Proper estate and succession planning is always to the benefit of those left behind and this, of course, is reason enough for business owners to take the time to do it properly and seek quality professional advice.
When a business owner dies without a valid will (ie “intestate”), there are likely to be legal and business complications that impact and may jeopardise the stability and future of the business, however it is structured and the legal entities involved.
Imagine the difficulties left behind for others when, after working as hard as you have, to build the business, you are suddenly no longer at the helm and the core decisions are suddenly having to be made by those grieving and without the benefit of a proper plan.
When a person dies intestate, their estate is administered and distributed in accordance with the Administration Act 1903 (WA). Any entitlement to the estate is predetermined and does not take into consideration the personal circumstances of those entitled or the relationships between the deceased and the entitled persons.
An administrator must be appointed by the Court on application of an appropriate person. This person can be any one of the people entitled to distribution of the deceased estate and may not be the person most appropriate to run or to have decision making control over the business, either for lack of knowledge or interest. The status of a person entitled to distribution can also be disputed, for example where the status of a de facto relationship with the deceased is challenged.
Do Estate Administrators know what to do?
When there is uncertainty, there will be disruptions to the day-to-day business operations and possibly, the long-term operation. If no one competent is appointed to quickly step into the role the business will suffer, and employees, fellow business owners, suppliers, creditors, and banks in particular will take action to protect their interests.
The people entitled at law to be administrators of the intestate estate may lack the desire or capability to run a business, leaving employees, clients, and suppliers in limbo. This can negatively impact the value of an asset you have worked hard to build.
Appointing a Legal Personal Representative
Sole traders and sole directors who are also the sole shareholder must always consider who will step into the role.
- By ensuring a will is in place, you are able to choose a trusted person, known as the Legal Personal Representative (LPR), to handle the estate and deal with the business as intended.
- By preparing a will and naming a trusted person as your executor you can ensure that a person who understands your business manages the estate, acting in your best interest, the interest of your family and preserving the estate value.
When a sole director/sole shareholder of a company dies intestate, this can paralyse a business. The shares would be considered an estate asset, and it is not until an administrator is appointed that any person would have authority to deal with the company. This scenario may be avoided if a company power of attorney is in place appointing a person to deal with the business in the event of the death or incapacity of the sole director.
A sole or majority shareholder in a company also has significant reason to have a proper will in place, so as to gift the shares to the person they seek to have the control of and interest in the business, rather than the shares forming part of the residue of their estate left to be distributed to the entitled persons under the Administration Act.
Action points for business owners
- Never downplay the ramifications of dying without a valid will and succession plan in place.
- Business owners must take the time to consider how their personal estate and the business itself, an interest in which is often the largest or one of the largest assets in a deceased estate, will interact upon their death.
- The potential for disputes and delay can be exacerbated by the lack of clear instructions which a will and succession plan provides, particularly when combined with things like family conflict, and spouses and children with competing interests. The result can be costly in time, money, business value destruction and damaged relationships.
- A well-crafted succession plan and transparency with those that will run the business when you no longer can is vital to avoid such disputes, to ensure your wishes are implemented and to provide continuity and stability.
To discuss your estate planning and how you can ensure the appropriate safeguards are in place for you and your business, talk to one of our estate team lawyers today.
The information provided serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable legal team for any specific inquiries or advice relevant to your circumstances.
