Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
137. Business Loan Accounts: What Happens When You Die?
Death creates enough emotional turmoil without adding financial chaos to the mix. Yet that's exactly what happens when business owners fail to plan properly for their loan accounts—those often substantial debts between themselves and their companies.
Most entrepreneurs pour personal money into their businesses, creating director loan accounts where the company owes them money. What many don't realize is that upon death, these loan accounts immediately become assets in their estate that must be collected. Suddenly, the business faces a potentially crippling financial obligation at precisely the moment it's already vulnerable from losing a key person. Without proper planning, this can force distress sales of business assets or even bankruptcy.
The reverse scenario can be equally devastating. When directors borrow from their company—perhaps to fund education or personal investments—their death creates a debt their estate must repay. Without liquid assets available, this could force the sale of family homes or other personal assets, adding financial stress to grieving families.
Fortunately, specialized life insurance solutions exist specifically to address these loan account challenges. These policies create immediate liquidity either for the business to repay the deceased's estate or for the estate to repay business debts. When structured properly alongside buy-sell agreements and key person insurance (keeping each as separate, distinct policies), they form a comprehensive protection system that ensures business continuity while protecting family interests.
Don't procrastinate on this critical business planning step. The modest cost of proper insurance and legal documentation pales in comparison to the potential financial devastation that unprepared businesses and families face. Connect with financial planners and legal professionals experienced in business assurance to ensure your loan accounts won't become a financial crisis for those you leave behind.
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hello everybody, welcome to know your money.
Speaker 2:I'm bronwyn weiner and I'm craig finch and we are from growth financial planning. We hope you enjoy our podcast. Hi everybody. So welcome to a third leg of business assurance we thought we'd chat about, and the third leg is loan accounts. So, bronwyn, I think a loan account is company needs money, director takes money out of their own pocket and they put into the company. Now the company owes that director money because they funded it. Like Warren, your startup here, I'm sure you've got a loan account.
Speaker 3:Yeah, both of us do yeah.
Speaker 2:Beautiful furniture and all the stuff and the hard work you put in here. So you put money in the company. So now Rogue Media owes you money, a loan account. So what happens if Warren dies?
Speaker 1:Yes, so there are two things that can happen. That needs to be in your buy and sell agreement, which we spoke about previously. So what happens with the loan that's supposed to be paid to you? Because the business does have to pay it back to you, it does form part of your estate. They might not have the funds straight away, so in the buy and sell agreement they can say this is how it will be paid out.
Speaker 2:When you say they, you mean rogue media. Rogue media, yes. Suddenly doesn't have the money to pay out Warren's estate. Yes, okay.
Speaker 1:So let's say, for example, your salary that you were drawing from here. They'll now use that amount that they were getting and pay that to your family. Yeah, Okay. And then the second way is a credit loan account financed by a life insurance policy. So you basically have a life insurance, a credit loan account and that would automatically pay. So, again, it's a life insurance policy system Based on your loan account amount.
Speaker 2:Yes, so rogue media would put an effective policy on Warren's life that if he passes away, the value of the loan account gets paid to his….
Speaker 1:To rogue media and rogue Media pays it to you Okay okay.
Speaker 2:So the loan account will form part of your estate. When a person passes away, they read the will and they say right, look at the finances. In Rogue Media we noticed that Warren lent the company 500,000 rand. Where's that 500,000 rand? And they have to pay it before the estate gets wound up. So that could put a lot of pressure on the company.
Speaker 1:Yes.
Speaker 2:So you have to clean out the loan accounts.
Speaker 1:And then also an important thing is who you nominate as a beneficiary. So we've had a case where they left these loan accounts to a beneficiary and they put a value on it, but the value wasn't the value that it was now.
Speaker 2:So the life policy had a value, but the loan accounts was different.
Speaker 1:No, there was no life policy. It's just in the will. You know, you say I leave everything to my wife, yes. Or you can say I leave my loan accounts that are in rogue media to my mom.
Speaker 3:Yes.
Speaker 1:Then there can be a state duty implications on that, because now someone that isn't your wife is benefiting from that Right, and then that person has a claim against rogue media, so it can be really complicated with the beneficiary as well. So when you are.
Speaker 3:That beneficiary is obviously how it works in your will.
Speaker 1:Yes.
Speaker 3:I leave my, Do you have to explicitly say I leave the shares and value of my loan account?
Speaker 1:No, you shouldn't necessarily, because it can be a little bit complicated. If you're leaving everything to your spouse, you trust your spouse, just say I leave everything to spouse, that will include loan shares, et cetera. Then just another quick one is there are loan accounts the other way around, and that's also important to understand. Example so the business owes you, did we do that?
Speaker 2:No, the business, the business.
Speaker 3:You owe the business. Yes, you go to the business, you owe the business.
Speaker 2:Yes, you go to the business and say I need to educate my child to university. I haven't got the cash and I'll pay it later for my earnings or my director's fees.
Speaker 3:So the company gives you the money so then you pass away to the company. So technically, your estate is in debt to the company, correct, right? So you pass away. You're in debt to the company.
Speaker 2:So technically your estate is in debt to the company. Correct Right. So you pass away.
Speaker 3:the company says where's the money that we loaned?
Speaker 2:But then, if you have that, buy-sell agreement and if you have the insurance policy, it's not buy-sell, it's separate.
Speaker 3:No, but what I'm saying is let me just flow this out. Right, you have a buy-sell between the two partners. You have partners, you have the life policy. So, effectively, that amount of the loan you've taken will be taken off the value of the life policy before it's then given to your wife, right?
Speaker 1:no no because that's a separate thing the shares.
Speaker 2:The shares are separate. You should keep all three separate. The key man, as we mentioned a few episodes, the buy and sell and the loan account.
Speaker 3:Okay, so I borrowed a hundred thousand Rand. I don't make it, yeah, what happens?
Speaker 1:So they come and find that 100,000 Rand from your estate. So let's say, for example, on all your life policies you've nominated your wife. That doesn't form part of your estate, but your property is there.
Speaker 3:Oh, okay.
Speaker 1:You would have to sell your house.
Speaker 3:Or bond.
Speaker 1:For 100,000 Rand to give that to her. So that's why liquidity analysis is so important is what liquid cash do you have in your estate that can go out?
Speaker 3:But this is what I was saying, though. If you do have the buy-sell agreement and you do have the life insurance policy, so then she doesn't have to, but she can. But what I'm saying is effectively, I know the company will go, you owe us a hundred thousand rand and then the wife will go. That's cool. Once you pay me the money from the buy sell agreement and the life insurance policy, I'll give you the hundred thousand.
Speaker 1:But she doesn't have to yeah, she doesn't have to no well they.
Speaker 2:They have to recover it from their state so then in the end she probably will be forced to.
Speaker 1:She should do that rather than having to sell what's in their estate.
Speaker 3:Yeah, that's what I mean. So she doesn't want to have to like rebond the house.
Speaker 2:So the key in the way of doing it is to say that a life policy, or your personal life policy, is the beneficiary, is your estate.
Speaker 1:Some of it.
Speaker 2:Bronwyn's saying liquidity in your estate. So let's say you owe Rogue Media 100,000. Yeah, for Finns University. Yeah, you make their life policy the beneficiary of your estate for 100,000. Yeah, so when Rogue Media's executors come and wind up, it's there, ready to go?
Speaker 3:Yeah.
Speaker 2:There's money there and you don't have to sell the property.
Speaker 3:Yeah, that makes sense, okay. So I think that's the thing that people… so you're kind of saying to me, those things I'm talking about are still technically separate, although the pool of money eventually goes there. Yeah, it's still separate.
Speaker 2:It's cleaner to keep them all separate the key man, the buy and sell and the loan accountant.
Speaker 3:What would the mafia do? They would keep it all tangled together, right, we don't know. Hard to read.
Speaker 1:Yeah.
Speaker 2:Look, as we said before, the buy and sell and the legal agreement is the most important. Yes, because it's the partners. You may never have a key man on the business, because maybe you don't need it, so that might not be, and you may never have a loan account, but most companies will somehow have a loan account, I think smaller companies for sure.
Speaker 1:Yeah, there'll be something and that's also in the documents on how that's done.
Speaker 2:Yeah, exactly, and once again seek legal advice and seek financial planning advice. That's very important and don't let it. Don't not do it, guys. We need to have another sit down eh. Yeah, exactly Because a lot's changed since the last one.
Speaker 2:And that's it. When you've got a business, there's lots of things that you it's not just your personal finances Now you've got a business, which is a separate organism on its own, that needs to be addressed, and these kind of things are what we we sort of make everybody aware that there's other parts of a business and insurance that you need to look at.
Speaker 1:Yeah, awesome All these books we can put away now, right, yes, yay, thanks, very much. Well done, brian. Thank you, thanks. Bye, bye.
Speaker 2:Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.