Many people don’t have a will. Throw a business into the mix and their affairs are heading for disaster. Sadly, businesses owners are the least likely to have made appropriate arrangements.
Consider Mark, who has co-habited with Charlotte for 20 years; they have three children. Mark is in partnership with two others and dies suddenly. He has no will, life insurance or partnership deed. The business has fixed assets of £1 million and creditors of £500,000.
On Mark’s death, the partnership terminates automatically without a partnership deed; the business has to be valued and final accounts drawn. Mark's personal assets consist of the house (remortgaged) and other assets, together worth £600,000. His children are 18, 15 and 10. The house is in Mark’s sole name and has been charged with the partnership loan.
Without a will, Mark’s three children gain his estate on intestacy. The eldest is entitled to take his one-third share outright, but the remaining two-thirds will be held in trust for the other two until they reach 18. Administrators need to be appointed to manage the estate and will become trustees for the children. Charlotte gets nothing, as she is not married.
First, there should be partnership deed provisions covering the death of partners in service. This prevents the termination of the partnership on a death. A deed may provide that the surviving partners have an option to purchase the deceased’s share of the business. An agreement should deal with the valuation of the partnership assets and it should also decide who would arbitrate disputes.
Many partnerships and companies buy insurance policies to provide funds enabling them to purchase a deceased’s interest in the business. This avoids the partnership having problems raising cash to buy out a deceased’s estate.
Ultimately though, business owners should have a properly drafted will, especially where unmarried partners are involved. Wills allow a choice of executors who will deal with everything following death. Special executors, maybe with experience of the business, can deal with important or urgent decisions on a death. Executors start immediately on death whereas if there is no will, administrators take time to be appointed. The will should give the executors powers to deal with the business for a limited period after death and confer all the powers held by the deceased to enable the business to function until decisions can be made.
Wills also assist with tax planning. Business property relief of 100 per cent can reduce potential inheritance tax liability arising in relation to business assets. It’s not possible to know whether a business relief will apply at the date of death. For this reason, the will may provide that the business interest is transferred to a discretionary trust, leaving the trustees to deal with matters in the most tax-efficient manner.
Planning ahead may mean having uncomfortable discussions with your family or business partners, but procrastination can result in serious problems for business owners.
Christine Green is a partner at Veale Wasbrough Vizards solicitors