Valuable assets protection from death, disputes, and divorce

The business may well be one of the most valuable assets the family owns and it is therefore vital to ensure it is protected against death, disputes and divorce. Changing social patterns have led to more extended and blended families which can in turn lead to particular threats to the passing on of family wealth in a business context. It is sensible to consider what options are available to protect and preserve that wealth at the earliest opportunity and hopefully whilst family relationships are healthy. Ideally, if a plan has been thought out in good time and properly implemented, the divorce, death or incapacity of a family member should never require the sale of business assets to meet tax or other liabilities.

Questions to ask yourself

• What do the company’s constitutional documents say about the transfer of shares?
• Are we concerned about shares in the business being owned by non-bloodline members of my family? Or other third parties? If so, do we do we want to make an exception to this rule for legitimate tax planning purposes?
• How should we discuss pre-nuptial/post-nuptial agreements and cohabitation agreements with our children?
• Have we made appropriate provision for any funding which may be required in the event of a divorce?

Pre-nuptial agreements

Births are not the only way in which new family members may be introduced to the business. Equally as important to consider are those new family members who are introduced by marriage. It is possible to restrict the transfer of shareholdings in the constitution of the company but it is also worth considering asset protection through pre-nuptial and post-nuptial agreements or cohabitation agreements in the context of family business.

Financial claims by former spouses or family members can put under threat assets built up over time and their intended benefit for future generations. In particular, deciding whether to allow shares to be transferred to spouses and, if so, how they will be protected going forward, is important.

Divorce

As set out above under ‘pre-nuptial agreements’, potential divorce can be planned for and should be planned for. There is not much more potentially destructive for a family business than an acrimonious divorce. It is bad enough where the business is dynastic, with huge awards being made by the English courts to the financially weaker spouse even on a ‘needs only’ basis; but where the business has been created during the marriage, or largely grown during the marriage, then there is a presumption of an equal division between the spouses on divorce (subject to a few complex arguments that may be run). Either way, the requirement of the paying spouse to find sometimes huge sums in a short period is a challenge for any family business.

It may be important to consider the extent of the involvement of a spouse in a business at the outset; if a case can be made on divorce that the financially weaker party was involved in the running of the other spouse’s long-standing family business, this may make a significant difference to his or her claim. If the paying party has been involved in the running of the generations-old family business during the marriage and it has increased in value, then there is likely to be a presumption that the financially weaker party can claim a share, at least in the increased value. Awards accounting for ‘special contribution’ on the part of the business creator as a reason for departure from an equal division are notoriously hard to achieve in the family courts and now very rare (if not non-existent).

London is known as ‘the divorce capital of the world’. That is partly because the English family courts are extremely thorough in getting to the bottom of the true ownership of assets, often looking through trusts and other entities to get to the ‘reality’ of beneficial ownership. The courts are pragmatic and tough. They even have the power to vary certain types of trusts and to transfer assets to which they consider a paying party is ‘entitled’, regardless of strict legal ownership. There is a duty of full and frank disclosure of all assets and resources on divorce which does not exist in many civil law jurisdictions and litigants are often surprised by the extent of the powers of the English family courts and the obligations and order which can be imposed.

This makes it all the more important to have these matters in mind in the context of strategic thinking for the family business.

Incapacity

The question of what would happen to the business if one of the owners or managers of the family business lost mental capacity is something that is often overlooked.

Questions to ask yourself

• What would happen to the business if I am unable to make decisions?
• Who is the best person to make decisions in relation to the business if I am unable to do so?
• Do I want the same person looking after my business affairs as my personal affairs?
• Have my business partners considered this situation and if so who have they appointed?
• Should there be a policy as to who is appointed in such a situation?

Lasting powers of attorney, in the event of loss of capacity, are the means by which control is handed over to someone else to enable business decisions to continue to be made. In certain circumstances it may be important for business owners to separate their business affairs from their personal affairs. For example, you may be happy with a spouse running your personal affairs, but you may not feel so comfortable in relation to your business affairs.

Perhaps other family members or non-family members may be more appropriate to act as attorneys in relation to the business. This can be sound risk management for the business as a whole and therefore including a requirement to have made proper provision for such circumstances in the family charter is sensible.

Death

Planning for death involves ensuring that up-to-date and tax-efficient wills are in place to cover the possibility that a family member is still holding shares in the company on their death. These can ensure that the ownership of the business passes in the appropriate direction and can also take into account tax planning opportunities so that the family’s wealth can be preserved.

It is important to consider the practical effect of what may appear to be straightforward terms of the will in the particular context of the business. For example, most parents wish to treat their children equally but applying equality of treatment to children may leave a family with a deadlocked business, with no one member being able to make decisions. It may also cause particular discord where some but not all of the children have been actively involved in the business and those that are may have assumed that they would one day inherit.

By considering these things in advance and anticipating the likely issues, conflict can often be avoided. Trusts are particularly useful in providing solutions as they can separate control and management from its ownership.

Structuring wills in the appropriate way can ensure that, on the death of any of the business owners, control of the business remains with his or her co-owners or in the right child’s hands rather than being dissipated amongst the deceased’s relatives. Funds can be made available at the right time to buy out the interest of the deceased co-owner through life assurance policies written in specially worded trusts. It may also be possible to balance the children’s entitlement through the use of such life assurance policies or other assets if they are available.

Questions to ask yourself

• If I am no longer around, can the business continue without me?
• Is the next generation ready and able to take over the business if I am suddenly not around?
• Am I being realistic in my view of the ability of the respective members of the next generation to run the business and their ability to work together?
• Do members of my family already work in the business? How will they view it if their siblings suddenly inherit shares and benefit from their hard work for little effort?
• Do any members of my family (for example my spouse) rely on the income from the business and will they still need to do so after my death? How can I best provide for them?
• Do any members of my family already own shares in the business – how do I ensure that I do not create a potential for deadlock if I want to treat my children equally?
• Have I considered and taken advice in respect to tax planning?
• Have I considered putting in place any life assurance?

Case Study: A UK land-owning family with unexpected succession issues

Following a terminal diagnosis for one of the founders of a predominantly farming family business, we helped the owners navigate succession and tax planning issues, the subsequent death and the remarriage of the surviving founder. Having ensured the appropriate assets would achieve CGT free uplift on the founder owner’s death, the business assets were left in an IHT free trust under their will.

Subsequent remarriage of the surviving founder allowed further wealth planning, including pre-nuptial agreements that satisfied the need to leave assets to the new spouse in an IHT efficient way and also ensure the deceased’s wish to benefit his or her children through the family business was fulfilled.

Questions to keep under constant review

• Are we constantly monitoring the possibility of conflicts of interest arising between individuals’ roles as trustees and their roles within the business and, are conflicts being effectively managed?
• Would the appointing of a professional independent trustee assist in ensuring better scheme governance and financial prudence?
• Are the business and the trustees working together to set a sensible pension scheme investment strategy which minimises financial the risk for the business and at the same time protects members’ benefits?
• Have we considered the funding required to meet the pension obligations, particularly if the employer has longserving employees, and have we fully considered whether cash, or a guarantee/charge over business assets is the best solution for the employer?
• Is the trustee board sufficiently trained in their trustee responsibilities/knowledge of applicable law and do they have a sufficiently diverse business background (across the board as a whole) to make sensible investment and discretionary decisions?