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Posts tagged ‘probate’

Succession or Sale? – HR’s Role In Advising Business Owners On Inheritance Issues

Two Hands Passing A Golden Relay BatonThis second post explores the opportunity for human resource consultants to advise small business owners on the future of their business, after their deaths. We’ll look at the important question of succession or sale after the owner’s death. It’s a rather long post, but there’s a lot to consider.

Before any planning can begin, it’s vitally important to get an up to date assessment of the business’s current value and future prospects, as financial viability will determine what options are available to business owners.

Succession or Sale?

The first decision to be made about the future of a business is whether it should be retained or sold, based on financial viability, the suitability of people wishing to take over its stewardship and the current owner.

If the business is losing money and has no prospect for future recovery, it may be better to close it sooner rather than later.  The cost of shutting down a small business and any debt it has incurred, will be met by the deceased owner’s estate.  As creditors receive preference over those who are left a legacy in a will, they will receive their money first, leaving beneficiaries empty handed.  However difficult it may be emotionally, it may be better to close the business now and manage the impact of the resulting debt.  Assuming the decision is to dispose of the business, and it is financially viable, it’s relatively straightforward to make arrangements in the will to sell it.

But if succession is a possibility, there’s a number of important factors to be taken into account:

  • Who would want to continue running the business? Owners often consider their children to be natural successors, but they may have no interest in taking on the responsibility of managing the business.
  • Who has the skills, knowledge and reputation? Although a willing successor is always preferable, but they may not have the profile, competence or experience to make the business work.
  • Is it important to keep the business in the family? Has the business become such an integral part of the family, either emotionally or financially, that it cannot be sold.

Sole Traders and Partnerships

For sole traders, the business must close on the death of the owner.  However, its assets can be left as a legacy to the chosen beneficiaries, picking up where the deceased owner left off.  It’s important to identify the business assets in the will and nominate the specific beneficiary, otherwise the assets will be lumped in with the residue of the estate and sold.

With partnerships the situation is slightly different.  The future of the business needs to be decided well before either partner’s death and set out in the partnership agreement.  The agreement must specify what will happen to each partner’s share and how, and if, the business will continue.  Working in tandem with each partner’s will, the future of the business will be assured when written into the formalised partnership agreement.

Family Businesses

Decisions about who will inherit the business can be decidedly more complex for families.  One option for owners who wish their businesses to benefit future generations, is the formation of a trust.  The legal ownership of the business passes to trustees, nominated by the deceased owner, who have an obligation to manage the business for the benefit of the trusts’ beneficiaries (i.e. the family).  Trusts are a convenient way of ensuring a family benefits from the future proceeds of the business, without the necessity for ‘hands on’ management.

Limited Companies

Owners with shares in small companies may have particular problems with the transfer of their shareholding.  The general principle is that an owner’s shares will form part of their estate on death.  However, written into some companies’ articles of association is the right for the existing shareholders to buy the deceased’s shares (pre-emptive rights), robbing beneficiaries of inheritance tax savings and the right to sell the shares when they choose (for the best price).  A ‘share transfer agreement’ is the preferred method of transferring inherited company shares, giving the beneficiaries the choice of when to sell their shares, and other shareholders a guaranteed option to buy.

Next week we’ll take a look at taxation.

[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.]

When Your Signature Is More Than Just a Formality – The Final Steps in Executing a Will

Considering all the time and expense that can go into creating a reliable will, it’s surprising that people still get the final steps wrong.  But failing to stick to these seemingly simple formalities can render your will totally invalid.

Firstly, the person who is the subject of the will (the testator) must sign the handwritten, typed or printed will, to show they intended to give effect to the document.  If the testator is blind, or cannot make an identifying mark, they can direct another person to sign the will, but it must be in their presence and under their direction.

Secondly, at least two people are required to witness the signature of the testator.   Most people can be witnesses, except those who will receive a legacy in the will (including the testator’s spouse or civil partner) or those lacking mental capacity.   Together, the witnesses must either see the signature being made or acknowledged by the testator.  Each witness then signs, or acknowledges, their signature in the presence of the testator, but not necessarily in the presence of the other witnesses.  As an added precaution some wills are initialled, by the testator and the witnesses, on each page.

Ideally, wills should not be altered once they have been signed and witnessed.  If an alteration is required, it’s preferable to complete a codicil, which is a separate amendment, requiring the same formalities (signing and witnessing) as the will itself.

Nobody may know, until the testator dies, if the formalities have been followed correctly.  When the will is submitted to the court to be approved before use (probate), it’s first checked for any irregularities.  Similarly, if a person wants to contest a will, they’ll begin by painstakingly examining every single element of the will, including the formalities.  In both cases, if things are not exactly right, the will is declared invalid and the rules of intestacy, usually applied when there’s no will, are used to determine how a testator’s property is divided.  This is probably not what the testator would have wanted, and it wastes the time and expense that went into creating a will.

So how can you avoid infringing the formalities?  With a DIY will, it’s all down to the testator to make sure the formalities are completed correctly.  Will writers, who construct your will for a fee, generally issue a set of instructions for completing formalities and check the executed will after execution.  An even better alternative, which prevents mistakes due to misinterpretation, is for the will writer to be present at the time of signing and witnessing, just to make sure that everything is exactly right.

The formalities seem simple enough, but as many cases in the courts and legal textbooks will bear out, it’s surprisingly easy to make a costly and irreversible mistake.

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.

Inheritance Tax – Good News But Not Quite Yet

On the 8th of July the chancellor announced the much heralded reduction in inheritance tax with these words:

‘The wish to pass something on to your children is about the most basic, human and natural aspiration there is. Inheritance tax was designed to be paid by the very rich.  Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years. It’s not fair and we will act…..’

Under current rules, no inheritance tax is paid on personal estates valued below £325,000 (the nil rate band or NRB), which will be frozen until 2021.  The government’s new measure is a ‘family home allowance’ which will be added to the basic NRB, starting at £100k in April 2017, increasing to £175k in 2020 (giving a total individual allowance of £500,000).  A married couple can then combine their allowances, to pass on their home worth £1 million, but that is 5 years from now.

But for some there’s little or no good news.  For those who are not home owners there will be no additional ‘family home allowance’.  Unmarried couples (and those not in civil partnerships) are still not able to combine their new ‘family home allowance’ NRB’s.  Furthermore, for those whose joint residential assets exceed £2 million there will be a tapering down of their main residence at the rate of £1 of NRB for every £2 of their main property.  Estates of over £2.7 million will be unaffected by these announcements.

So couples leaving a will, who die in 5 years from now with estates of up to £2 million pounds, can pass on the the full benefits of the chancellor’s tax reductions to their beneficiaries.   But in the meantime, and especially if property values grow at the same rate over the next five years as they have recently, there is still a need to engage in active estate planning, creatively using wills and trusts to minimise tax exposure.