I imagine there aren’t many business partnerships whose day-to-day concerns include what will happen to their respective interests should the other partner die. This lack of concern represents a potentially significant risk.
For the financial planner, however, it represents an opportunity.
While the limited company and limited liability partnership represent more popular styles of trading vehicle, the partnership cannot be ignored as a market. This is especially so in the legal and accountancy sectors.
Rather like the individuals who do not write a will on the basis “it will all go to my spouse/kids on my death anyway”, business partners may also assume their interest will either automatically pass to their family or their surviving partners.
While there are no “formal” intestacy provisions for businesses and partnerships in particular, there are some well-defined laws that state what will happen on the death of a partner, in the absence of any clear agreement. These can be found in the Partnership Act 1890. So let’s compare some common aspirations partners will have in relation to the rights of their family or other beneficiaries with the legal reality.
Aspiration: The continuing right to share in profits as a partner.
Reality: Under the Act, the partnership is dissolved on the death of a partner in the absence of any agreement to the contrary. Even if the business is not dissolved and the surviving partners carry on trading, there is no inherited right to become a partner.
That said, the deceased’s personal representatives would be entitled to such a share of profits as is attributable post-death to the deceased’s right to a share of assets, or interest at 5 per cent per annum on that share of assets.
Aspiration: A right to call for the repayment of any outstanding debt (loan account) owed to the partner by the business.
Reality: Such loans would normally be repayable on demand, unless otherwise specified in the agreement or (perhaps unusually), there is a provision in the deceased’s will. For example, instructing the personal representatives not to call in the loan, with the right to repayment being left to, say, a surviving spouse.
Aspiration: A right to wind up the business to secure an amount representing the value of the deceased’s interest in the company.
Reality: There would be a dissolution under the Act, subject to any contrary provision in the partnership agreement.
Aspiration: Having the right to force any surviving partners to buy the deceased’s interest in the business.
Reality: There is no such right if it hasn’t been provided for in the partnership agreement. The surviving partners may not have the funds to do so anyway, if not specifically provided for.
Aspiration: A right to sell the deceased’s interest in the business to any willing buyer on the open market.
Reality: This market may well not exist in reality and, on top of this, the practical impediments may be insurmountable.
Aspiration: An obligation to sell the deceased’s interest in the business to any surviving partners.
Reality: No such right exists outside somebody specifically provided for in the partnership agreement. And even if the partners wished to buy then, without pre-funding (for example, through life assurance), this may well not be practically possible to do.Eliciting the aspirations of clients who are partners in a business and then articulating the legal reality should hopefully generate the necessary anxiety for them to take action.
Tony Wickenden is joint managing director of Technical Connection (a St James’s Place Wealth Management group company). You can find him Tweeting @tecconn