Cementing your succession plan to ensure your legacy. Getting all your "ducks in a row"

This is one of an ongoing series of 10 articles on this topic. This article is the final in the series, and follows on from, The Role of the Will in a Succession Plan, Family Business Succession and Asset Protection, Succession to the Third Generation, Transitioning the Current Generation out of the Business, Employment and Equity in Succession to the Next Generation, Sale of the Business as an Option in the Succession plan, Succession Planning: How to Bring Non-Family Members into the Business, How to Create a Succession Plan and Understanding Business Structures for Succession & Asset Protection.

Throughout the preceding nine articles in this series, specific steps have been advised to attempt to ensure smooth succession:

  • The correct structure, for operation, asset protection and succession;
  • An up-to-date family succession plan setting out current and future governance, employment and equity roles;
  • An operating board with non-family experience, to provide independence and provide continuity and stability in transition; and
  • Effective Wills, trust deeds, and company constitutions.

After death, the executors named in the Will, and professional advisers such as the lawyer and accountant, will need to determine the values of the deceased’s assets and liabilities at the date of death to make the Probate application to the Supreme Court. The Grant of Probate is the document needed to deal with the assets of the deceased, and pass them on to the beneficiaries under the Will. Shares in corporate trustees are disclosed at nominal value, company shares are disclosed at their value at date of death (as determined by the accountant) and sums due to the deceased in the financial statements of any entities are also disclosed as assets of the estate, whether or not forgiven in the Will.

Certain assets can be accessed without a Grant of Probate, for example superannuation and life insurance. Assets owned jointly as “joint tenant” (but not “tenant in common”) can be transferred to the surviving joint owner on production of a death certificate.

Hopefully, the family agreed to a Succession Plan (to prevent nasty surprises), planning started early enough to provide fairly for everyone (whether equally or not), assets at risk of a claim were shielded and the individuals within the business were properly prepared for the transition.

Where the Will or trust deed includes successor trust appointor provisions, which are immediate, the new appointor or appointors may immediately exercise the powers of appointor in the trust deed (outside of the deceased’s estate) and may usually remove and replace the trustee and take control of the trust. Alternatively, if there is a corporate trustee, and the Will provides for a gift of the shares in that corporate trustee, the beneficiary of the shares may wait until the shares are transferred to them, be appointed a director (if they have enough shares) and join in exercising the powers of the corporate trustee together with any other director. In the same manner, if other company shares are bequeathed in the Will, the beneficiary will need to wait for the transfer to be registered and then use the votes attaching to those shares to be appointed a director (if not a director already).

Case Study

The case of Wood v Inglis [2008] NSWSC 1147 highlighted some important procedural issues pertaining to corporate trustees and control of companies and trusts on death of a shareholder, and the importance of the choice of the executor of the Will in ensuring a smooth succession process. In that case, the deceased bequeathed his controlling shares in the corporate trustee of a trust by Will. The beneficiaries of the shares recorded the transfer in the register of members of the corporate trustee, to show themselves as the owners of the deceased’s shares, convened a general meeting and proceeded to remove and appoint directors, who would exercise the powers of the corporate trustee.

The importance of the constitution of the company soon became clear. Shares may be transferred to beneficiaries pursuant to the Corporations Act, any “replaceable rules” and the company constitution. In this particular case, the constitution prevailed and, as is common, provided that the legal personal representatives (executors) of a deceased holder would be the only persons recognised as having title to the deceased’s shares. As such, the Court found that only the executors could have validly transferred the shares, either to themselves, and subsequently to the beneficiaries, or directly to the beneficiaries. Further, the constitution provided that only the directors could validly approve and register the transfer of the shares. As the deceased’s wife, who was an executor and a director, had played no part in either the transfer of the deceased’s shares to his children from a previous relationship, or the subsequent general meeting purporting to replace her as director, the transfer of the shares and the replacement of her as a director were invalid.

As the shares in the corporate trustee, which were of nominal value only, were not required to pay the debts of the deceased, the executors, acting together (as executors are bound to act), could have taken steps to transfer the shares to the beneficiaries and the directors could have registered the beneficiaries as the owners of the shares. However, the deceased’s wife, as an executor and director, had not been prepared to do so due to differences which had arisen within the family.

Of course, had the trust deed included successor appointor provisions and the Will nominated the children from the previous relationship as successor appointors of the trust, effective at the date of death, the new appointors could have removed and replaced the corporate trustee and assumed control of the trust immediately.

This is not uncommon. Similar issues have often arisen where, for example, nominations over super death benefits have been found to be invalid, or have lapsed, and the trustee has exercised discretion over the member benefits of a deceased member, in his or her own favour instead of how the deceased intended.

The case of Wood v Inglis highlights the importance of understanding the legislation and documentation surrounding the Will, both in the succession planning process and subsequently when dealing with the administration of an estate. It also highlights the importance of giving proper consideration to the nomination of executors of a Will, the trustees and appointors of a trust and the shareholders and directors of a corporate trustee or other company. Understanding the interrelation between them is vital, as one disgruntled relative in the wrong role can derail a carefully planned process.

There is no such thing as a “simple Will” in business succession, or where companies and trusts are involved. The process of making a Will should have regard, not only to estate assets, but also to the non-estate business entities and the people who will eventually influence the transition, such as trustees, appointors, shareholders, directors and executors.

This was originally published in Australian & New Zealand Grapegrower & Winemaker.