that use of put and call options is usually the safer alternative

Option for the seller to be bound to sell = call option

Option to purchase the interest of departing or deceased partner = Offer must be put to the seller

(At the time of death/incapacity ;departing Partner can offer to sell and the remaining Partners offer to buy)


Trigger Events- When Agreement Operates

All Insurable (at a price !)

Death of a Principal or Partner Terminal illness of Principal or Partner TPD ( Total Permanent Disability ) Trauma In these eventualities insurances pay out Partners’

Spouse & Beneficiaries & their shares transfer to the remaining partners……………


Trigger events

Non Insurable

Criminal offences Mental disability Bankruptcy Retirement

(although Shareholder Agreements can take care of these……)


Valuation Issues

Principals agree from time to time on the valuation of their interests.= Mechanism to determine

Business is valued at time of trigger event.

If insurance used for funding this approach ensures that insurance is always adequate = review the Value and Insurance annually (Minute & Record)

Many ways can you value a business.

A Portion may be unfunded.


Tax Implications

•Tax treatment of insurance proceeds

•Deductibility of premiums

•Determining cost base

•CGT Discount

•CGT Small Business Relief


Funding with Insurance

Who owns policy ?

•Self ownership

•Cross ownership

•Trust ownership

•Super fund ownership


Tax Treatment

•ATO treats acquisition date as the date the interest is transferred not the date the agreement is made to grant the option(s) to buy/sell = Put/Call Options best…….

*Policy proceeds exempt under s 118-300 ITAA 1997

•Provided principals are original owner of policy

•TPD and Trauma proceeds may not protected by 118-300 ITAA 1997 must be received by injured party or relative


Recommendation

Generally self owned policies are the preferred method


Who pays the premiums?

Options

The principal pays for their own policy or

An equal or proportionate share of other principals premiums or

Company/trust/partnership pays


Tax deductibility of premiums

The only situation in which premiums are likely to be deductible is where the relevant policies

are taken out through super.


Fringe Benefits Tax - FBT

If it can be shown that a benefit is provided to a shareholder/employee soley by reason of that person’s position as shareholder benefit not

subject to FBT.


Insurance

How much is enough?

Don’t overlook ;

•CGT, Stamp Duty and legal fees

•Changes in Value of the Business = Annual Review

•Personal debts

•Business debts

•Key person amounts (Revenue & capital)

•*Can use share of Businesses retained earnings ?


Implementation of Business Succession/Buy Sell Agreement

1.Owners/Partners initial meeting = a) Agree Price and method of Valuation on Transfer & Conditions ; Minute or record the Meeting.

b).Value = Sum determined to be insured ;Assess Unfunded Liability(if any)

c) Determine who owns the Insurance Policies = Policy Owner(s)

d) Inform the Family = Possibly lessen chance of disputes in future

2. Insurance Proposal Submitted ,-Insurable Interests & Underwriting

3. Finalise the Agreement between the Partners/Principals = sign agreements

4.Ensure Wills of all Partners/Principals exist; add clauses referring to Business Succession; ensure powers to run the business are included and refer to use of insurance proceeds to pay debts & purchase price ; in Families mutual Wills recognising Business Succession agreements are often useful.

5.If a Company,Trust/Partnership ensure all the above is Minuted/Recorded & Reviewed annually & incorporated within Partners Estate Planning Portfolios.


QUESTIONS

Contact:

Alex TeesSolicitor, Estate Planning Adviser

www.trustdeedregister.com.au

PH: 02 9281 3230/0409813622

Email: [email protected]

www.trustdeedregister.com.au

Thank you!

Alex Tees

Tel 02 9281 3230

[email protected]

Bus Success 2009 2

Documents

Transcript of Bus Success 2009 2