Fiduciary Services

Is your ‘business will’ worth the paper it’s written on?

As a business owner, you’re proud of your legacy – regardless of its size. Having a last will and testament to help ensure that your loved ones benefit from your lifelong sweat is therefore a no-brainer. But, how sure are you that your ‘business will’ is worth the paper it’s written on?

Sanlam legal adviser David Thomson explains that a ‘business will’ should not be confused with the individual’s will executed in terms of the Wills Act. Instead, the concept of a ‘business will’ refers to a succession plan. A buy-and-sell agreement is sometimes referred to as a ‘business will’ as it expresses the wishes of the business owner as to who will take over his or her share in the business and at what price.

Why the details matter

“Many business owners appreciate the importance of having a succession plan or business will. However, we often find some wills difficult to implement because they just don’t have enough details about how to deal with certain issues. Or, there is just not enough cash in an estate to fully implement them – even if the business owner had millions of Rands worth of assets,” explains David.

He cautions business owners who are either sole proprietors or in a partnership to pay particular attention to the liquidity of their assets, as this will determine the extent to which any inheritance will be possible.

He says that at the death of a sole proprietor, a business ceases to exist. The executors of the estate cannot keep the business running as if nothing has changed. Therefore, unless the last will and testament makes provision for someone to take over the business while the estate is being wound up – or there is a buy-and-sell agreement in place with a third party – the business will be forced to shut its doors. A partnership, on the other hand, is automatically terminated even if the other partner plans to continue with the business. The deceased partner’s estate needs to be wound up and the executors may not be able to transfer the business assets to the other partner if there is not enough cash in the business.

What this means for stakeholders and the critical importance of liquidity

What this means for stakeholders

In such a scenario, employees are displaced and the business is obliged to offer them retrenchment packages, settle leave pay and vested bonuses. Because employee and creditors’ claims get preferential treatment, the business owner’s heirs will only receive what is left after all such claims have been paid.

Furthermore, outstanding SARS payments (including VAT), UIF payments and retirement fund contributions collected from staff are also settled first, and all this may erode the cash that the business owner left behind.

“There is also a problem of lease agreements, hire-purchase contracts and timeshares. These still need to be paid until the contracts expire. While in the case of lease agreements, the landlord must endeavour to find a new tenant, this may take months. Until then, rent will be claimed against the estate as provided in the lease.”

The critical importance of liquidity

Thomson explains that while a business owner may have valuable assets when he dies, it doesn’t mean much if the value cannot easily be converted to cash. The lack of liquidity means executors of the estate may have to sell items at a giveaway price or delay the process of winding up of the estate if the heirs do not want to sell some assets.

“Unfortunately the best price you can charge when winding up a cash-strapped estate is what a cash-paying buyer is willing to pay. When heirs don’t accept that price and the estate cannot be wound up in reasonable time, interest-bearing debts like SARS payments accumulate and they eventually claim a greater share of the deceased estate when the process is finalised.”

Solution worth considering

To circumvent the problems created by cash shortfalls and delays in the winding up of their estate, business owners are encouraged to have some personal investments outside of the business.

In this context, David says a retirement annuity (RA) is a very sensible option since its proceeds are protected from creditors. If you are a sole proprietor and need to spread your personal investments beyond the RA, he explains that you may need to consider setting up a trust given that, in the eyes of the law, a sole proprietor and his business are one entity. A business owner can then donate up to R100 000 per year to the trust. Anything above R100 000 per annum will attract donations tax of 20%.

A method of dealing with potential cash challenges is to take out a life policy specifically to cover business debts, says David. The business owner can specify in his will that the policy must be payable to his estate and he may even stipulate which debts are to be covered by that policy. Some estate-planning companies like Sanlam Trust will discount the executor’s fee substantially if a business owner has made such an arrangement.

“This can truly make a difference between winding up the estate in four months or four years,” says David.

He concludes that business owners need to enlist the help of both financial and legal advisers when drawing up a will in order to ensure that all potential problems are addressed.