DEATH OF A BUSINESS PARTNER

Christine Green – It’s a subject that most avoid, but having a business partner die without a will can lead to serious problems

An unhealthy proportion of people don’t have a Will. Throw into the mix a business and their private and business affairs are heading for disaster.

Take the (fictitious) case of Mark, a 45-year-old man who has co-habited with his girlfriend, Charlotte, for the last 20 years and with whom he has three children. Mark owns a garage in partnership with two longstanding colleagues. Mark dies suddenly of a heart attack. On going through his papers, Charlotte finds that he has no Will and no life insurance. There is no Partnership Deed, although the three partners have borrowed heavily against their individual assets. The garage has fixed assets of approximately £1,000,000 and creditors of approximately £500,000.

On Mark’s death, the partnership terminates automatically as there is no Partnership Deed. The garage will then have to be valued and final accounts drawn. Mark’s personal assets consist of the house (subject to remortgage and other assets, together worth £600,000). His children are 18, 15 and 10, and Charlotte is horrified when she finds that the house, in Mark’s sole name, has been charged with the partnership loan.

In the absence of a Will, Mark’s three children are entitled to 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 children until they reach 18. Administrators will have to be appointed to manage the estate and they will eventually become trustees of the children’s trust. No provision is made for Charlotte on intestacy as she is not married. She makes a claim against Mark’s estate under the Inheritance (Provision for Family and Dependants) Act 1975 on the basis that reasonable provision has not been made for her on intestacy.

There will need to be two administrators as two of the children are under age. Acting on behalf of the children, they challenge the valuation of the business. There are also some difficult negotiations with HMRC that need to be dealt with.

There are ways in which these difficult scenarios could be avoided. In the first place, there should be appropriate provisions in the Partnership Deed covering the situation if one of the partners dies in service. Many businesses operate in the absence of any or adequate governing documents. The presence of a clause setting out the procedure on the death of one of the owners will prevent the termination of the partnership on death.

VALUATION
Often, the Partnership 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 basis of a valuation of the partnership assets, including any value attributed to goodwill. This may be the current market value at the date of death or the historic value at which assets are carried in the partnership accounts. It should also provide for referral of any dispute to an agreed arbitrator.

INSURANCE
Many partnerships and companies consider putting in place insurance policies to provide funds enabling them to purchase the deceased’s interest in the business. This avoids the difficulties that will be faced by the partnership having to raise a potentially large amount of cash to buy out the deceased’s estate.

Clearly, the easiest option is for business partners to simply make a Will. If this is done, you can choose who will be the executors. The Will should give the executors powers to deal with the business for a limited period after death and would confer on them all the powers held by the deceased to enable the garage to function smoothly until decisions can be made. It will also reflect any provisions in the Partnership Deed as to payment.

INHERITANCE TAX
The Will can also assist with tax planning. Business Property Relief of 100% is available to reduce the potential inheritance tax liability arising in relation to business assets. Providing that the deceased has owned the
assets for two years before death the relief covers:

• A business;
• An interest in a business;
• Unquoted shares in a company;

At the time of drafting the Will, it is not possible to know whether a business relief will apply at the date of death. The nature of the business may change and the garage may hold large cash reserves that will not qualify for Business Property Relief. For this reason, the Will may provide that the business interest is transferred to a discretionary trust. The trustees can then assess the situation on death and deal with it in the most tax-efficient manner.

Business owners plan ahead as soon as possible. It may mean having uncomfortable discussions with a family or business partners but procrastination can result in serious problems.