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Choosing Executors – HR’s Role In Advising Business Owners on Inheritance

Following the death of a business owner, an executor will be nominated (in the will) to manage the administration of their estate (probate).  People will often ask friends or relatives to act as executors for their will, but for business owners the implications of choosing the wrong executor can be unexpectedly detrimental in the long term.

Probate generally lasts a minimum of a year in the UK (often longer for complex estates), and if there’s no suitable alternative, an executor may be required to step in as an interim business manager.  Without formal instructions in the will, the executor’s default position will be to sell the business and pass on the proceeds of the sale to the beneficiaries.  However, this may not be in the best interest of the beneficiaries, as an expedient sale may not deliver the best return.  Therefore, the executor has some discretion in how and when business assets are disposed of.

Given this responsibility an executor’s role might include:

  • Taking over the management of a company.
  • Opening new bank accounts.
  • Transferring staff under TUPE (and managing the resulting tax and national insurance implications).
  • Taking on responsibility for health & safety, employment contracts and environmental obligations.
  • Letting, buying, or selling assets (including land and property).
  • Defending the business against litigation or issuing claims against others.
  • Assuming the legal ownership of shares.

The executor is personally responsible to the beneficiaries for the effective management of the business, in the period between the owner’s death and the completion of administration.  If executors fail to manage a business efficiently, or fail to distribute the deceased’s estate as decreed by the will, the beneficiaries can ask for the courts to step in. In addition, if the actions of the executor reduce the value of the beneficiaries’ legacy, they can recover any losses from the executor. Beneficiaries can and do sue.

That is not to say that an executor cannot employ specialist professionals to assist in managing the business.  They can also insure themselves against claims. To give additional support, the deceased may nominate up to four executors, all with different experience, to help administer large or complex businesses.

Given the complexity, responsibility and accountability inherent in the role of the executor(s), it’s well worth choosing them very carefully.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]

 

 

 

Dying to Do Business? – HR’s Role In Advising Business Owners On Inheritance Issues

Businesses spend a great deal of time analysing risk, but when it comes to the potential for people who lead companies to unexpected die, business owners will often prefer to avoid a discussion about their own mortality. This is a particular issue for small businesses, managed by sole traders, partners or families, whose success can rely almost entirely on the skills, reputation and knowledge of one or two people.  Considering that 90% of UK businesses employ less than 50 staff, it would seem likely that many thousands of businesses may be in this vulnerable position.

Human resources consultants, who advise small and medium sized enterprises, can play a vital role in reducing the risk to businesses caused by the sudden loss of their owners.  It may be a bit awkward to raise the likelihood of a business owner’s unexpected demise, as the arrangements people make for their death can feel distinctly off limits.  But substitute ‘sudden death’ for ‘succession planning’ or ‘business continuity management’, and when the subject is raised with tact and sensitivity, these discussions can be made to feel a lot more comfortable.

Take for example the case of a web design company owned by business partners Natalie and Gregory. Being friends for many years they had felt it completely unnecessary to have a formal partnership agreement, although the business was growing quickly and they employed three staff.  When Natalie died unexpectedly in a car accident, the lack of a formal partnership agreement mandated that the business had to close, by virtue of the Partnership Act 1890.  Under this legislation the dissolution of the partnership became Gregory’s responsibility and it took well over a year.  Debts were paid, assets liquidated and all three staff were made redundant. The very small surplus was then shared between Gregory and Natalie’s estranged (and much despised) husband Philip, as she died intestate without leaving a will. After dissolution, Gregory began the hard work of starting another design business from scratch.  Natalie’s long term ambition, that her daughter Camilla (who was studying design at university) would succeed her in a profitable and expanding business, was never realised.

And yet, with effective estate planning, this scenario could have turned out very differently for everyone after Natalie’s death.

Advising sole traders, partners or family businesses, on how to safeguard the final wishes of the business owner, can be broken down into three specific areas:

  • Succession or Sale.
  • Taxation Management.
  • Interim Management (Choosing the Executor)

In next three posts we’ll explore these areas in more detail and the options for advising small business owners.  These posts are not intended to make HR consultants experts in estate planning, but they will give them the insight and confidence to begin asking the right questions.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]

Trusting in Trusts –Protecting Your Home with A Property Protection Trust (Part 2)

Continuing from our last blog, which identified why giving your home to your children (in order to avoid the cost of care and tax) may not be such a good idea, we’ll spend a little more time on two solutions to the problem – writing a will and setting up a trust.

Firstly, it’s vitally important to make a will.  Taking stock of your assets and following the necessary steps to prepare a will, makes you think critically about how much you own, how it would be best protected now and who you would like to leave it to.  A will also speeds up the process of probate (administering a person’s estate after death), reducing the strain of coping with bereavement for those family and friends you leave behind.

Secondly, setting up a trust is a widely recognised solution to resolving a number of inheritance problems.  The process involves placing your home, and sometimes other assets, into a trust. In the case of a couple, a trust is formed on the death of the first partner (as their home cannot be forcible sold with one partner still lives in it). For single people it involves setting one up right away. The process involves transferring the legal ownership of your home to a small group of trustees (of which you may be one), who will be bound by your instructions when the trust is established.  As you no longer own the assets outright your home cannot be sold to fund your care. But as the sole beneficiary of the trust you are still free to use the trust assets as you wish (e.g. you can still decide to sell or let your home).  Following the homeowner’s death, when the trust has done its job, it can be dissolved and the property passes to your immediate beneficiaries.

However, it’s important to realise that trusts set up expressly to avoid care costs may be challenged by local authorities.  There are many other advantages to setting up a trust, such as protecting wealth for future generations, avoiding the need for probate and making the best of your taxation position.  It’s much better to consider the protection offered by a trust as a welcome additional benefit, as opposed to its primary purpose.

With a single person’s charges for care estimated to be around £40,000 per year (Trinity Mirror 2014), the cost of care poses a significant threat to the financial security that people have worked hard for all their lives.  But with careful planning your home can be comprehensively protected for today and your wealth can be preserved to benefit many generations who are yet to be born.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]

The Trouble with Children – Problems Defining Offspring for Inheritance

It’s very natural for parents to pass on all their worldly goods to their children, and for those who die without a will the probate rules will ensure that they are the first in line (along with any spouse) for the assets from your estate.    But although the definition of your child sounds simple, probate law draws some fine distinctions when it comes to determining who your children are.

 

  • Adopted children – formally adopting a child means that it can legitimately inherit a share of its adopted parent’s estate.  However, adoption means that it will not have any claim on the estate of its birth parents.
  • Step children- unless adopted, step children cannot claim part of their non biological parent’s estate.  However, step children can make a claim after the parent’s death for a share of the inheritance if they have been treated as a ‘child of the family’ or where they are financially dependent on the deceased step parent.
  • Illegitimate and Legitimate children – Children born to parents who are unmarried, or not in a civil partnership, are considered to be exactly the same as children of married parents, and so are entitled to their parental legacy.  Unmarried parents marrying changes nothing regarding their children’s inheritance.
  • Unborn children – a child that is conceived, but unborn, will be eligible to receive an inheritance from your estate.  A trust will normally be set up, to hold the assets inherited, until the child reaches a suitable age.
  • Children Conceived By Artificial Insemination or In Vitro Fertilisation  – the Human Fertilisation and Embryology Act 2008 is a complex piece of legislation that determines the recognised legal parents of a child, even though neither may be the biological parents.  As with adopted children above, a child has a right to a legacy from its recognised legal parents, but cannot claim a legacy from its biological parents.

It is always preferable to name children in a will, to ensure that they are very clearly distinguishable from other relatives (or anyone else).  However, some wills are drafted to include a phrase similar to ‘all of my children’ that is designed to cover the eventuality of any future births, after the will is signed.

It’s this catch all class of ‘children’ that makes the above definitions so vitally important in determining who will be considered your child, and who will not.

When Gifts Fail –Legacies That Don’t Turn Out Exactly as Expected

Wills are an extremely efficient way of passing on your estate, after death, to those who you loved and cared for in your lifetime.  Gifts (as the law calls them) can be money, personal property, land or businesses.  However, there are a number of traps for the unwary that might prevent your gifts from reaching the very people you intended to benefit.  Here are some of the most common problems:

Beneficiaries Dying Before You  There’s always the possibility of someone who you wish to leave property to dying before you.  If the gift was intended for your child who then predeceases you, it will automatically pass to their children in equal proportions.  However, if you leave a gift to someone other than your child and they predecease you, the gift will fail.  It will not pass to their children so you must nominate another person to receive the gift.

Divorce  Following a divorce (or the dissolution of a civil partnership), the law will automatically remove your former partner’s right to receive a gift from you (just in case you forget), unless there is explicit instructions in your will to prevent this from occurring

Ownership – To leave property in a will you must own it.  That seems pretty simple, but wills can be written some time before a person’s death and their fortunes may change (so it’s important to review your will after a specified time).

Witnesses  If a witness who signs your will is also nominated to receive a gift, then the gift will fail (but the will itself remains valid).

Uncertainty – When the will is finally read, after your death, it’s sometimes not possible to accurately identify who the gift is intended for or what the gift actually is.  The issue can be that an uncertain group of people have been identified as beneficiaries (e.g. a gift to ‘all of my friends’) or that a description of a person is vague (e.g. a gift to your ‘favourite son’, when you have five sons).  There can be similar problems in differentiating property.

These are just a few of the reasons why gifts fail, resulting in them being returned to the bulk of your estate, to be shared out amongst the residuary beneficiaries who receive what’s left after taxes, debts and those all important gifts.   The solution is to employ a competent professional to draft your will.  They’ll spend a great deal of time: clarifying your wishes, helping you to identify and value your property, asking plenty of ‘what if’ questions, working to minimise your tax exposure – and, knowing the pitfalls above,  they’ll make sure that gifts are placed directly into in the hands of the people who you care most about.

Last in Line – Why Beneficiaries Are the Last to Receive Property from a Will

When a friend or family member dies, the beneficiaries of a will are the last in line to receive any share of the estate.

The current publicity concerning the estate of the late Boris Berezovsky, the billionaire Russian oligarch who died in Ascot in 2013, highlights this important principle.  Once worth an estimated £1.9 billion, Berezovsky’s remaining estate is now thought to be worth around £100million.  A firm of UK lawyers has recently successfully requested that its £12million legal bill was paid, before the personal representatives (the professionals administering his estate) have identified all of Berezovsky’s assets and assessed what his family are entitled to.

The personal representatives’ first duty is to identify, collect and value the deceased’s estate.  They must then pay out in priority order:

  1. Inheritance Tax – The personal representatives must first estimate and then pay any inheritance tax due to HMRC.  The representatives have the power to sell assets and transfer money from the deceased’s bank account, if there is insufficient cash to pay the tax bill.
  2. Charges, Liabilities and Debts –Next, personal representatives pay any debts owed by the estate, which includes funeral expenses.  They have an obligation to search for creditors and assess any claim made by them.
  3. Gifts & Legacies – Finally, personal representatives can make specific legacies (gifts) and then distribute the remainder of the estate (the residue) to beneficiaries as detailed by the will.

Considering that the probate administration (the process of allocating the deceased’s estate) usually takes about a year, beneficiaries often wait a very long time for what’s left, after everyone else has taken their share.

The good news is that you can take some positive steps to protect the legacies you make and speed up probate.  Firstly, have a will drafted by a professional.  This will ensure your exposure to inheritance tax is assessed and, with careful planning, often reduced.  It will also require you to list your assets and debts, so your personal wealth can be valued.  It’s important to keep this list up to date, as it speeds up the process by which your assets can be collected, it also helps trace creditors and assess their claims.  Finally, it’s worth taking professional advice with regards to any debt you must retain, as there may be more effective ways to manage it, leaving more for the people you care about.

Keep Your Friends Close and Relatives Closer – The Risks of Disinheriting Your Dependants

Unusually for an inheritance dispute, the Ilott v Mitson case caught the attention of the media last week.  Whilst contested inheritance claims are not uncommon, the most recent decision by the Court of Appeal has attracted a high level of editorial interest for a number of reasons.

The case itself is straightforward enough.   Helen Ilott’s mother (Melita Jackson) died in 2004 leaving an estate worth £486,000 to three animal charities.  Helen, who had not been in contact with her mother for many years before her death, was left nothing.  Jackson’s will and supplementary instructions made it very clear that her daughter had been disinherited.   Ilott brought a claim under the Inheritance (Provision for Family and Dependants) Act 1975, which gives dependants the grounds to challenge a will, when the deceased has not made sufficient provision for them.   Ilott’s claim was based on her and her family’s very low income.

Following a long and tortuous journey through the courts, the most recent decision of the Court of Appeal was to award Ilott £164,000. The decision was unexpected for two reasons.

Firstly, although challenges to wills due to inadequate provision for dependants are relatively common, claimants usually have to show that they are directly dependent on the deceased and are typically unable to work.   However, in this case Ilott had had no contact with her mother for several years, received no financial support from her and was capable of working, although she was in receipt of state benefits at the time of her mother’s death.

Secondly, in their decision to award Ilott a third of her mother’s estate, the Appeal Court pointed out that Mrs Jackson had no direct connection with the three animal charities to which she left her estate.  Her intention was simply to give the legacy as a donation.  The court felt that there was no clearly demonstrated ‘expectation or need’ by the charities and so adjusted the distribution of the estate.

So what can be made of the Court of Appeal’s decision in relation to estate planning and the drafting of wills?   The decision to uphold an appeal, from an independent adult child, widens the net of potential claimants.  It serves as a reminder to professionals involved in drafting wills to advise clients of the substantial risks of disinheriting close relatives and dependants.  They may want to cut their nearest and dearest out of their will, but the courts may have other ideas and have the power to change the final allocation of the deceased’s estate.  Indeed many will writers require people making a will, who are intent on disinheriting their closest relatives, to sign a statement confirming that they understand the consequences of their actions.

In addition, legacies to charities may have to be considered in terms of the deceased’s contact with the charity, especially if there is the possibility that the will may be contested.   That said, the Appeal Court made its final judgement by balancing the needs of the charities against the needs of the claimant and still concluded that they should retain two thirds of the estate.

But this may not be the end of the matter as far as inheritance claims are concerned.  An appeal to the Supreme Court is being considered by the three charities, which may bring the whole issue to our attention once again.