Passing a business to the next generation is not just a family decision. It is also a legal, tax and commercial one.
A will that simply says “the business goes to my children equally” may sound straightforward, but it can create difficult questions later.
What if only one child works in the business? What if another wants their share paid out? What if the business is owned through a trust rather than personally? What happens if you lose capacity before you retire?
A proper succession plan should deal with these issues while there is still time to structure the outcome properly.
Planning to pass the business to the next generation? Get the legal and tax plan aligned before ownership changes.
Book a Free Client Assessment →Why a Will Alone Is Not a Business Succession Plan
A will is an important part of succession planning, but it is only one part.
For a business owner, the real questions are usually broader. You need to decide who should own the business, who should run it, whether control should pass during your lifetime or after death, and how family members who are not involved in the business should be treated.
There may also be practical issues around funding the transfer, protecting the business if you lose capacity, and managing the tax consequences of changing ownership.
These questions are closely connected. Giving each child an equal share may appear fair, but it can create practical problems if only one child has worked in the business or is expected to manage it.
A proper succession plan should therefore consider the business structure, the family circumstances and the wider estate plan together, rather than relying on the will alone.
First, Check How the Business Is Owned
Before deciding how the business should pass to the next generation, identify who actually owns it.
The business may be operated:
- personally by an individual
- through a company
- through a family or discretionary trust
- through a unit trust
- through a partnership
- through several entities.
The structure determines what can actually be transferred.
For example, where a company operates the business, the succession plan may involve transferring shares rather than individual business assets.
Where a discretionary trust owns the business, the position is different again. The trust assets are generally controlled by the trustee and are not simply assets that can be gifted under a beneficiary's will.
The trust deed therefore needs to be reviewed carefully.
If the Business Is in a Trust, Plan for Control of the Trust
Family businesses are often operated through discretionary trusts.
In those cases, succession planning needs to consider who will control the trust after the current controllers retire, lose capacity or die.
Depending on the structure, this can include:
- who controls the corporate trustee
- who becomes a director or shareholder of the trustee company
- who holds any power to appoint or remove the trustee
- whether those control rights pass under a will or another document
- whether the trust deed permits the intended succession arrangements.
The Victorian Law Reform Commission has noted that, in a typical discretionary trust structure, the appointor may have significant practical control because of the power to appoint and remove the trustee.
That means updating a will without reviewing the trust deed can leave an important part of the succession plan unresolved.
Buy-Sell Agreements: Planning for the Unexpected
Where a business has more than one owner, a buy-sell agreement can provide a process for what happens if one owner dies, becomes permanently incapacitated or leaves the business.
Depending on the structure, the agreement may deal with:
- who can acquire the departing owner's interest
- how the interest is valued
- when a compulsory sale can occur
- how the purchase price is funded
- payment terms
- insurance arrangements
- what happens during a dispute.
Insurance may sometimes be used to fund the purchase, but the ownership of the policy, trigger events, tax treatment and payment mechanics need to be structured carefully.
Without an agreed process, the surviving owners and the outgoing owner's family may be forced to negotiate the future ownership of the business at a particularly difficult time.
Transferring a Business Can Have Tax Consequences
A family transfer is not automatically tax-free merely because no money changes hands.
For capital gains tax purposes, a gift or below-market transfer may be treated as occurring at market value.
That means a transfer can create a capital gain even where the outgoing owner receives little or no cash.
Depending on the circumstances, the small business CGT concessions may reduce, defer or sometimes eliminate part of the capital gain. However, detailed eligibility requirements apply.
The availability of those concessions should be checked before the transaction is implemented rather than assumed simply because the business is small or the recipient is a family member.
Other rollover relief may also be available in particular circumstances, but not every restructuring or intergenerational transfer qualifies.
Tax advice should therefore form part of the succession planning process from the beginning.
What About Victorian Stamp Duty?
Victorian duty also needs to be considered, but not every transfer of a family business attracts duty.
The outcome depends on the assets and entities involved.
Duty issues can be particularly important where the transaction involves:
- Victorian land
- an entity that owns substantial Victorian land
- trust property
- changes in beneficial ownership of dutiable property.
The State Revenue Office confirms that duty can apply to transactions involving trusts that hold dutiable property, including transfers of property to or from trustees and certain changes in beneficial ownership.
Landholder duty can also arise where an interest is acquired in an entity that holds sufficient Victorian land.
There are exemptions and concessions in some circumstances, including particular trust transactions and family farm transfers, but the conditions are specific and should be checked before documents are signed.
Succession Planning Should Also Cover Incapacity
Succession planning should not focus only on death.
An owner may become unable to manage the business because of illness, accident or loss of decision-making capacity.
The plan should therefore also consider:
- enduring powers of attorney
- company directorship and control
- trustee succession
- access to banking and financial systems
- authority to make operational decisions
- insurance.
A plan that only activates after death can leave the business exposed if the owner becomes unable to participate beforehand.
When Should Succession Planning Start?
Usually, well before the intended retirement date.
For a complex business, succession planning may need to begin several years in advance.
That gives the family time to consider who is genuinely willing and capable of running the business and whether ownership should transition gradually.
It also allows time to restructure the business where appropriate, review tax consequences and update the necessary legal documents.
Those documents may include:
- wills
- enduring powers of attorney
- shareholder agreements
- buy-sell agreements
- company constitutions
- trust deeds
- trustee company arrangements
- insurance arrangements.
Leaving succession planning until shortly before retirement usually reduces the number of available options.
Legal and Tax Planning Need to Work Together
A succession strategy should not be designed by the lawyer first and sent to the accountant afterwards, or vice versa.
For example, a legally simple transfer may create an unnecessary tax consequence.
A tax-efficient structure may also fail to achieve the family's estate-planning objectives.
The better approach is to decide first what the family and business are trying to achieve, then test that plan from both a legal and tax perspective.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, Victoria, our lawyers and accountants work together on business succession planning.
Our lawyers can advise on wills and estate planning, trusts, company structures, shareholder arrangements, buy-sell agreements and the legal transfer of ownership or control. Our accounting team can assess the tax consequences, business structure and financial impact of the proposed succession plan.
By working from the same strategy, the legal documents and tax planning can be aligned from the outset.
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Frequently Asked Questions
1. Is passing a business to my children just a matter of updating my will?
Usually not. A will only deals with assets that form part of your estate. A broader succession plan may also need to deal with trusts, companies, business partners, incapacity and transfers occurring during your lifetime.
2. What is a buy-sell agreement?
A buy-sell agreement sets out what happens to an owner's business interest following specified events, such as death, incapacity or exit. It can address who acquires the interest, how it is valued and how the purchase will be funded.
3. Does transferring a business to a family member trigger tax?
Potentially. A gift or below-market transfer can still have capital gains tax consequences because the tax rules may treat the transaction as occurring at market value. CGT concessions or other relief may be available, but eligibility needs to be checked before the transfer.
4. Does Victorian stamp duty apply?
It depends on the structure and assets involved. Duty can be particularly relevant where Victorian land, landholding entities or trust property are involved. It should be checked before the succession transaction is implemented.
5. When should succession planning start?
Ideally well before you intend to leave the business. For a complex business, starting several years in advance can provide more time to prepare the next generation, restructure where necessary and address legal and tax consequences properly.
This article contains general information only and does not constitute legal, tax or accounting advice. Business succession outcomes depend on the ownership structure, family circumstances and assets involved. Specific legal and tax advice should be obtained before implementing a succession plan.