This presentation provides an overview of implementing a business succession plan and discusses key concepts including ownership, revenue, and asset debt protection. The presentation also explores the key legal issues involved in succession agreements and funding issues.
16. Succession Plan A and Plan B
â
The business succession plan âAâ (shareholders agreement)
includes
⥠retirement or sale
⥠resignation
⥠other exit conditions (divorce, bankruptcy)
â The business succession plan âBâ (buy/sell agreement)
includes
⥠death
⥠disablement
⥠critical illness
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17. Exit options
Today
Voluntary Exit
Death
Involuntary Exit
Business Succession Planning
Estate Planning
Trigger Events
Plan A- (VOLUNTARY) Retirement, Resignation, Sale, Divorce
Plan B- (INVOLUNTARY) Death/Disability/Trauma
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26. Asset protection â case study
â
Peter and Mary own 50% of the shares in their family company
â
Company borrows $2 million
â
Insures each for $1 million
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28. Revenue protection
â
Equity/debt reduction is not key person
â
Allows the business to carry on
â
Some owners may be key persons, some may not
â
Employees may be key persons
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39. Super owned
Plus
Minus
Tax deductibility on contributions to
pay premiums
Death benefits can only be paid to
beneficiaries as limited by legislation
Premium funding (Super fund pays
premiums not insured)
May make the fund Non Complying
Removal of RBLâs â 1 July 2007
Would need careful drafting of the
associated documentation
More favourable tax treatment of
TPD (particularly self employed)
Potential tax on TPD benefits if Life Insured
is under age 60 at time of claim
Binding nominations can be made
Critical Illness premiums are not generally
deductible
Critical Illness tax
Flat rate maximum deductible contributions
Claims settlement and access - possible
delays
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40. Trust owned
Plus
Minus
Avoids CGT on insurance proceeds:
ď§ policy owned by Trustee on behalf of
Life Insured
ď§ Life Insured is the beneficial owner
CGT payable if absolute entitlement trust
not accepted by ATO
One policy:
ď§ covers several needs
ď§ reduces policy fees
ď§ may provide annual premium
volume discounts
Obtain comprehensive ATO approval
before proceeding â product ruling 2010
Can provide for quick settlement, as
policy proceeds are held outside of the
estate
May be documentation and
administration costs
Trust Deed embodies rules covering
application of policy proceeds
Insurance benefits can be varied
without amending ownership
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42. Self owned
Plus
Minus
Proceeds are paid quickly into the
estate
Good documentation to protect interests
of all parties is required
Should avoid CGT on TPD or Critical
Illness benefits
Cost inequalities
The Insured can take the policy with
them after they leave the business
No deductibility
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43. Company owned
Plus
Minus
Can pay premiums out of the
company cheque book
Potential for CGT on TPD or critical illness
benefits
Company may buy back the shares
which can simplify the settlement
process
Proceeds into the company may compound
the problem by increasing the value of the
business
Money may be tied up in the company
Could be issues on getting money out
Proceeds under control of remaining
directors
As the surviving party acquires an additional
interest in the business for no further
consideration, this method can give rise to
less than desirable CGT implications on later
sale of business
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44. Hybrid model
Plus
Minus
Avoids CGT on insurance proceeds:
ď§ policy self owned
ď§ issue of âabsolute entitlementâ
or âbare trustâ does no exist
Good documentation to protect interests of
all parties is required
One policy
ď§ covers several needs
ď§ reduced policy fees
ď§ annual premium volume
discounts
Additional documentation required to be
built in to ensure key person or debt
protection covers are paid to the business
and CDF liabilities avoided
Policy proceeds are paid to the estate
Cost inequalities
Insurance benefits can be varied
without amending ownership
Involvement of lawyer means almost
impossible to omit agreements from
process
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46. What we are seeing in the market
â
Self ownership/super
â
Option agreements
â
Structuring of arrangements
â
Keep it simple
â
Total package
â
Hybrid
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48. Other factors
â
Release of guarantees
â
Internal loan accounts â both debit and credit
â
Insuring for CGT
â
Asset holding entities
⥠do they have the power to gift
⥠CGT â deemed market value consideration
â
Commercial debt forgiveness
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50. Implementation process
â
Facilitate the process
â
Provide background material
â
Recommend funding
â
Obligation free fixed fee quotes
â
Keep it simple
â
Bespoke or elawyer
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51. Plan A â shareholders agreement
â
Activities of the company
â
Involvement in business
â
Funding of the company
â
Management of the company
â
Decision making
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52. Plan A â shareholders agreement
â
Restraint of trade
â
Pre-emption arrangements
â
Deadlock
â
Termination of agreement
â
General matters
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56. Contact
Matthew Burgess
Partner
T +61 (0)403 209 977
E mburgess@mccullough.com.au
Disclaimer: This presentation covers legal and technical issues in a general way. It is not designed to express opinions on
specific cases. This presentation is intended for information purposes only and should not be regarded as legal advice. Further
advice should be obtained before taking action on any issue dealt with in this presentation.
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