Making a gift of a partnership share under your Will

A share of a successful business partnership can be a very valuable asset. After spending years of time, effort and money on building a successful business, you will want to ensure that you are confident that your share in the business is being left to the right people on your death. The law surrounding partnerships, however, is archaic (dating back to the Partnership Act of 1890) and without a well-prepared Partnership Agreement and Will, reliance on the Partnership Act can result in undesirable consequences on the death of a business partner. To ensure that your share of the partnership is passing in accordance with your wishes, a well drafted Partnership Agreement and Will are vital in ensuring that there are no nasty surprises for your family and business partners on your death. 

What if there is no Partnership Agreement? 

A partnership can be set up without any written agreement between the partners. While the business is running smoothly and everyone is getting along, it may be perfectly possible for the partners to simply come to informal agreements as to how the business is run without needing to formalise the partnership rules. 

However, the lack of a Partnership Agreement can be fatal to a business on the death of one of the partners. If there is no Partnership Agreement in place or the Partnership Agreement does not specify what should happen on the death of any of the partners, the provisions of the Partnership Act will kick in. Under the Act, on the death of any partner, the partnership automatically must come to an end. The surviving partners, and the deceased partner’s personal representatives (PRs), will therefore need to dissolve and wind up the partnership. If the surviving partner(s) want to continue the business, their only option will be to form a new business which could be very detrimental to the finances and goodwill of the business. 

Moreover, the potential beneficiaries of the deceased partner’s estate would, once all partnership debts have been paid off, receive whatever share of the cash proceeds of the partner’s share is left rather than receiving a share of an ongoing business. If the deceased partner had intended for one or more of their children to step into their shoes on their death and continue running the family business, this unfortunately will not be achieved if the PRs and surviving partners are forced to rely on the default provisions of the Partnership Act. 

How to avoid a partnership ending on death 

In order to avoid the automatic dissolution of a partnership on the death of a partner, you should seek expert advice on how to put in place a Partnership Agreement. A well drafted Partnership Agreement should include the following: 

1. Provision for the partnership to continue on the death of a partner. 

2. The “rules” as to how a partner can leave their share of the partnership on their death.  

For example, some Partnership Agreements may provide that a partnership share can only be left to a fellow partner and/or their children. Others may specify that the surviving partners have the option to purchase the deceased partner’s share of the business. The cash proceeds may then pass to the PRs for them to distribute in accordance with the deceased partner’s Will. 

Provided all of the partners agree, the terms of a Partnership Agreement can essentially set out whatever rules the partners like as to how the business can be dealt with on the death of a partner. It is, however, very important that expert advice is sought on the preparation of the Partnership Agreement to avoid any unintended consequences on the death. 

Once a Partnership Agreement has been put in place, this should be reviewed regularly and particularly when significant changes happen in the partnership, for example, the admission of a new partner and/or changes to each partner’s share of the business. 

Making sure your Partnership Agreement and your Will work together 

Alongside a well-prepared Partnership Agreement, a Will is essential to ensuring that your share of the business passes in accordance with your wishes on your death.  

It is very important to note that a Partnership Agreement will override the provisions of your Will where they both make provision for the same interest or asset which are contrary to each other. If, for example, the Partnership Agreement stipulates that only a surviving partner can inherit a deceased partner’s share but the Will provides for the partnership share to be divided between their children, it is the Partnership Agreement that will take effect, not the Will.  

Whenever you are reviewing the Partnership Agreement, therefore, you should also take the opportunity to review your Will (and vice versa) to ensure that the two documents still work alongside each other. 

What should I be considering when making a Will? 

When considering how to leave your share of a business on your death, your main concerns may often be twofold: how to ensure that the business remains successful and profitable after your death and how to provide for your family and loved ones in a way that is fair and equitable.  

It may be, for example, that one of your children is heavily involved in the business whilst the others are pursing completely different life goals. This can be a tricky situation to navigate in a way which does not leave one or more of your children feeling hard done by or result in the business needing to be sold and divided up between them. An expertly drafted Will can, however, help to ensure that your children are treated as equitably as possible whilst also not putting at risk the ongoing success and longevity of the business. 

Moreover, making your Will with an expert should give you the opportunity to consider how to deal with any Inheritance Tax liability on your death. There can be very powerful Inheritance Tax reliefs for businesses (including Business Property Relief and Agricultural Property Relief) which can prevent the need to sell a business on the death of a partner in order to foot the tax bill. A legal advisor who is well versed in dealing with partnerships will be able to advise you on the potential availability of the reliefs and help you to consider how best to draft your Will to maximise their availability on your death. 

Conclusion 

If you are a partner in a business, the importance of ensuring that your Will and the Partnership Agreement dovetail cannot be understated. Without putting in place a Will and a Partnership Agreement which work well together, on your death, some unwelcome surprises may arise for the surviving partners and your family.  

A carefully considered Will and Partnership Agreement which work in tandem can go a long way in ensuring that your wishes are followed on your death whilst also protecting both the longevity of your business and the needs of your family and loved ones. 

The Birketts view 

Birketts’ Private Client Advisory Team can advise you on all aspects of Will drafting including where you have complex business assets. Our Commercial and Agricultural Teams are also able to provide expert advice on the preparation of a Partnership Agreement for all types of businesses. Where businesses are involved, we work closely with our Commercial and Agricultural Teams meaning that the business partnership and your personal affairs are considered in the round. Our teams will then work together to ensure that your Will and Partnership Agreement are achieving your wishes and aims.