Will disputes in a family business

Losing a family member can be a distressing time, sometimes the anguish of the bereavement may also be compounded with the additional pressure of how a family business is going to be distributed.

It is important to ensure that a business owner’s Will is consistent with the corporate documents that have been created and subsequently governed the running of the family business company, and dovetails with any additional agreements made within the family business. These could take the form of a Shareholder’s Agreement or other legally binding family agreement.

It is therefore essential if you have any interest in a business to seek professional legal advice.

Business Will Dispute Case

A High Court case * highlights this when the Court was tasked to determine whether, a deed agreeing that the ultimate beneficiaries of shareholdings in the business would be children (‘the Deed of Agreement’), had in fact been revoked by a Will dated after the Deed of Agreement.

The case concerned ownership of a thriving family business and a man and wife who were equal shareholders in a family catering company.  Following their divorce they retained a working relationship as regards the family business, and each signed the Deed of Agreement agreeing that any shares in the company would pass to their two children upon the death of either of them.

The man went on to remarry and following his marriage he prepared a new Will gifting his shares in the family company to his second wife.  Sadly, the man died suddenly and only after his death were his actions in preparing the new Will discovered by his first wife and children of that marriage.

His first wife and his adult children, who had expected to inherit their father’s shares in the family business, commenced Court proceedings to enforce the Deed of Agreement.

The Court determined that it was appropriate to uphold their claim, commenting that the Deed of Agreement was drafted in circumstances where the father was aware of that the effect of signing the Deed was that his children would inherit his shares in the family business.  The Court characterised the wording of the Agreement as ‘plain’ and such that it ‘would have caused him no confusion’.

Deed of Agreement v a New Will

In opposition, the father’s second wife claimed that the new Will superseded the previous Deed of Agreement and as such rendered the Deed invalid.  The Court rejected all of her claims on the basis that the Deed of Agreement was a binding document and should be adhered to.

This case highlights the importance of seeking legal advice on correctly preparing for the transfer of business assets in your death within an appropriately worded Business Will, which avoids such contentious probate claims.

“Whilst making a Will is vital to ensure your estate is left to the loved ones whom you wish to benefit, careful additional considerations come into play when making a Will which involves a family business,” says Business Wills Solicitor, Sarah Finnigan.

“It is clear from this case that the Court will consider previous agreements made in respect of the business and further add a great deal of weight to such agreements.  Your adviser needs to be familiar with the documents that create and govern companies and partnerships, and au fait with the correct and tax efficient way to deal with such assets within the business owner’s Will.”

If an estate includes complex high value business assets then the potential for contention is increased.  It makes fiscal, financial and practical sense to get proper professional advice prior to making a Will which passes business assets so as to ensure the document is legally enforceable and consistent with existing corporate documents.

Making a Will if you own a business

Things to consider when making a Will if you are a business owner are:

Taxation

Valuable Inheritance tax reliefs are available in specific circumstances for business assets and advice on this aspect of ownership is integral to any agreement as to the ultimate distribution of business assets.

‘Business As Usual’

Is the business owner ensuring that their death avoids any disruption to the running of the business.

Succession Planning

In a family-owned business, conflicts can arise when the founder or owner passes away and the terms of the Will impact the distribution of shares amongst surviving family members. Disputes can arise if the Will is unclear or if there are differing interpretations about how the business should be divided.

Beneficiary Claims

If a business owner designates the business, or its assets, to pass to specific beneficiaries in their Will, other parties who believe they have a rightful claim to those assets might contest the validity of the Will, alleging issues such as undue influence, lack of capacity, or improper execution. A child who has never worked for the business may resent their sibling who has worked for the family business being given the business assets under the Will, to their exclusion.  A well-worded side-letter for the Will prepared with the benefit of professional involvement to explain the deceased business owner’s rationale for the distribution may go some way to mitigating that resentment.

Business Partner Disputes

If a business is owned by multiple partners, the Will of a deceased partner might stipulate the transfer of their own partnership share to a specific beneficiary. However, the surviving partners might have legitimate concerns about the new partner's ability to contribute effectively to the business or might dispute the validity of the transfer.

Executor Conflicts

The executor of a deceased business owner's Will might have different interpretations of the deceased's intentions, leading to disputes with beneficiaries or other stakeholders. Appropriate advice should be taken as to who would be a suitable candidate to be an executor of an estate containing business assets.

Asset Distribution

Disputes may arise when a business owner's Will passes complex assets such as intellectual property, valuable contracts, or company-specific rights. Determining the fair distribution of these assets among beneficiaries is required to avoid disagreements.

Contested Valuations

If a business's valuation is contested by beneficiaries, disagreements can arise over the worth of the business and its impact on the distribution of assets.

“To mitigate these possible problems it is important to have a Business Will prepared by a business Will specialist.  If not, legal action might be necessary to resolve an avoidable dispute over what is a fair distribution of business assets which affects family relationships and detracts from what should be a sober and dignified process of implementing the wishes of a deceased loved one,” advises Sarah.

How can we help?

If you are a business owner and need advice on making a business will our specialist commercial team will advise. For legal advice on a will dispute or contesting a business will speak to our Contentious Probate Solicitors on  0161 785 3500 or email enquiries@pearsonlegal.co.uk.

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.