Planning for what will happen to your estate once you are no longer around is never an easy task. Careful considerations must be made as to who you would like to inherit your estate, when you would like them to inherit, and what tax implications inheritance might have. Where a business is owned, it is also important to consider these same points, as failing to plan for succession of a business can have seriously damaging effects on the business and to your family's inheritance. For private, owner-managed, or family-owned businesses, a solid succession plan can drive the growth of the business, reduce taxes, and set the stage for retirement and continued growth of the business for generations to come.
Despite this, Legal and General reported last year that over half of business owners left no instructions in a Will or any special arrangements regarding the succession of their business. Without a valid Will, the business assets you leave behind after your death would be subject to the laws of intestacy and the person who inherits may not be the person you intended. It is therefore important to put in place a Will which deals with the issue of business shares or assets, and carefully consider who would be appropriate to receive these.
It is important to consider who you would want to inherit shares of your business, as inheriting shares can come with significant responsibilities. Would you or your business partner be content to run your business with their surviving spouse or their beneficiaries? This could have a significant impact on the running of the business, or the value of the business. Passing shares to an individual who does not have an understanding of how to effectively run a business could result in a significant downturn in profits, and perhaps bring the business to an end altogether.
Ensure that your company documents are up to scratch. Ensuring that partnership agreements or company documents contain clauses which specify what is to happen on the death or retirement of a key member of the business is essential to protect the continued success of the business. For example, a buy-sell agreement is a legally binding agreement between partners or co-owners outlining what will happen if an owner dies, is forced or chooses to leave.
You may also consider other exit options such as selling or closing the business or hiring outside management to run the business. Before selling a business, it is important to consider the tax implications this could have. Qualifying business assets are exempt from inheritance tax on death and can be an effective way of reducing inheritance tax liability. It may, therefore, be worthwhile keeping hold of these assets.
As well as being experts in advising on succession planning generally, we are also experts in the succession of family businesses. It is important when planning for your future, not to neglect the future of your business, as taking steps now can avoid the business facing future avoidable difficulties, and ensure that your business continues to thrive for your loved ones for generations to come.
Partner, Peter Shand, is an experienced family business lawyer and authoritative voice on delivering bespoke and integrated advice to business families. Contact Peter today using the Enquiry Form or call on 0131 225 1200.