Business mentor: Many issues in gifting business

I am a small business owner. Is there anything special I need to put in my will regarding my business?

John Donovan, solicitor at Public Trust, answers.

This depends on the nature of your business entity (sole trader, partnership or company) and if you wish to specifically gift your business under your will.

First you need to make sure that the business is something that you can legally gift under your will. Many businesses are owned by family trusts or trading trusts so the distribution of these businesses is determined by the terms of the Trust Deed rather than your will.

Each type of business entity poses different issues to consider.

Sole traders need to be sure that they understand what assets belong to the business. The business premises may be in your name, but are they an asset of the business or merely leased by you to the business? Do you want the gift to include the money in your business account?

Sometimes a sole trader wants to leave the business to a particular person or child in the hope he or she will carry on the business. You need to consider if the person you wish to leave the business to is old enough, and capable of carrying it on without you. It's not usually practical for a trustee to carry on the business (by employing a manager) until the beneficiary is able to do so.

A partnership ends when one of the partners dies. Is there a partnership agreement that provides what will happen on the death of one of the partners? Some agreements give the surviving partners the right to buy the deceased partner's share. When gifting your share of the partnership, you need to think about whether to include undrawn profits, money advanced by you to the business and any balance credited to you in the partnership books.

Company constitutions often include rights of pre-emption. This means that other shareholders may have a prior right to buy the shares of a deceased shareholder. The company may have different classes of shares so you may need to be careful about which types or classes you mean. If you have personally guaranteed any of the company debt you need to consider what your estate may need to do to be released from any guarantee. You also need to consider whether you want your gift to include any unsecured loans to the company, undrawn dividends and unpaid remuneration.

Two final thoughts. Is there someone with knowledge of your business that you trust? If you are gifting your business it's a good idea to consider appointing this person as advisory trustee. They can assist your executor in the management or sale of your business.

When you review your will, consider taking advice from Public Trust or your legal adviser. The advice might include how business assets can be protected, tax planning and what impact, if any, the Property Relationships Act might have. A well thought out estate plan can help ensure that your wishes are carried out and your business assets are protected for your family.

* You can can visit the Public Trust website or contact info@publictrust.co.nz


* Send Mentor questions to: ellen_read@nzherald.co.nz Answers will be provided by Business in the Community's Business Mentor Programme.