Having A Will Done Is Different From A Business Succession Plan

By Alan Wong

Principal Consultant
W3 Consultancy Pte Ltd
Senior Estate & Succession Practitioner
Precepts Legacy Pte Ltd

While both a Will and a business succession plan deal with the transfer of assets and responsibilities, they serve different purposes and cover different aspects of a person’s life:

A Will

  • Primarily deals with personal assets, not just business-related ones
  • Ensures that personal belongings and wealth are distributed according to an individual’s wishes

A business succession plan

  • Focuses specifically on how a business will be managed and transferred to others
  • Addresses the unique challenges for considerations of business ownership

For business owners, it is important to have BOTH a well- crafted Will and a comprehensive business succession plan, especially in the event of premature death or disability.

A business succession plan outlines the strategy for transferring the business in the event of the business owner’s death or incapacity. Without an appropriate exit plan, his/her business and beneficiaries could face various challenges. Here are some potential issues that may arise:

  • Uncertainty for beneficiaries: If the business owner passes away unexpectedly without a clear plan, his/her beneficiaries may be unsure about what to do with the business. This can lead to disputes and confusion among family members, partners, or shareholders.
  • Loss of business continuity: If the business owner is a sole owner or a key figure in the business, his/her sudden absence could disrupt the business and lead to an eventual loss of customers, contracts, and reputation.
  • Debt and liabilities: If the business has outstanding debts or liabilities, the business owner’s beneficiaries might become responsible for those obligations. This can result in shrinkage of the business owner’s estate.
  • Value erosion: A lack of planning could result in depreciation in the value of the business. Without a proper strategy in place, the business may lose value over time, affecting the financial well-being of the business owner’s loved ones.
  • Succession challenges: If there are partners or co- shareholders, will they be willing to work with the business owner’s successor?

Considering a trustee buy-sell agreement

Let’s address how a trustee buy-sell agreement can be structured as a business succession plan in the case where shareholders are not blood-related.

A trustee buy-sell agreement is a type of buy-sell agreement that involves the use of a trustee to facilitate the transfer of ownership interest in a business. In traditional buy-sell agreement, the owners of the business (or their successors) are typically responsible for executing the terms of the agreement.

However, in a trustee buy-sell agreement, a trustee is appointed to oversee and manage the implementation of the agreement. Here is how a trustee buy-sell agreement works:

  1. Appointment of trustee: The business owners, who are involved in the agreement, appoint a trustee. The trustee can be an individual or a corporate trust company. The trustee is usually someone impartial and experienced in such matters.
  2. Triggering events: The agreement specifies the triggering events that would initiate the transfer of ownership. These events usually include the death, disability, or mental incapacity of any owner of the company.
  3. Valuation: The agreement outlines how the business will be valued when a triggering event occurs. This is crucial to ensure a fair price is determined for the ownership interest. The valuation method could be pre-determined (fixed price or formula based).
  4. Funding mechanism: The agreement outlines how the purchase of the departing owner’s share will be financed. This usually involves the use of life insurance policies as life insurance is the most cost- efficient method to address such a purchase.
  5. Trustee’s role: When a triggering event occurs, the trustee becomes responsible for facilitating the transfer of ownership according to the terms outlined in the agreement. Using a trustee can help to ensure a smooth transition and minimise conflicts between the remaining owners or the departing owner’s successor. The trustee acts as an impartial third party, which can be especially useful in emotionally-charged situations.

Below are some frequently asked questions by business owners:

Q: Why do we need a trustee to be involved in our buy-sell agreement?
A: The trustee acts as a neutral party involved in assisting to settle the transfer of shares to the remaining shareholder and for the outgoing shareholder’s estate to receive the insurance payout as soon as possible. Without the trustee, the settlement may take longer to settle.

Q: Is it expensive to set up trustee buy-sell?
A: The cost is for setting up the trust. With the inclusion of the trustee, the neutral party, this expedites the settlement process and prevents potential litigation if there is a delay in settlement.

It is important to note that a trustee buy-sell agreement can be a complex legal arrangement that requires careful consideration and planning. Consulting with an experienced estate planner is highly recommended to ensure that the agreement meets the specific needs of the business owners involved.

Alan Wong is the Principal Consultant of W3 Consultancy Pte Ltd which provides training and consultancy services in the specialised field of business protection planning.

This article was first published in our newsletter, The Custodian Issue 27. Click here to access our latest newsletter.


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