In our October blog article, we looked at the ten reasons why you should use a solicitor to make your will. While it may look like a standalone document, a will can often be the starting point and essentially the back bone to your wider estate planning. In this month’s article we’ll be considering the role a will plays in estate planning for business owners.
For many business owners it can be impossible to fully separate their business and personal affairs. Often your business is the main asset within your personal estate and the main source of income for you and your family. Business owners have particular demands and circumstances and their will and estate planning needs to take this into account. Here are the reasons why will planning for your business is vital.
Protecting your Business
It is important to think through exactly what inheriting a business would mean to each of your beneficiaries and to adapt your will accordingly
As a business owner, you’ll want to make sure that your will is structured so that your business assets are passed on in the most effective way. When a business owner passes away, the potential impact on surviving business partners, their spouse/partner, their children and other potential beneficiaries can be significant.
It is important to think through exactly what inheriting a business would mean to each of your beneficiaries and to adapt your will accordingly, and in a way that is both most appropriate to them and most protective of the business. For example, if the business owner leaves shares outright to a surviving spouse or other family members, there are some key issues they will need to address in their estate planning:
- Experience: How much experience does the beneficiary have in running a business? Has there been a succession plan in place? How much experience is necessary? Ultimately, what measures need to put in place in the will to address their level of experience or inclination to engage with the business?
- Selling their shares: What are the implications for the business if the beneficiary sells their inherited shares or business holding? Does the will need to protect against or make allowance for this?
- The future: A spouse may enter a new relationship or remarry in the future. If they have shares or a holding – how might this affect the business? What if they require long-term care in old age – does this have implications for the business?
Limiting Inheritance Tax
It is also worth considering the potential inheritance tax implications if the shares are left outright to a surviving spouse. At present, shares in a trading company may qualify for 100% Business Property Relief from inheritance tax. This means that, no matter what the value of the business, the shares will pass to your beneficiaries free from inheritance tax on death.
While at the moment the shares may automatically pass free from inheritance tax when you die, this might not always be the case. For example, the relief might be abolished in the future. Or, alternatively, if the company is sold, the surviving spouse will have to pay 40% inheritance tax on the assets within their own estate.
Benefits of a Trust Structure
With these concerns in mind, many business owners might like to consider the benefits of putting together their will using a business trust structure. This allows them to address the particular issues that are relevant to them while protecting the family business. Some of the benefits that a business trust structure offers are:
- The company can continue to trade on and after your death.
- Shareholdings do not become diluted.
- Family members can continue to draw on the funds/dividends that they are entitled to.
- Business assets or sale proceeds can be protected from future marriages and divorces.
- If the business is sold in the future, the sale proceeds will not form part of any beneficiary’s estate and the proceeds will not be taxed at 40% inheritance tax on their subsequent death.
- Where a surviving spouse has surplus funds in their own estate enabling them to purchase the business back from the trustees, there is the potential for double relief to be claimed on the same shareholdings.
The Bigger Picture
The trusts in your will need to work in harmony with your company articles of association, any shareholders’ agreement, cross-option agreement and key man insurance.
Given the unique nature of the Progeny Group, we are also in the perfect position to provide a holistic approach to your planning. It is important that your personal estate planning fits within the corporate structure of your business. For example, the trusts in your will need to work in harmony with your company articles of association, any shareholders’ agreement, cross-option agreement and key man insurance. Our colleagues at Progeny Corporate Law are able to provide the expertise and advice needed in this area. We pride ourselves on always looking at the bigger picture to provide the best possible service to our clients.
These are just some of the key issues to be borne in mind by business owners when structuring their will and planning the distribution of their estate. There are clear benefits of employing a business trust to help them ensure their wishes are carried out. No two businesses or sets of beneficiaries are the same, so before drafting your will we work with you to understand the dynamics and structure of your family business as well as your family itself.
If you would like advice on passing on your business, putting a will in place, or on any other legal matters, please get in touch.
The content of this article is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Progeny Private Law Ltd accepts no responsibility for the content of any third-party website to which this article refers.