Preserving your business assets for your family
26th June 2013 : By Jason Cherrington
It is not uncommon for my blog posts to be inspired by real life situations that I encounter whilst carrying out my role of an Estate Planning Consultant for Mind at Rest Wills. Today's post was inspired by a recent visit I made to client's that were concerned about what would happen to their business in the event of death and aims to cover the topic of "Family Business Protection".
The majority of my consultancy work is spent working with client's who's focus is ensuring their personal assets are protected for future generations, however when discussing a client's wishes with them it is important to question as to whether or not they run their own business as the answer to the question will dictate what the most appropriate overall estate planning advice would be. This is because without putting appropriate Business Succession strategies in place, the client's true wishes may never be realised.
Without the appropriate Business Succession strategies in place -
! Your spouse / partner and children may not inherit your share of a business
! Business partners may not be able to buy out the deceased’s share
! The surviving spouse or children may be obliged to take over the running of the business
! The value of the business could depreciate owing to the inexperience of any beneficiary
! The business may have to be sold and the proceeds become liable to Inheritance Tax
Why protect your family business?
No doubt you have shed blood, sweat and tears working hard to build up your business to not only benefit you now, but with the intention for it to benefit your family and future bloodline ensuring that your loved ones are provided for in the event of your death.
So what if the worst happens and you or a business partner was to die?
Who would be entitled to this share of the business?
Would you or your business partner be content to run your business with their surviving spouse or their beneficiaries?
Would they even want to be involved with the running of the business?
Without a valid Will the deceased’s share would be subject to the Laws of Intestacy and the person who inherits may not be the person you wanted. This could have a major impact on the running of the business, the value of the business may reduce following the death of such a key person. Many spouses would probably not want to be burdened with the running of a business they may know very little about. For example, if there are young children to care and provide for then the surviving spouse might prefer to be bought out.
Would there be sufficient funds available to purchase the deceased partners share from their family?
Would you have adequate funds to purchase the deceased Director’s share from his family? Or would the business have to be sold?
If the business is sold by the deceased’s beneficiaries how would this impact on their estate as their assets increase?
How would it also affect the surviving business partner’s assets as these too increase?
Both parties’ estates could be impacted by Inheritance Tax in the future, having now lost any (BPR) Business Property Relief that was previously available whilst the company was still trading. With the sale of the business you risk losing 40% of the cash proceeds to the tax man.
You may have made some provision for this eventuality. You may feel that you have already prepared for the worst by taking out sufficient life cover to protect all parties’ shares of the business. You may even have had the presence of mind to set up a Company Cross Option Agreement. This would ensure that the surviving business partner/s has the right to buy out the deceased’s share of the business.
The proceeds of the life assurance policy could be paid to the surviving spouse or beneficiaries, in exchange for their inherited share of the business. Equally, the surviving spouse or beneficiaries would be able to exercise their right to sell this share of the business to the remaining business partner/s in exchange for either the market value or an agreed amount covered by a life assurance policy.
But what about the impact a standard cross option agreement has on someone’s personal estate?
If you or a business partner dies their share will pass to their spouse or beneficiaries through their will and is deemed to be part of their estate. Whilst this share is held and the business continues trading then the assets could be exempt from Inheritance Tax if they qualify for Business Property Relief (BPR). Once the Cross Option has been effected then BPR is no longer available on the proceeds, for example from any life assurance.
The spouse’s assets that are assessed for Inheritance Tax (IHT) purposes, have now increased by the funds received from the proceeds of the life assurance policy, this potentially now risking 40% of the proceeds to IHT. Depending on the size of the business this could result in a significant loss. These assets are also now at risk from attack from any future remarriage claims, creditors or bankruptcy and Long Term Care costs.
What about the consequences a standard Cross Option agreement has for the surviving business partner?
With a standard Cross Option Agreement in place, the surviving partner would now own 100% of the business. This is fine whilst the business is still trading and whilst BPR is still applicable.
However, what would happen when they decide to sell the business?
The value of their personal estate would increase as it would now include the proceeds from the sale of the business. This leaves the spouse wide open to attack from Inheritance tax, creditors / bankruptcy, divorce settlements and long Term care costs.
So how do you ensure both your business and personal assets are protected for your family?
The first step is to talk to your Estate Planning Consultant or Solicitor, if you don't have one already, don't worry as the majority are more than happy to provide an initial free consultancy that will allow you to discuss your situation and wishes in full. At this point you would normally be provided with a full estate planning recommendation report, which is tailor made to suit you and your business. This will allow you to make an informed decision on how you would like to proceed.
It is important to ensure that significant protection to the business is put in place as this reduces the possible impact of Inheritance Tax dramatically. Furthermore the business and proceeds from a future sale of the business are protected for the bloodline from IHT, Nursing Care Fees, Remarriage and Bankruptcy / Creditor claims.
In Summary
When providing"Family Business Protection"solutions to client's of www.mindaterst.co.uk, I ensure that each partner or director’s share of their business is directed to individual Family Trusts through appropriate Clauses written into their Wills. Furthermore the appropriate Life Cover will also be assigned to ‘Shareholder Trusts’ so that these proceeds do not impact on the surviving individual estates.
Once the Cross Option has been executed, the proceeds from any Life Assurance policy replace the share held in the deceased’s Family Trust(s) and so do not form part of the beneficiary’s estate. These funds are now protected against any of the risks named above and the surviving spouse and beneficiaries still have full access to the Trust assets.
So how does this benefit the remaining business partner?
The surviving business partner still retains their original share of the business but the deceased’s partner’s share is passed directly into a Shareholder Trust(s) from where the Life assurance proceeds were originally paid. The surviving Partner / Director still has the fullest of control on the business as they are a Trustee of the Shareholder Trust(s). The Shareholder Trust(s) can also be utilised as a further efficient income tax planning tool. Now that a proportion of the business is in the Shareholder trust(s) any dividends paid into the Trust(s) could be distributed to beneficiaries of the trusts who may well have nil or low rate income tax.
That's all for today, hope you find my post helpful.