Succession Planning for Non-Estate Assets: Understanding Your Family Company

If you hold assets in a family company or run a business through one, then it’s important to plan for what will happen to the company after your death. A family company can continue to operate beyond your lifetime, but its assets are not part of your estate and cannot be included in your Will. However, your Will should indicate who will inherit your shares, as this affects the control of the company after your death.

A Separate Legal Entity
A family company is a separate legal entity from its shareholders. While shareholders own the company’s shares, they do not own the company’s assets. Therefore, the company’s assets cannot be passed on through your Will. When planning the transfer of control of your family company, it’s essential to understand the company’s structure and governance, which is outlined in its constitution (also called a memorandum and articles of association). It is important to keep in mind that the company’s constitution may have been updated since the company’s formation.

Issued Shares
Companies can issue different classes of shares with varying rights, such as voting power or entitlement to dividends. When planning your estate, it is important to think about who should inherit your shares and gain control of the company. This could mean leaving shares to someone who will become the majority shareholder or hold shares with special voting rights.

However, it is important to be aware that the company’s constitution may have rules about how shares can be transferred. If your Will conflicts with the company constitution, the constitution will take precedence. For example, the company constitution may give surviving shareholders the right to buy your shares before they pass to any beneficiaries. Similarly, any shareholder agreement will override the operation of the Will. 

Company Officers
The company’s directors and secretary are responsible for managing its operations and keeping records. Directors are appointed by shareholders, so a shareholder with a majority of votes typically controls these appointments. When deciding who will inherit a controlling stake in your company, you may wish to consider someone you trust and who can make sound decisions about managing the company.

Loans
If you’ve lent personal funds to your family company, then this creates a loan from you to the company. Any unpaid dividends may also create loans between the company and its shareholders. While the company’s assets are not part of your estate, any loans you’ve made to the company are considered part of your estate and may be collected by your executor.

It's important to ensure that your death doesn’t force the company to sell major assets to repay loans to your estate. Additionally, if you’ve borrowed money from the company, this liability may need to be repaid to the company by your estate after your death.

Need Help?
Succession planning for family companies can be complex, but we’re here to guide you through it. For advice specific to your situation, please contact Wills and Succession Lawyers.