Why your client's buy and sell policy matters
National Wills Week (13-17 September) comes at a somber time in the current Covid-19 climate, where many are more aware of their mortality than ever before. 84% according to the latest Sanlam study by Brand Atlas. In fact this has encouraged many to take action - 44% of economically active South Africans have either amended or created wills in the last 18 months. Intermediaries have a pivotal part to play in estate planning, including ensuring clients are covered when it comes to their business affairs. Buy and sell agreements are an often-overlooked aspect of planning that can delay the winding up of an estate, sometimes by a few years.
There’s often a mistaken notion that simply having insurance policies in place between parties is sufficient. From first-hand evidence, I’ve seen this isn’t the case. A valid buy and sell contract is vital to underpin any cover as insurance policies themselves do not constitute a sale binding contract.
Without this cover, there could be several challenges for the remaining owners, after a co-owner passes away. The executor of the deceased owner’s estate may lack sufficient expertise and capacity to manage the business. The executor may want to sell the deceased owner’s interest to the highest bidder, which opens the business up to external investors as the remaining owners might not have the resources to repurchase the deceased owner’s shares at that point, despite having right of first option to purchase.
Typically, a deceased estate should take four to nine months to wind up depending on how complex it is. Unfortunately, having spent almost three decades in both the intermediated and fiduciary spaces, I have encountered numerous estates where that process has been delayed for up to two years through no fault of the executor. Instead, the blame can often be laid at the feet of poorly executed or out-of-date ‘buy and sell’ agreements, a lack of adequate financial planning; or both.
Sanlam Trust strives to wind up deceased estates quickly and efficiently and the role of a skilled financial planner and a valid ‘buy-and-sell’ solution are critical to that process. Without them, one can often bump into some of the problems I have encountered. Here are some cautionary case studies:
A battle between the policy owner and heirs over shares: No written ‘buy and sell’ agreement was entered into by the members. The policy owner received the proceeds on the death of his partner (life insured) and the parties became locked in a dispute over the price of the shares.
Naturally, the partner wished to pay as little as possible, while the heirs demanded more. In the meanwhile, the business suffered from uncertainty, while the heirs to the estate were prejudiced by the delay. The matter was eventually settled.
A battle between the accountants: An agreement was concluded, but the price of the shares was not stipulated. Instead, the parties agreed on a process of valuation by an accountant. The opinion of the accountant was contested by another accountant and the matter referred for arbitration.
The business’ financial statements weren’t up to date, so this proved to be a lengthy process. Another policy paid out to the business as well, which complicated things further as its purpose wasn’t recorded. Even if the arbitrator can issue a determination, this does not prevent the unsuccessful party from taking the arbitrator to court on review. Fortunately, the matter was settled.
A battle over a loan – who pays? The testator (maker of a will) stated that an amount of money “he has borrowed” from a third party should be “refunded” to that third party on his death. During the winding-up of the estate, the executor found proof that the loan had not been concluded between the testator and the creditor, but between a company and the creditor.
The heirs to the estate are naturally opposed to the estate paying and, of course, the executor cannot pay a debt that is not due, owing and payable by the deceased estate. Furthermore, there is evidence that this creditor may even have had life insurance in place to settle the debt. The creditor is litigating, and the estate is held in abeyance.
In all the above scenarios, having a financial planner that was willing and able to intercede and assist the parties to reach an agreement would have made a world of difference.
What is evident is that having clear, thorough, and up to date ‘buy and sell’ agreements in place is imperative. It is vital that clients be made aware of this or they run the risk entangling themselves in more red tape than a Valentine’s Day gift.