Running a family business can be exciting, frustrating, extremely busy and very rewarding both financially and emotionally. A lot of time will be taken up with immediate commercial and business decisions. However, it is vital for the long-term success of the business and family relationships to consider what would happen if something went wrong.
Below is a quick family business ‘disaster checklist’:
1. Wills and succession planning
2. Articles of association
3. Inheritance Tax
4. Lasting Powers of Attorney
5. Pre-nuptial agreements
Wills and succession planning
It is very important for all the family business owners to make a Will. This will ensure that the interest or shares in the business will pass to the right people at the right time, and that executors are in place to deal with decisions. The Will can also be used to protect business assets from the effects of beneficiaries going through divorce or bankruptcy.
It is also important to provide for family in a way that does not negatively impact on the business. For instance, an owner may leave everything to a spouse or children who have no involvement in the business. This can put the surviving business owners in a difficult position. In this case, the Will could provide the other owners with an option to buy out those family members. In order to provide them with necessary funds, a life policy can be put into trust to pay out funds to them to enable them to exercise that option.
Articles of Association
These are company documents, but should be reviewed as they can include succession rights for shareholders that override the provisions of a Will. However, the articles can be changed or amended.
Inheritance Tax (IHT)
Every estate on death is potentially liable to IHT, so it is extremely important that planning is undertaken to ensure that any business assets will qualify for Business Property Relief (BPR) which can reduce this tax by 100%. There are specific criteria that must be met, so this could impact business decisions well before any owners have died.
There is a danger where the person inheriting sells up in the future. If they do this, then on their death they would have no BPR on the sale proceeds, and so these are potentially subject to IHT at 40% depending on the positon of their estate. Again, planning can avoid this by creating a trust in the Will to hold the business assets and keep them outside the survivor’s estate. This can be flexible, so that person can still benefit from the trust, but the whole capital amount will not be exposed to IHT on their death.
More complex planning can be done too depending on particular circumstances, and advice would always be tailored to specific circumstances.
Lasting Powers of Attorney (LPAs)
These allow you to appoint one or more persons to act on your behalf in relation to property and finances, even where you may have lost mental capacity to make decisions. This is vital where key business decisions may need to be made in such circumstances.
It is possible to create two separate LPAs, so that different people are appointed to deal with personal finances and business matters.
They must be registered with the Office of the Public Guardian before they can be used.
These set out what will happen to particular assets were a married couple to divorce in the future, and they can be useful where one of the family business owners is getting married. Although not strictly legally binding, they can be enforced in court and may help to ensure that, should there be a divorce, the interest in the business can be protected.
Much of the above will take some time and thought to put in place, but it is far better to deal with these things now rather than when problems arise.