Wills – Case Study 2
Richard successfully runs a family business that he and his brother inherited from his late father. Richard owns 75% of the company shares and he is the primary business generator for the business. His brother, James owns the remaining 25% and is employed by the company on a part-time basis.
Richard (aged 54) is married to Patricia (aged 46)and they have 3 children aged 12, 15 and 17. They own a number of other assets, some jointly. Their overall wealth currently exceeds the inheritance tax threshold by some margin, even without the company shares because the shares qualify for a full inheritance tax exemption.
Richard and Patricia put in place a Will when their children were very small so their priority at that time was to make sure that guardians were in place for the children. They opted for a simple Will, gifting all assets to the surviving spouse. Richard hadn’t inherited the shares at that time, so he didn’t need to think about the fact that the wording of the Will meant that the business shares would be passed to Patricia.
Richard and Patricia enjoy a high living standard, they draw high income from the business because Richard has not generally favoured funding a pension.
Richard is worried because Patricia will inherit the shares. He wants to makes sure his family inherit the value of the business. However, Patricia would have no interest in running the business after Richard’s death and it’s very unlikely that she and James would share a vision for the future of the business. Simply transferring the 75% shareholding to Patricia on Richard’s death is unlikely to meet anyone’s objectives or contribute to a successful business in the long term.
Richard also wants to make sure that his children’s legacy is protected. If Patricia were to remarry after his death, he doesn’t want the value from his father’s business, or their other wealth, to be transferred to any future partner of Patricia’s.
Patricia is concerned to make sure that she and the children can maintain their current standard of living after Richard’s death. She would not want to spend the value of Richard’s company shares. She would not want to start running the business.
Richard and Patricia need to consider:
Creating a trust to control the division and transfer of the company shares, either by Will or by lifetime trust planning;
Creating flexible wills (Category 3) to ensure that the survivor on first death has the ability to determine their financial need and select the assets that would enable those needs to be met; and
Lasting Powers of Attorney to assist with the control and protection of their individual wealth should either of them lose their mental capacity at any stage, even if temporarily;
Life assurance to make sure their expenditure needs are met. If Richard were to die, a drop in the standard of living would currently be inevitable, because Richard has very little pension provision and the business might struggle to pay Patricia, having just lost its key earner.
We recommend life assurance for Richard to meet those needs, until the children and Patricia no longer depend upon his income.
Richard and James should also consider:
Implementing an agreed business succession plan, to determine what will happen on the death of either of them. Working without a plan potentially threatens the long-term stability and profitability of the company;
Lasting Powers of Attorney should either of them be unable to fulfil their respective business roles because of incapacity;
Insurance options to cover the possibility of either of them not being able to fulfil their respective roles or to enable the company to buy back shares from their estate when they die. How long could the business afford to pay either of them, without their day-to-day contribution to the business?
It is clear that immediate action is needed. If Richard were to die without taking any action, here are the risks
The business fails and loses its value to his family and James
Patricia and the children face a substantial drop in their standard of living.
Patricia’s decision to remarry may mean that Richard’s wish to preserve the children’s legacy is overlooked.
The good news is that Richard and Patricia can easily meet their objectives with Will planning, business planning and financial planning. Here you see what we changed, with planning:
Now, if either Richard or Patricia dies or they both die, their Will and trust ensure that
Patricia benefits financially from the value of the shares, without needing to run the business with James
James assumes control of the business
Patricia has full access to whatever funds she needs
Should Patricia remarry later, the assets she inherited are ring-fenced so the children benefit from them
If either Richard or Patricia become unable to manage their affairs
The lasting power of attorney appoints their chosen attorneys to make decisions on their behalf
If either Richard or James become unable to manage the business
The lasting power of attorney appoints their chosen attorneys to make decisions on their behalf.
By undertaking a financial review Richard and Patricia can
Make the most of their earnings
Ensure they can maintain a reasonable standard of living in retirement
Make sure their children are protected from inheritance tax
Arrange the life assurance they need to protect the family’s standard of living