As a business owner, estate planning should be your top priority along with your retirement plan. This is because, besides all the life stage estate planning concerns described in this web-site, you will face additional concerns. The two most common concerns are:
Will your personal assets be contaminated by your business liabilities?
The most probable, and deadly, cause of the above situation is if you were to act as personal guarantor to a business (either knowingly or unknowingly). If you operate a business in Singapore, you will inevitably be signing off as a personal guarantor for your business capital from banks or financial institutions. Many people have the misconception that, if you structure your business as a private limited, your personal assets will be shielded from your business liabilities, giving rise to a false sense of security. Theoretically, this is correct, but the problem is that the bankers also know about this. Therefore, in order to secure their interest when granting you credit or business loan, they will require you to be personal guarantor so that they can recover from your personal assets if your business defaults on the loan.
Another possible cause of the contamination of your personal assets is law suits regarding negligence or your failure to fulfill the business contracts, of which you are personally accountable for.
Therefore, whether you are a specialist doctor starting your own clinic, an entrepreneur doing a niche business, or a filial son taking over a family business, you have to start ring-fencing some of your personal assets immediately. Some important assets to be ring-fenced could be your fully paid matrimonial property, life insurance policies and your retirement plan.
Does your business need to be continued when you die? If your answer is yes, you need to think about business ownership and management succession. If your answer is no, you need to think about a business exit or liquidation plan.
Business continuity is an important consideration point in estate planning for business owner. If your business is owner-dependent, (e.g. if you are a specialised doctor, a one man law or accounting firm), you might want to drop the idea of business succession and focus on having a business exit or liquidation plan upon your death.
If, on the other hand, your business ownership and management are organised around siblings (i.e. family business), or a private limited holding company controlling substantial shares of a listed company, you might want to have a business ownership and management succession plan. Otherwise, the transfer of the business assets will follow the Intestate Succession Act, which may result in an undesirable outcome.
It is not uncommon to see businesses, and even families, break up due to estate planning disputes after the founding business owner passes away.
Estate Planning Implications
- Do you think your business needs to be continued after your death?
- Are there family members in your business? Is it wise to pass on the business ownership to a family member who is not involved in your business?
- Your personal assets could be exposed to your business liabilities, e.g. personal guarantees or law suits.
- Your designated executor might not know your business affairs. This could lead to subsequent creditors’ claims onto your estate, even after your estate has been distributed & the case has been closed. Your executor could be legally liable, which is unfair to him/her.
- Your employees could feel resentful about the sudden closure of business, and sue your estate for accrued bonus, salaries, and CPF.
- The existing co-owners might not have sufficient liquidity to buy out the shares from your estate. This can upset the business ownership dynamics.
- Some of your personal assets could not be distributed because they have been pledged as collateral for business capital. E.g. fixed deposit.
- Your family’s financial security might be diluted or compromised by your business liability.
- If you own the business property (e.g. office unit) in personal name, the unintended beneficiary of this property (e.g. your survival joint owner of this property) has more legal rights on the property than your business.
Estate Planning Solutions
- You need to review your will, taking into consideration how to dispose or transfer your business.
- You need to think about using the appropriate legal and financial tools (e.g. trust) to ring-fence your personal assets away from your business creditors.
- If your business needs to be continued after your death, you should have a business ownership & management succession plan.
- If your business does not need to be continued after your death, you should have a business exit or liquidation plan.
- You should set up a well-funded buy-sell agreement with your existing business stakeholders so that the fair value of the business can be realised for your estate.
- If you intend to pass the business to one of your children, ensure that the rest of the children are treated fairly in your estate distribution plan.
- Ensure your business creates sufficient liquidity upon your death to discharge your personal guarantor responsibility.
- Provide sufficient liquidity for the business to buy over the business property from your estate.
- Guarantee your family’s financial security using appropriate life insurance policies.
- Communicate and brief your designated executor or trustee about your business affairs.