Unnecessary grief could be avoided

Mar 9 2010 by Faye Thorman, The Journal

WHEN a shareholder or director becomes incapacitated due to an illness or accident, a number of difficulties can arise as a result. Similar problems can occur if a shareholder dies – unless safeguards have been put in place.

Take the position of Christian, whose wife Laura, 40, died recently. Laura owned 50% of a marketing company alongside her friend Paul. Laura and Paul always felt too busy to sit down and decide what should happen if either of them died.

Paul has the right under the Shareholders’ Agreement to buy Laura’s shares, but he is not financially able to do so. Laura considered herself too young to make a will and always assumed that, if the worst did happen, all her assets – including the company shares – would pass to husband Christian.

After Laura’s death, those involved are learning the hard way about something called the intestacy rules, which take effect when someone dies without making a will.

In Laura’s case, the result is that her shares are divided between two trusts – one for Christian and one for Laura’s children.

Paul now has to run the company alongside various new shareholders – Christian’s trustees and the trustees of the children’s shares.

Christian is now finding it difficult financially, and he considers taking legal action to claim entitlement to the shares passed into the children’s trust – effectively, bringing a legal claim against his own children.

A few years before her death, Laura was told by a friend that the company shares would not suffer inheritance tax due to a relief called “Business Property Relief”. Laura did not check whether this would apply. Only after Laura’s death does Christian realise the company holds assets which prevent the relief applying in full. As a result, Laura’s death has triggered an unnecessary hefty inheritance tax bill.

No one likes to think about what will happen after they are gone, however, Laura’s story illustrates the unexpected consequences of failing to plan ahead. It is important that shareholders consider not only how their business might be affected, but also the needs of those they leave behind.

:: For more information contact Faye Thorman, solicitor in the wealth management department at Dickinson Dees LLP on 0191 279 9446