Where there's a will ... thinking about the death of a practice partner may be an uncomfortable process, but as Christine Green reflects, being prepared now can avoid serious legal complications further down the line.
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 an optometry partnership with two longstanding partners, but dies suddenly of a heart attack. When going through his papers, Charlotte finds that he has no will and no life insurance. There is no Partnership Deed, although the partners have borrowed heavily against their individual assets. The practice has fixed assets of approximately 1m[pounds sterling] and creditors of approximately 500,000[pounds sterling].
On Mark's death, the partnership terminates automatically as there is no Partnership Deed. The practice 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[pounds sterling]). 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, the administrators challenge the valuation of the practice, and there are also some difficult negotiations with HMRC that need to be dealt with.
For practices across the country, it is important to know how these difficult scenarios can be avoided.
The Partnership Deed and Articles
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 deeds. 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.
Often, the Partnership Deed may provide that the surviving partners have an option to purchase the deceased's share of the business. To avoid argument after death, 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 (likely to be the most beneficial for the deceased's estate) or the historic value at which assets are carried in the partnership accounts. This latter provision will benefit the continuing partners. In the case of a company, this will take the form of pre-emption rights, enabling the shareholders to purchase the deceased's shareholding and there will be provision in the articles relating to the valuation of the shares. There should also be provision for referral of any dispute to an agreed arbitrator.
Many partnerships and companies put insurance policies in place to provide funds, enabling them to purchase the deceased's interest in the business. This avoids the difficulties which will be faced by the partnership having to raise a potentially large amount of money to buy out the deceased's estate.
Make a will
Apart from ensuring that the relevant clauses are in the Partnership Deed, any business owner should have a properly drafted will. It is particularly important in the above example, as the rules of intestacy do not make provision for unmarried partners. In addition the will can make several provisions:
It is possible to choose executors. These are the people who will deal with everything following death. It may be sensible to appoint a special executor to deal with the practice. This can be someone with experience of the practice who can deal with important or urgent decisions as soon as the death occurs. The executor's authority commences immediately on death, whereas, if there is no will, an administrator will have to be appointed on the intestacy, and this can take time.
The will should give the executors powers to deal with the practice for a limited period after death and would confer on them all the powers held by the deceased to enable the practice to function smoothly until decisions can be made. It will also reflect any provisions in the Partnership Deed as to payment.
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, and unquoted shares in a company.
At the time of drafting the will, it is not possible to know whether a business which qualifies for this relief will still do so by the date of death. The nature of the business may change and the business may hold large cash reserves, which 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.
It may be advantageous, for example, for the surviving spouse to purchase the business from the trust using assets in her own name. The trust will then hold cash which can be distributed free of inheritance tax to the children, providing the surviving spouse holds the business assets for two years. She can leave them again in her will and they will continue to enjoy Business Property Relief. This arrangement, known as 'double dipping,' essentially provides the opportunity to claim Business Property Relief twice and can be extremely valuable for business owners.
Powers of attorney
Finally, when making plans for the future, business owners may well wish to consider making provision for a situation which could arise if they were to lose capacity during their lifetime. This can be as difficult as the situation that arises on death. Important decisions and actions which require the input of the person with a disability cannot be made, and again, the business may find itself frozen until the Court of Protection can appoint an appropriate person. One way to deal with this would be for the partners to give a Lasting Power of Attorney for property and financial affairs to someone who can establish a trust to do this in their best interests. The Lasting Power of Attorney would enable the appointed attorney to continue to act, even if the individual loses capacity. Provided it has been registered with the Office of the Public Guardian, it can be effective immediately and avoids the potential difficulties of having one partner, or director, unable to act.
The path ahead
The most important message for practice owners is to deal with the measures needed as soon as possible. Although this often means having difficult or uncomfortable discussions with a family or business partners, procrastination can result in serious problems.
Six steps to getting protected
* Partnerships must create a Partnership Deed
* Individuals need to have a valid will
* Owners should consider having insurance in place to buy out a deceased's estate
* Partners ought to have in mind who would be the executors
* All parties should take advice on the tax implications of owning and disposing of a business
* Incapacity is possible and a plan should also be in place
The High Street view
High Wycombe-based opticians, A R and J A Salter, has been in business some 36 years. Established originally by Andrew Salter on a sole trader basis, his son, James, joined him 15 years ago and the practice became a partnership nine years later.
Andrew Salter, now 71, says: "I'm supposed to retire and go away"--but he's still enjoying work and is quite clear about the need for service to be the key to business survival.
The practice does have a Partnership Deed, but as Mr Salter explains: "It doesn't cover death or incapacity; it's only a method of establishing the mathematics to keep HMRC happy, as we're both self employed." There has been no discussion about inheritance, powers of attorney or what would happen following the death of a partner.
Recognising that he needs to plan for the future, Mr Salter said that he's soon going to speak to his brother, who is a lawyer, to see what steps he needs to take.
Presently, the partnership percentages change each year, with James taking a bigger slice to reflect the greater role that he's playing in the practice. "I'll run it down to 20% and then take that as my pension," says Mr Salter.
Christine Green is a partner at Veale Wasbrough Vizards solicitors, email@example.com
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|Date:||Feb 8, 2013|
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