PEOPLE with business interests have multiple factors to consider when planning succession within their business and the impact their strategy may have on how members of their family will inherit, which of course should be reflected in their wills.
If you plan to retire from your business have you identified successors to manage it? How will your departure impact on your family’s financial security whether they are directors, shareholders, employees or neither? What are the benefits of appointing an attorney to make your business decisions for you if you lose your capacity?
Have you identified your future financial needs? Do you know the tax implications of
different decisions when departing from a business?
Have you written a will? What would happen to your business if you had a serious accident or died tomorrow? Who would authorise payments to suppliers if you were suddenly absent? Remember, legal action by creditors over unpaid bills can close a business in 28 days.
Lawyer Sarah Finnigan of Pearson Solicitors and Financial Advisers LLP explains more.
Sarah Finnigan is a specially-qualified Trust and Estate Practitioner and member of STEP, the global professional association for family inheritance and succession-planning specialists. Sarah, from Rochdale, trained in London and joined her London firm’s Private Client team once qualified. She later returned to her roots in the north and spent seven years in Manchester city centre, working for two commercial law companies, then joined Pearson Solicitors & Financial Advisers in 2014.
Her specialism is working with private individuals with business interests on succession planning and preparing wills that will pass business assets appropriately after death. This involves considering many business and personal factors. She said: “Business owners still have the same personal issues as non-business owners, such
as a disabled child, a divorcing grandson, a spend-thrift relative or a family member dealing with an addiction. All these things need covering in will documents along with the business interests. “I need to give each client bespoke advice in the interests of their business. This work puts me in a unique position. I act as a business adviser, tax and legal consultant and succession specialist, and often as a family mediator too, because a lot of the businesses who engage me are family-owned. So, I often discuss emotive and deeply personal matters with clients, their family and their business colleagues.”
PLANNING FOR THE FUTURE
“Conversations about the future of a business will often get people to think wider, about what they want to do in the future for their family, not just with the business. Business planning discussions therefore help clients with business interests work out lots of issues that flow from business discussions.
“For example, what are the income and capital requirements of people who are staying or leaving the business? Does the business owner have a plan to sell? What about a management buy-out or a natural successor already working in the business who could take over? And will the client’s family still be adequately provided for financially if things are re-structured. “There can be disagreements about who is best-placed to take the business forward. I cannot decide the business strategy but I can prompt and inform the discussion.
“Clients also need to think about their attitudes to risk. Sometimes there are tax
advantages to having assets held as part of a business. But there are risks if the business fails. Clients also need to keep things under constant review because changing circumstances in the business world and within their families mean their wishes will change
“There are capital gains tax and inheritance tax consequences that business owner clients need to be made aware of. Clients can then take decisions about the future knowing all the financial consequences of their actions. Wills and letters of wishes need to be considered as part of this process.”
TRUSTS, SUCCESSION & CONTROL STRUCTURES
One business succession option to consider is whether to establish a trust to hold the
business assets. A trust is a legal structure which separates legal ownership (responsibility) for the assets from the enjoyment of the assets.
‘Trustees’ are the legal owners of the assets in the trust and are not usually the people who will benefit from the assets (but they can be). Trusts are often used to protect a beneficiary from themselves (such as from taking poor, short-term decisions or external factors, such as divorce or bankruptcy) and this is no different. Trusts can be established in your lifetime or on your death in your Will.
Sarah said: “Whether a trust is established or not, and whether this is in a Will or not, the documents we produce for business owners and the supporting planning discussions should aim to give the business a future that is as certain and secure as is possible; to provide a sense of financial security for those relying on the business; and a sense of certainty, control and flexibility for business clients and their families.
POWERS OF ATTORNEY
“Many discussions with business owners about wills and succession include discussing the effect of the loss of capacity of an individual with a business interest. For example, if you are a director and you lose mental capacity, does that mean cheques cannot be signed or decisions be made? “A business can be killed in 28 days. This is because a creditor who is owed money can issue a statutory demand for payment and if they have not been paid after 21 days they can escalate that demand be seeking a winding-up petition from court. The court will give the business seven days to pay. Failure by the business to pay may result in the Court issuing a
winding-up in favour of the Creditor potentially leading the business to go into liquidation. So this risk that loss of capacity presents needs to be avoided through planning for that eventuality.”
Clients with business interests need to consider making a Lasting Power of Attorney. Thus, a shareholder business owner should name someone to make shareholder decisions for them in case they lose the ability to do so themselves. Shareholders regularly vote on important business decisions ranging from strategy to acquisitions. Incapacity would frustrate this; having a Business Lasting power of Attorney in place rectifies the problem.
Sarah said: “Any discussions about powers of attorney should include consideration of who is best-placed to be an attorney. That is not always who you might expect. For example, shareholders may have different opinions about a business so should not be each other’s attorney for that business. Someone’s spouse may seem an obvious choice to act as attorney particularly as they are likely to find it easiest to put the client’s interests first.
However, if they do not understand the business fully would there be adverse effects? If there would be, could the Power contain any provisions to ensure the spouse gets
professional help with the making of any decisions?”
Tax consequences arising from any business decision are ignored at the peril of any business owner.
Sarah emphasised: “Pearson work closely with the accountants who are already in place helping our Business-owner clients with tax advice. What we offer complements the service being provided by accountants. Accountants are integral to preparing annual accounts for businesses, calculating tax liabilities flowing from different proposed actions and advising on reliefs and re-structuring to improve a tax situation.
“We do the same and bring a practical and commercial perspective to planning discussions, tending to get more heavily involved in the inheritance tax and capital gains tax planning side, always with an eye on what a Will document needs to cover. We seek to challenge the business-owner and their family to think about future succession strategy and exit plans.
“If a client wants to take a step back from a business and understands they must cede some control to do this, they need advice on both selling and giving away their business. Giving away a business asset does not give a business owner client any proceeds of sale and yet may give rise to an immediate tax liability (capital gains tax). That liability needs paying unless the client gives away the assets in a particular way and seeks advice on deferring the capital gain.
In contrast, the sale of a business gives the business owner cash at their disposal but may give rise to a future inheritance tax liability unless they reinvest the proceeds from the business sale within specified time limits, meaning some tax reliefs can be preserved that may otherwise be lost. Any reinvestment of the proceeds of sale of a business interest should be done under the auspices of a Financial advisor specialising in Wealth and Estate planning and at Pearson there are financial advisors in-house to assist with this important aspect of the planning process.
“Whether you have an accountant or not, I would definitely recommend a chat with
Pearson. If you want a review of your business documents, we can do that. Pearson works with clients with all types of business assets – sole traders, partners, shareholders – and we act for many directors. We can tell them if they have a business interest that is capable of being passed on after their death and if so how to do so to meet their wishes for their families and build in tax efficiencies.”
Each situation is different because every family and individual is different,
Depending on personalities within families, discussions on succession and wills can be seamless or present challenges.
She explained: “Children who work in a family business may feel a greater sense of entitlement to what they are ‘owed’ than children who do not work in the business. Some family members are also business owners; some may simply be employees and each will have a standpoint on their own role, their future, their contribution and how they are valued. How does the founder of a successful company treat fairly children who have different roles and levels of involvement in the family business? This may lead to potentially tricky conversations regarding their individual remuneration packages and these will then become part of a wider planning discussion which was actually aimed at securing Wills that reflect a business owner’s wishes.
It is however important for future harmony within the business that these broader issues are discussed and settled if possible.
“Sometimes such questions may feel like we are undermining how a business operates. However, seeking answers to these questions makes the business stronger in the long term as these discussions identify strengths and weaknesses and whether there is alignment (or not) in the outlook of the family members.
“In some companies, majority shareholders may have more-strident views than minority shareholders and may believe they have earned the right to grow a company in a particular direction by dint of their own efforts. But if this is at the expense of the rights of minority shareholders (who may be their siblings) is this right? So, in our work we may have to challenge strong personalities who are used to getting things their own way.
“Sometimes, family members may be on different salaries and have different attitudes
surrounding the business. Parents and children may disagree on what’s right for the business. Brothers and sisters may disagree. One sibling might be an enterprising risk-taker while another is a cautious risk-avoider. One may value a large salary and dividend; the other may value contributions to their pension pot from the company.
“These differences over personality, lifestyle and business ideas can create clashes.
However, we can mediate with families and come to agreements, through joint and
separate meetings. We can identify areas where interests overlap, along with issues that they have failed to talk about. They can all gain a lot of insight from these discussions.
“Planning discussions rarely result in the status quo being preserved; a serious consideration of how to provide for you loved ones in your will often changes the mindset of a business owner from purely business growth to ‘What is my legacy for my family?’.
“Ultimately, our aim is make sure our client has considered everything, understands any risks and that the will document reflects their wishes, as far as possible. That way, everyone affected by change at a business knows that plans are in place supported by appropriate structures, such as a trust in the Will, to manage as smoothly as possible succession and the change this will bring.”