Why is succession planning important?
Your business is likely to be a major asset in your estate. You have worked hard to make it a success and it’s important to make sure that, if something happens to you, the benefits pass to the right people in a timely and tax-efficient manner.
We would recommend you create a Will that is tailored to your individual business needs as well as making sure that your family and loved ones are properly provided for.
A Succession Plan requires careful thought - so do it when the road ahead looks clear, not when there are problems!
What you need to consider depends on how you own your business
You should consider whether the business would continue after your death, or whether it would be wound up or sold on as a going concern. You need to appoint appropriate executors and trustees who could handle the sale and then account to your beneficiaries for the sale proceeds.
If you do not have a Will in place then the statutory intestacy rules (also downloadable from the side of this page) would govern who had the power to wind up your business and also ultimately who it would go to. In particular, if you are not married to your partner, or if you have young children, it is likely to prove costly and time consuming to resolve everything.
An important point to note is that if you have a Will, your executors have authority to deal with your estate and business straight away. If there is no Will, the administrators of your estate do not have authority to deal with your business until a Grant of Representation is obtained. This can take a few weeks or even months to get from the Probate Registry.
If your business is run as a partnership, you and your business partners should have a partnership agreement in place as well as a Will. Without a detailed partnership agreement, on the death of one of you, the partnership may dissolve automatically, despite the wishes of the continuing partners.
A partnership agreement can set out procedures for how a deceased partner’s share would be valued on death, and how that share would be paid for by the continuing partners – for example, by monthly instalments to make it more affordable for the business.
With a limited company, the asset that you are leaving behind is your shares in the company, rather than the assets that the company owns.
You need to consider whether you want the shares to pass to your beneficiaries, or whether you want your executors to sell the shares and for the sale proceeds to pass to your beneficiaries.
In addition, if your shareholding is a controlling interest in the company, you need to consider whether you want this to be kept intact by having the entire shareholding transferred to one beneficiary, or whether you want to divide it up amongst the family so that no individual beneficiary holds all the power.
The Memorandum and Articles of Association of the company should also be checked to see whether there are restrictions on the transfer of shares, known as pre-emption rights. Often the Articles will include a clause stating that any shares to be sold or transferred must first be offered to the existing shareholders. Alternatively, there may be a restriction on transferring the shares to anyone who is not an existing shareholder.
As with a Partnership, you might also like to consider preparing a shareholders agreement to sit alongside your Will. A shareholders agreement can (amongst other things) fix the price to be paid for shares when one shareholder dies. They can also give surviving shareholders a right of first refusal on the death of one shareholder; and a right for surviving shareholders to pay for the shares in instalments.
Key Person Insurance
As well as making a will and considering whether you need any other documents to sit alongside it, it may also be worth considering Key Person Insurance. It could be advantageous to take out life cover which would provide a lump sum payment to your partners or other shareholders on your death, so that they have a lump sum to be able to buy your share of the business immediately following your death. If you are going to take out an insurance policy for their benefit, you need to ensure that they do not simply keep the insurance payout on death – so in this case, a partnership agreement or shareholders agreement is vital.
Your business may quality for “business property relief” so that it is 100% exempt from inheritance tax.
You should take proper advice from both your solicitor and your accountant as to whether your business assets would qualify for business property relief. The relevant assets must have been owned for at least 2 years prior to your death and the business must not just be an investment company.
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Why not give us a call today on 01724 854000 to talk to a Succession Planning expert. Alternatively, visit our Wills & Probate Team and Business Team pages to see how they can help you, as these departments would work together to provide the best possible solution for your business.