Question:
Hi, we are Ben and Bobby, directors of BB Sdn Bhd, a company that we set up to operate a couple of well-known F&B outlets as franchisees. Ben owns 60% of BB while Bobby owns the remaining 40% of the company. Both of us are married to our beloved wifes namely, Betty and Bonnie. They are not involved in BB as they both have their day jobs.
We had spoken to our wifes and they informed us that they are not interested in inheriting or running the business if we pass on prematurely. Hence, we decided to set up a buy-sell trust to buy over each other’s interests in BB, if any one of us passes on unexpectedly in the near future. For this purpose, we determined that our business is currently valued at RM 1 million.
Our question is, ‘What are the documents needed to set up a buy-sell trust?’
Answer:
There are 4 main documents needed to form a comprehensive buy-sell trust for Ben and Bobby. They are as follow:
Document 1: The Buy-Sell Agreement
In general, the details of a buy-sell agreement would include:
In essence, if Ben passes on, Bobby agrees to buy over Ben’s 60% shareholdings in BB for RM 600,000. Likewise, if Bobby is the one who passes on, Ben will buy over Bobby’s 40% shareholdings in BB for RM 400,000.
But, what if Bobby does not have RM 600,000 to buy over Ben’s stakes in BB?
Also, what if Ben does not have RM 400,000 to buy over Bobby’s stakes in BB?
What is their solution? Hence, this leads us to:
Document 2: Life Insurance Policies
This would be the most practical method to finance the above transaction for it is cost efficient and convenient for business partners, Ben and Bobby.
For instance, if Ben wishes to buy over Bobby’s shares in BB for RM 400,000 but does not have RM 400,000, Ben can buy Bobby a life insurance policy, where its sum assured is RM 400,000. The details of this policy is listed down as follow:
Likely, Bobby is unable to receive the RM 400,000 in sum assured himself for he is either dead or disabled. As such, this leads us to:
Document 3: Trust Deed
Let us continue with Bobby.
It is ideal for Bobby to set up his own trust to nominate his beneficiaries, how is the sum assured to be distributed and managed by his trustee. Thus, Bobby will need to prepare a trust deed for this purpose. The details are as follow:
Hence, Bobby can be assured of how his money will be managed, upon the sale of his shares in BB if he passes on unexpectedly in the near future.
But, what about Ben? How is he assured of receiving Bobby’s shares? Thus, this leads us to:
Document 4: Power of Attorney (POA)
This is the final document that completes a comprehensive buy-sell trust. In the case for Bobby, he could sign a POA, which authorises the trustee appointed for the buy-sell trust to transfer his 60% shares in BB to Ben if Bobby has passed on or became totally and permanently disabled.
What Happens If Bobby Passes On?
Let’s say, Ben and Bobby have set up a comprehensive buy-sell trust for BB with the 4 powerful documents stated above and subsequently, Bobby passes on. As such, how does Ben buy over Bobby’s 40% shares in BB for RM 400,000? Here, I will summarise the process as followed:
Hence, Ben receives his 40% shares in BB from Bobby and Bobby’s beneficiaries will receive the RM 400,000 in accordance with Bobby’s trust deed.
This shall conclude the entire buy-sell process of Bobby’s shares in BB.
Conclusion:
The above is a simple illustration of how two business partners can plan out the exit strategies of their business if any one of them passes on unexpectedly. This ensures that the business can continue to be run smoothly while compensating a fair amount to the family members of the deceased partner.
Personally, if you are a business owner, it is likely that your situation would be a lot more complicated than the above and as such, requiring a qualified estate planner to craft out an effective succession plan. Here, if that is you, you may begin by filling up the details below to book yourself a 30-minute consultation session with our estate planning consultant:
