Executive Hire News › Archives › June 2019 › Executive Report : Have some will-power
Executive Report : Have some will-power
It is important for business owners to make a will: in the absence of one, the law will step in and determine how assets are distributed, perhaps leaving survivors with not what they expected, suggests Adam Bernstein.
According to research published by Royal London last December (2018), 59% of parents have no will or have one that is out of date. For a business owner, dying without making a will can have a devastating effect, and not only on their family.
Angharad Lynn, a solicitor in the Private Client team at law firm VWV, says that if you die without a will your estate will be passed on according to the intestacy rules, which changed in October 2014 when the Inheritance and Trustees Powers Act came into force. “Under the rules, if an individual dies leaving a spouse and children, the spouse will take the statutory legacy (currently £250,000) and the rest of the estate will be divided equally between the spouse and the children.” She says that if there are no children, the spouse inherits the whole estate.
For unmarried couples it is particularly important to have a will as the intestacy rules take no account of such relationships. Angharad Lynn warns that if there are children they will inherit everything. If not, the estate will go to other blood relatives. The surviving partner will receive nothing.
Planning for the future
An executor administers estates after death. Angharad Lynn says, it is quite normal to appoint a spouse or children, but she suggests it is also worth appointing a professional to ensure that business assets are dealt with as you would wish. This can be an individual, such as your solicitor or accountant; alternatively, many professional firms have a trustee company that can act as an executor. While your own lawyer or accountant may have retired (or died) by the time of your death, the trustee company will provide continuity for the appointment of executors, enabling partners from the firm to act.
Tax planning after death will be a consideration and Angharad Lynn notes that one of the reliefs from inheritance tax is Business Property Relief (BPR) which is available for a business or an interest in a business, as well as land, buildings, plant and machinery used for the purpose of the business and shares in unquoted trading companies. “BPR is currently awarded at 50% or 100%. It’s a very generous relief and it is possible that its use will be curtailed in a future Budget. So, when planning your succession, you should ensure the business will qualify for BPR by checking it meets the scheme requirements.” To qualify, businesses must be trading but if the proportion of assets held in investments is too high, the business may not be eligible.
It can be useful to leave business assets in a discretionary trust in the will, with the surviving spouse and children as potential beneficiaries of the trust. “These very flexible arrangements allow decisions to be taken after death, rather than trying to predict at the time the will is made what the situation will be in the future.” She says that after death the business interests can be kept in trust and income paid to the children, or shares can be transferred out to the children in appropriate proportions, and adds that, “If uninvolved family members inherit shares directly they may want a say in the running of the business, even if they do not have the skills or experience to be involved. Using a trust can protect against this.”
Angharad Lynn says that, if you are including a trust in your will, then you should also include a letter of wishes to give guidance to your trustees about how you envisage the trust being used. The letter is not legally binding, but it can explain how you see the capital and income of the trust fund being used after your death. She also suggests that company documents, such as the articles of incorporation and shareholders' agreement, should accord with the wishes set out in the will. “Some family businesses may only allow shares to be passed to direct descendants of the founder. A spouse or stepchildren would not be included in this case. If your will leaves company shares to your spouse but the company’s constitution does not allow this, the gift will fail. Alternatively, if the business is run as a partnership, in the absence of a partnership agreement, the Partnership Act 1890 will apply and on the death of a partner the partnership is dissolved.”
It is also possible to leave instructions in your letter of wishes about the sale of the business and who you think may buy it. You can address issues such as who will manage the day-to-day running of the company until the sale is completed and who the preferred buyer might be. •