Helping your business survive through death and divorce


by Nathan McEwan and Kurt Topper

In a business context, the failure of a marriage or de facto relationship or the death, critical illness or incapacity of a business owner can result in serious and sudden risks to the business and significant impact on the people involved in it.

Business owners should be aware that such risks as just as important as any other business risk, such as potential creditor claims, employee claims and public or product liability claims. However, in the authors’ experience, this is seldom the case.

Preventative family law and estate planning strategies can be a key factor in reducing the impact of such risks on businesses and their participants.


Your interest in a business can be exposed to a claim from your ex

Under family law, the court has broad powers to make orders altering the interests of parties in assets, including businesses, as it considers “just and equitable”. This requires the court to identify and assess, among other things, the parties’ assets and financial resources, the parties’ contributions to their assets and likely future needs.

This means that your ownership interest in a business may be exposed to the claims of a separated spouse or partner. This, in turn, may lead to a significant disruption to the business, loss of business value or assets, a forced sale, loss of control and cash flow or insolvency problems.


What happens when one of the owners of a business dies?

Similarly, an unexpected death, critical illness or incapacity can create significant problems with the business operation, give rise to unnecessary taxation and lead to benefits or control going to the wrong persons, which may lead to costly disputes.

Furthermore, other key persons in the business may find themselves entangled with a deceased’s family, with whom they may have little or no working relationship.


Family law strategies - Six practical planning steps worth considering.


1. Entering into a binding financial agreement with your spouse or de facto partner before or during your relationship

This may address an agreed division of one or all of the assets of the relationship on separation and agreed financial arrangements during the relationship. The binding financial agreement may deal with how the business is to be continued and treated upon separation. (For more information, please see our earlier article Documenting agreements in family law – parenting plans, consent orders and binding financial agreements.)


2.  Keep your personal and family assets separate from your business

There should be a clear division of personal and business resources. Structuring the business or your business interest via a trust may provide an additional layer of protection.

However, this must be done long in advance of any relationship beginning or developing problems, and its effectiveness will depend on numerous factors. If the separation of business assets is clearly defined, it may be easier for you to detail your contributions to the business, as distinct from personal assets.


3.  Pay yourself a genuine market salary

This is advisable to avoid any argument that you might have diverted family resources to support the business. It will also allow any valuation to be more precise.


4. Keep your spouse from being involved in the business

If your spouse does have some involvement in the business, pay an appropriate wage for the work actually undertaken. This may minimise post-separation arguments around non-financial contributions towards the business by your spouse or partner.


5. Keep up-to-date, accurate records and be transparent with financial information

Importantly, review the business loan accounts and take care when accounting for any directors’ loans, to prevent the accumulation of sizeable accounts which may lead to exposure. If there are loan accounts, then have those properly documented and recorded.


6. Have an agreement between business partners on how the business should be valued every year

An effective buy-sell agreement may also preserve the ongoing control of the business by other key persons and provide a mechanism for acquiring the business interest of a business owner who is in crisis.

Not all of these steps may be appropriate or feasible in all cases, and these steps may not prevent a claim being made on your business by your ex, but they may identify more clearly what is and what is not the “relationship property”, as well as the parties’ respective contributions.


Estate planning strategies

Here are three practical estate planning strategies which can safeguard a business in the event of the death or incapacity of one of its owners.


1. Review and consider the appropriateness of existing business structures and control

Estate planning for business should involve a thorough consideration and understanding of how the business is owned and operated, to ensure that the transfer of assets and control of the business is orderly, and the process is managed to the maximum benefit of the deceased’s estate, family beneficiaries and other key persons in the event of any sudden death or incapacity.

Appropriate planning can also help to structure business asset ownership to minimise or avoid other commercial risks. For example, consider separating business assets such as premises, plant/equipment and intellectual property from trading activities through the use of holding entities, licensing and registered security interests.


2. Plan for management and ownership succession and assign roles and responsibilities

This may entail planning for a future change of trustee and appointors of trusts, the selection of executors and beneficiaries, the appointment of alternative directors, and the appointment of attorneys and corporate attorneys.

Depending on the nature of the business, this will often require preparing other documentation in addition to a will, such as shareholders agreements and buy-sell agreements, as well as reviewing and updating trust deeds, partnership agreements, leases, licences and superannuation death benefit nominations.

Simply leaving assets in a will can expose the business to any potential estate claims from disgruntled family members or other eligible persons. Where a family provision claim is anticipated, the ability of the business to withstand that challenge will depend on the nature of the business ownership and the effectiveness of any succession plan.


3. Funding and taxation considerations

Lawyers will often need to work closely with other professionals, such as accountants and financial advisers, to ensure that the estate plan is appropriate and effective for minimising taxation and other potential transaction costs.

In addition, ensuring that where appropriate, such planning is funded through the use of insurances will help to minimise or avoid any unintended inequalities and potential impact on the ongoing business liquidity and cash flow.


Effective planning can safeguard your business for the future

The importance of planning for managing business risk cannot be understated. The choice not to plan early will mean that succession may be triggered by an event over which you have no control, and so fewer options will be available.

In summary, all planning should address the unique characteristics of your business, as well as your specific and individual wishes and objectives. This may take a variety of forms and strategies, depending on the circumstances, and may traverse legal, accounting and financial advice areas.

Even if you are happily married or partnered and without apparent health problems, the effectiveness of planning often stems from getting in early, well ahead of any problems arising.

While people generally do not commence a relationship or move through life expecting the worst, all relationship and business succession arrangements should at least be considered and deliberate.


Divorce Resource Family Lawyer Nathan McEwan     Divorce Resource - Kurt Topper - Family Lawyer

Nathan McEwan and Kurt Topper are lawyers in the family law and estate planning teams at Stacks Heard McEwan”.
The information provided in this post is general in nature and must not be construed as either legal or financial advice. You are advised to seek advice specific to your circumstances from a registered expert.
This article is republished by Divorce Resource with the permission of the authors.

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