Laptop, coffee mug and mobile phone sitting on a wooden desk

Successor Directors: a key player in estate planning and asset protection

What would happen if you no longer had control of your company?

It’s a sombre thought, but a reality: if you or your partner are a director of a company and happen to become incapacitated or die without company resolutions or a properly drafted will in place, you could lose control of your company and therefore your trust or self-managed super fund, too.

If it’s a trading entity, your business may not be able to continue operating. Your staff and creditors would end up not being paid and, depending on how you’re structured, your family could be left without an income. Furthermore, your bank and other financiers would have every right to cease taking instructions, and any share or other transfers would also be held in limbo.

Even worse, if you are one of a number of directors in a company, your family may find themselves being unable to vote to protect their best interests. Your remaining director(s) could make decisions to benefit themselves and not your beneficiaries, which might end up hurting your loved ones significantly during an already difficult time in their lives.

In its Information Sheet 73, under the heading “Why do directors need a Will?”, ASIC writes:

“Where there is no will, however, a near relative or other person would have to apply to the local Supreme Court for letters of administration to manage the estate and this could take some time – possibly weeks if not months. Alternatively, in the absence of any immediate relatives or other obvious people to deal with the estate, the Public Trustee may step in and administer the deceased estate but this process can also take months.

During that period when there is no director, the company may be completely unable to operate.”

What To Do

Very simply, if you don’t already have one, you need a ‘worst-case scenario’ action plan, which involves appointing a successor director and doing some estate planning.

successor director is a person who automatically becomes your nominated successor – a fully-fledged director of your company – in the event that you lose capacity or die. That means that if you are suddenly out of the picture, your family can maintain control of your interests. Your entity can continue trading and your beneficiaries will not be disadvantaged should your business associates wish to make impactful decisions in your absence. Your successor will be able to carry out your wishes and minimise some of the difficulty associated with losing you. 

Estate planning is the process of looking at your unique situation holistically and determining how you want things managed should anything happen to you. It puts you in the driver’s seat and gives your family and business partners some certainty about your wishes and how they can and should move forward without you. Often, professional advisers will look at estate planning from a purely legal and financial perspective, but the fact is, what happens to you from a healthcare perspective is also an important consideration.

While estate planning can be a complicated and time-consuming process, appointing a successor director is something that can be done quickly and inexpensively, giving you some peace of mind today that should the worst happen, you have some certainty in place.

How It Works

In most family groups, one person will be the ‘risk taker’ and another will be the ‘asset holder’. The risk taker will be the company director and, where appropriate, they may choose to appoint the asset holder as their successor director. The successor director can then do whatever is necessary in order to continue business, or perhaps wind up the risk taker’s various affairs (as each situation is different).

It is vital to note, however, that once the asset holder is appointed successor director, they automatically become the new ‘risk taker’ and any and all assets held in their name are subsequently at risk. To safeguard their position, it is imperative that an asset protection review is undertaken and the right strategies put in place so that your family avoids incurring stamp duty, triggering any capital gains tax events, or leaving everything you own open to legal action. (With few, if any, assets in the successor director’s name, most lawyers would advise against initiating legal action against a successor director.) 

What About Alternate Directors?

While alternate directors certainly have their place, they are not the same as successor directors. Their positions cease in the event that their appointing person (i.e.: you) loses capacity or dies. A successor director, on the other hand, much like the executor of a will, is only appointed in the event the latter occurs.

Who Can Be A Successor Director?

Your successor director must be at least 18 years of age and consent to taking on the role and responsibilities of director. Practically speaking, they should be a person you trust to carry out your wishes and someone with good general knowledge and comprehension skills. Importantly, they should be someone who recognises when they need to access professional advice or additional support.

What Needs To Happen

For a successor director to be appointed, your company Constitution must allow it. Therefore, we recommend that the Constitutions of any companies you control are reviewed, which we can help you with. Then, if necessary, we can arrange to have your Constitution(s) updated to specifically allow a successor director, after which a Resolution of Directors must be prepared to allow for the appointment of a successor director.

This work can happen quickly and painlessly on your part. All you have to do is contact us to get the ball rolling, and we’ll do the rest.

We then encourage you to ensure that your successor director has a written set of instructions on hand so that they know what to do in the event that you are no longer around. That way, you can outline any plans or visions you have for your company and its future, and explain how you anticipated moving forward. If you’d prefer not to provide your successor director with written instructions until absolutely necessary, they can be provided to us to keep on file in the event they are needed, or you can keep them with your other important documents in a filing cabinet or safe.

More broadly speaking, if you don’t already have one, we encourage you to write a will. Doing so will mean giving careful consideration to who you appoint as executor (more information here on the Public Trustee’s website), and what you want to see happen to your estate, which will involve some considered planning.

If you already have a will in place, we urge you to review it as a matter of priority, and ensure that you do so on a regular basis. Depending on the life events that may have transpired within your family, your will may be significantly out of date. If that’s the case, you will need to have it re-written. 

We also highly recommend that you put in place an Enduring Power of Attorney* and an Enduring Power of Guardianship. Doing so when you are well and of sound mind means that you determine what happens to you and everything you own, when the time comes.

Again, it’s important to note that you should have an asset protection review undertaken to ensure that the plans you put in place don’t accidentally result in stamp duty or capital gains tax liabilities, or otherwise leave your family open to financial loss.

*NB: Your Enduring Power of Attorney will need to tie in with your Resolution of Directors.

You Need A Successor Director

If you are a company director, and particularly if you have a corporate trustee in place for your trust and/or self-managed superannuation fund, you need a successor director.

Importantly, you need to put your successor director in place whilst you are still well and of sound mind. The sooner you act, the better.

Unfortunately, very few company Constitutions allow successor directors to be appointed, which is why it’s so important that your documentation is reviewed and revised if necessary.