Later life planning for business owners
Planning for later life by making a will, an LPA and considering other options, such as trusts, is important everyone, but more so for business owners.
While it can be difficult for familiies to manage the affairs of a loved one who passed away without a will, it can be even more complicated if the Estate also included a business. Depending on the business structure, it may end automatically upon the death of it's owner, or may still exist, but require the involvement of someone else.
By planning for the unexpected during your lifetime, you can ensure your business affairs are managed as effectively as possible.
What options are available?
|Including your business interests and assets in your will should always be considered for business owners.
|Trusts can be used to ensure the succession of your business interests and assets are managed in a tax-efficient way.
|A tailored LPA, or reference to your business interests in your property and financial LPA, can ensure the smooth running of your business.
|The above options are dependent on the agreements you already have in place for your business (such as your Partnership Agreement, Articles of Association or Shareholders’ Agreement).
Generally, ‘small’ businesses will either be sole trader businesses, or sole director companies and the business interests in those two types, i.e., your ownership of the business or shares, will be an asset of your Estate and should be included within your will. There are typically two options here, and your will should include one of them:
When considering whether to gift your interest in your will, be careful to consider who the beneficiary should be and whether they have the required knowledge to run your business effectively. Similarly, you should also consider appointing a professional executor who will be able to assist your Estate in running your business.
Business Will Trusts
A discretionary trust in your will, which includes your business, is particularly useful for Estates where Inheritance Tax (IHT) is an issue. Under a trust, your Estate will be able to take advantage of Business Property Relief (BPR) which could be available at either 50% or 100% of your business assets, depending on the particular asset.
A business trust will give the trustees wide powers to run the business after you’ve passed away, whether this be to sell the business, or to continue the business, they have the discretion to decide. As with all advice in this guide, you should carefully consider who the trustees should be, and whether they have the required skills and experience to run your business effectively.
If tax efficient planning is your main objective, and you are married, you should consider leaving your business assets in trust, rather than gifting them to your spouse, to ensure your Estate can benefit from BPR. Your spouse can still be named as a trustee and can therefore manage the trust, but if they receive the business assets directly under your will, the IHT relief could be wasted.
It is also important for business owners to consider what will happen if they lose their mental capacity but have a business that still needs to be run. You can tailor a property and financial LPA so that it includes instructions for your business and authorises your attorneys to act on your behalf. You should also be careful when appointing an attorney, again taking into account whether they have the required skills and experience for running your business while you are incapacitated.
If your LPA does not allow your attorneys to manage your business interests, and you become incapacitated, then your business bank account is likely to be frozen, preventing wages and invoices being paid. It is also unlikely there will be anyone who can make decisions for the running of the business without an application to the Court of Protection (which can take several months).
Depending on your business structure, and the options listed above, we may need to update your commercial agreements. For limited companies, your Articles of Association or Shareholders’ Agreement may already have measures in place which cover your death. Similarly, the Partnership Agreement may already have a process which is triggered by the death of a partner.
To avoid any issues with the planning options you decide to use and the arrangements already in place, we can review these documents and advise whether they need to be updated.