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Publications and Documents:
Adviser Tips:
Adviser Updates:
Individual Updates (Most Recent First): Adverse ATO Advice on Super Buy/Sell Cover Partnership and Trust Loan Accounts Effect of Debt Reduction Cover on Buy/Sell Cover Tax Treatment of Self-Ownership Agreements Vested and Indefeasible Interest Simplifying the Valuation Issue Simple or Complete Succession?
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Simultaneous Deaths
Many Advisers and Clients ask about the possibility of two or more Proprietors dying in the same accident. What are the implications for a Business Succession Plan? How does the standard IGS Business Succession Agreement deal with this situation?
Timing of Deaths It's easier to explain the operation of the Agreement in the case of a two Propritor Business. However, similar logic would apply to more than two Proprietors. Regardless of the terms of the Agreement, the first step is to determine the order of the deaths. If one Proprietor was still alive when the two people were found or they were hospitalised before their Death, then it will be possible to determine the actual order of their Death. However, if they died simultaneously or their bodies were found Dead together, then the General Law infers that the oldest Proprietor died first. The actual (or deemed) order of Death is then used to administer the transactions required by the Business Succession Agreement.
Buy/Sell Arrangements under Business Succession Agreement The operation of the Business Succession Agreement depends on the order in which the Proprietors died. The following explanation applies where there are two Proprietors. First Proprietor to Die In the case of the First Proprietor to die, the standard Provisions require that Proprietor (and any Related Party Vendors) to sell their Equity to the Continuing Proprietor (and their Related Party Purchasers). The first Proprietor to die will be fully paid out, in exactly the same manner as if they had been the only Proprietor to die. This will normally occur, even if the other Proprietor has died as well. Upon their Death, the First Proprietor ceases to have any rights to acquire the Equity of the Second Proprietor on their Death. Second Proprietor to Die As a result of the first transaction, the Second Proprietor to die (the Continuing Proprietor) will now own all of the Equity in the Business. Upon the subsequent Death of the Continuing Proprietor, the Equity in the Business will be distributed to their Family in accordance with their Will (or other documentation). Their Family will now have the sole responsibility and burden of deciding whether to:
They will also be able to make a Claim under the original Buy/Sell Insurance Cover with respect to the Second Proprietor. They will receive Insurance Proceeds equivalent to the Sale Price of their original Equity in the Business (e.g., 50% of the value of the Business). In effect , they would receive exactly the same amount as they would have received if they had died first. However, because there is no surviving Purchaser to sell to, they are able to retain their Equity, as well as the Insurance Proceeds attributable to the value of their Equity. Under the Agreement , their Buy/Sell Cover effectively reverts to Personal Cover, which they would receive tax-free. If they on-sell the Business to a Third Party, then they will also receive the Sale Price for 100% of the Business. Again, this is exactly the same position as if they had not died at the same time as the first Proprietor to die. They would have been able to sell 100% of the Business to a Third Party at any time in the future. .Alternative Arrangements Some Clients wish to change the normal operation of the Agreement. For example, they might specify that there not be a Sale, if the Second Proprietor is also injured and dies within, say, three months of the first Proprietor to die. This means that the Buy/Sell Cover for the first Proprietor to die would revert to Personal Cover. Equally, the Buy/Sell Cover for the second Proprietor to die would revert to Personal Cover. In both cases, they would receive the Insurance Proceeds tax-free. However, both Families would now have the responsibility and burden of deciding whether to:
Whether the Business is sold at a loss or for a gain, both Families would share equally in the loss or gain. This alternative would effectively bind the two Families into a "three-legged race", where they would have to make decisions and reach agreement together about the fate of the Business. It should not be assumed that this will be an easy or conflict-free process.
Debt Reduction and Key Person Cover Under a Complete Succession Plan, it is also possible that there will be Debt Reduction and/or Key Person Cover. The Debt Reduction Cover with respect to the first Proprietor to die would normally be used to reduce the External Debt of the Business. If the Sum Insured was one-half of the Debt, the remaining Debt would be 50% of the original Debt. If the Sum Insured was 100% of the Debt, there would be no remaining Debt at the time of Death of the second Proprietor to die. Their Debt Reduction Cover would effectively revert to Key person Capital Cover or Personal Cover, which they would receive tax-free.
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Adviser Tip The One Page Strategy is designed to help you simplify Succession Planning. It helps you understand your needs, it helps you quantify them, it helps you cost them, and it helps you prioritise them.
Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings. Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth. Please contact us to arrange an appointment or teleconference.
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