Navigating the complexities of business partnership after a partner’s demise

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July 8, 2024

The sudden loss of a business partner can introduce significant complexities and challenges, not only personally, but also in the realm of managing business affairs and accessing crucial financial resources. This can be especially daunting for 60-plussers who have been in business with a partner for years and who may suddenly have to navigate the loss of a well-trusted and essential business partner. This article will explore the ways in which 60-plussers who are still in business can plan ahead to avoid issues on the death a business partner.

Given that a business or your shareholding might be your most significant asset, it is vital to consider the consequences if a business partner passes away. A recent discussion with a surviving business partner, hereinafter referred to under the pseudonym Ben, highlighted a common issue: the stringent requirements financial institutions have for granting access to business accounts after a business partner’s death.

A well-managed yet inaccessible business

In this scenario, Ben recounted the unfortunate passing of his business partner, who, despite meticulously managing the business affairs, held exclusive access to several critical business accounts. This situation is not uncommon; many businesses operate under the assumption that a seamless transition of control will occur in the event of a partner’s death. However, reality often paints a different picture.

The trustee and co-director conundrum

Ben, who is not only a surviving partner but also a trustee in mutual trusts with his previous partner (who has passed away) and a co-director in multiple companies, found himself at an impasse. Despite his legitimate roles and responsibilities within the business framework, the banks refused to grant him access to the banking platforms. The primary reason? The absence of a letter of executorship regarding his business partners personal estate or a new Letter of Authority (LOA) for the trusts.

Understanding the legal landscape

The reluctance of banks to provide access without proper documentation is deeply rooted in legal and regulatory requirements. A letter of executorship is a legal document issued by a court that authorizes an executor to administer the deceased’s estate. This includes accessing bank accounts, paying debts, and distributing assets to beneficiaries. Similarly, a new LOA for trusts is required to ensure that the management of trust assets is legally transferred and handled by the appropriate trustees.

The critical role of documentation

The insistence on a letter of executorship or a new LOA underscores the importance of having robust documentation and legal safeguards in place. These documents serve as protective measures to prevent unauthorized access and potential misuse of funds. For the surviving business partner, obtaining these documents becomes an essential step in regaining control and ensuring the continued operation of the business. It is also important that there is transparency between business partners and that the partner who may be more actively involved in the management of the business, has a good succession plan in place to ensure that the surviving partner has access to the necessary documentation in order to ensure continuity.

Steps to mitigate future risks

The challenges faced by Ben highlight the need for businesses to proactively address potential risks associated with the death of a partner. Here are several steps that can be taken to mitigate such risks:

  1. Joint Access and Signatory Arrangements:

Ensure that multiple partners or trusted individuals have joint access or signatory rights to critical business accounts. This can prevent the business from becoming incapacitated in the event of a partner’s death.

  1. Legal Documentation:

Regularly update and review legal documents such as partnership agreements, trust deeds, and company bylaws. Include clauses that outline procedures for succession and access to accounts.

  1. Appointing Successors:

Clearly designate successors or alternative trustees in legal documents to ensure a smooth transition of control. Alternatively, have a succession plan in place.

  1. Regular Communication with Financial Institutions:

Maintain open lines of communication with banks and financial institutions. Inform them of any changes in partnership or directorship to facilitate smoother transitions.

  1. Professional Advice:

Seek advice from legal and financial professionals to ensure all aspects of the business are adequately protected and compliant with relevant laws and regulations.

Shareholding and Partnerships

For businesses with multiple shareholders or partners, the approach to business succession can be more structured and planned:

  1. Shares as Part of the Estate: When a shareholder passes away, their shares become part of their estate.
  2. Buy-Sell Agreement: Ideally, the business should have a buy-sell agreement in place. Buy and sell agreements can ensure that there will be continuation of the business on the death of a business partner or co-owner. This agreement allows the remaining shareholders to buy out the deceased’s shares from their estate. Such agreements are vital to ensure a smooth transition and continuity of the business.
  3. Key Person Insurance: To facilitate the buyout, the business can have key person insurance. This insurance provides the necessary funds to purchase the deceased shareholder’s shares, ensuring the business has the liquidity to handle the transition without financial strain.

Due to the complexity involved in estate planning and business succession, seeking assistance from legal professionals is crucial. These experts can help tailor a plan that meets the owner’s objectives and ensures a smooth transition.

Conclusion

The death of a business partner can unveil unforeseen challenges, especially regarding access to vital financial resources. While Ben’s experience underscores the importance of meticulous planning and documentation, it also serves as a reminder for all business owners to proactively address potential risks. By implementing strategic measures and maintaining robust legal safeguards, businesses can navigate the complexities of partnership transitions with greater ease and assurance.

FOR ENQUIRIES:

Jan Pretorius

jan@perpetualservices.co.za

082 889 4000

Meyer de Waal

MDW INC meyer@mdwinc.co.za

021 461 0065 & 083 653 6975

Daniela Papa

daniela@mdwinc.co.za

021 461 0065 & 083 783 8494

Devedine Armstrong

devedine@mdwinc.co.za

021 461 0065 & 076 902 4027
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as legal advice.

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