Private Lives - Wills and business owners

03 October 2016

An area that can cause untold complication on death if not properly addressed in advance is business succession.

Problems may arise if you do not check the provisions of your partnership/company documents to ensure they comply with what you want to happen at the end of the day and dovetail correctly with your Will.

It is also critical to ensure that you know which assets are owned by you and which are business assets as the distinction can cause significant issues if you get it wrong. Property, private client and litigation solicitors will all have experience of how issues of ownership (as opposed to benefit or occupation) where there is a business, can become blurred in the mists of time.

Consider the following examples:

  1. You leave a gift of your family company shares to your husband in your Will. On your death it comes to light that there is a clause in the company documents that says shares can only be left to direct descendants of the founder. The gift to your husband fails.
  2. You leave a specific legacy of your interest in a partnership to your son and daughter equally with the intention that they will become partners in the business. On your death the partnership agreement is consulted and its provisions do not allow you to pass on your partnership share in the way you envisaged; the surviving partner has an option to buy your children out of their interest and so they may only receive cash rather than become partners themselves.
  3. You leave a gift in your Will of some buildings to your wife. On your death it transpires that the buildings are actually an asset of a partnership in which you are a partner and you are not able to control their destiny via your Will. The partnership was formed many years ago and the original agreement omits re-valuation provisions so that your business partner has a right to buy your partnership share, including your interest in the buildings, from your estate at their original cost rather than their current value.
  4. You leave your company shares to your wife in your Will thinking that your house is a company asset. You leave everything else to your son from a previous marriage. On your death it comes to light that the house is not a company asset at all and it passes to your son (who does not get on with your wife) which was never your intention.

Issues that need to be addressed to avoid problems arising on death:

  • Are your governing documents up-to-date, in line with your wishes and in accordance with your Will? Businesses evolve and develop over time and what was right previously may change. All business documents should be reviewed regularly in conjunction with your estate succession plans.
  • Will the value of your business create an Inheritance Tax (IHT) charge in your estate? While Business Property Relief (BPR) and Agricultural Property Relief (APR) may be available, there are many instances where they are not. A review of the assets and structure may present opportunities to bring the business interest within the scope of the IHT reliefs.
  • If it is envisaged that the business will not cease on your death, you need to consider who will run it while your estate is being administered. If you are a sole trader your executors will effectively step into your shoes after your death. They will need to keep the business going and then either transfer it to a beneficiary or sell it. You might want to appoint a separate ‘business executor’ rather than leaving this to the executor of your personal estate.
  • How will the business be funded after your death? Banks may typically freeze overdraft or loan facilities when a business owner dies. Is there sufficient cash to keep the business afloat during the estate administration period so maintaining the value for a future sale/transfer?
  • Does your business partner have the funds to buy out your estate? Consider taking out life insurance on the lives of the business owners with a double option agreement enabling the purchase of the business interest by the surviving owner/s. This would also give rights to the estate beneficiaries to call for the business interest to be purchased from them and would set out the basis of valuation of the interest. It is critical that this is correctly structured to preserve any BPR that may apply.

If you make no specific provision in your Will, then any business interest that you own, whether an interest in a partnership or a company shareholding will fall into your residuary estate or pass under the intestacy rules if you have no will. It will not automatically pass to the surviving owner.

The content of this article is for general information only. For further information regarding Wills and business owners, please contact Lorna Spear. Law covered as at October 2016.