Death and businesses…

It would be prudent, when taking instructions from your business client, to ensure that their business affairs are up to date and in order. This will not only save time in the long run, but may also save the estate some money by way of penalties.

Are your clients in the minority of people that have prepared a will and got their affairs in order? Will their executors be able to administer the estate without any trouble once they’ve gone?

This may ‘normally’ be the case, but if your clients are in business, whether as a sole trader or as a director, then there may be more to think about than is obvious at first glance.

What would happen to the business on the death of the key person? Would it carry on or would it need to be wound up? Your clients may not have thought about these issues, but should you be advising them of the potential dangers that await their executors?

Initial steps

It will be the executors’ job to value all of the assets in the estate. This may be straight forward for the bank account or even the house, but what about the business? Unless the executors have some experience in the area of the particular business, this might prove difficult without expert help. Not only will this involve extra cost, but will also add to the general ‘time scale’ of administering the estate.

The executors will need to obtain, from the accountants, not just the last set of accounts but also the accounts to the date of death. A balance sheet, as at the date of death, might also come in handy, especially if your client has left specific business assets as legacies in his or her will. This exercise will inevitably take time, but if your client’s affairs are not in order, then this could take much longer than you would like, especially if you have deadlines to meet, for example, for inheritance tax.

Continuing the business

There may be valid reasons why it would be sensible to keep the business running, or it may be a case of having to keep it running while the executors decide what to do with it. Either way, the decision is not as easy as it may, at first, seem.

If your client’s business is VAT registered, then the executors will need to notify HM Revenue & Customs (HMRC) of the date of death and the date they started running the business.

The VAT regulations allow the executors to be treated as acting in place of the deceased. While this facilitates a seamless transition, the HMRC has an ulterior motive in allowing this. The responsibility of submitting all future VAT returns and ensuring that all the correct tax is paid will now rest with the executor.

As an adviser, the least you can do is ensure that there is suitable provision in the will to allow the executors to continue to run the business after the death of your client. What if there is not an option to carry on the business? If the business is a limited company, the articles of association may stipulate that the existing members/shareholders have the ‘first call’ on the deceased’s shares. This is something you need to be aware of and it would be a good idea to peruse the articles of association when drafting the will. This may avoid you ending up with disgruntled beneficiaries who are only getting money instead of a stake in the (family) business.

If you think your clients are ‘off the hook’ just because they operate as a sole trader, then you may be unpleasantly mistaken. The executors will have to deal with the following (as well as trying to administer the rest of the estate):

Trading name – no need to change this, but the invoices, headed paper etc, will need to show the executor as running the business – needless to say, there are cost implications to this;
Bank account – will need to open new accounts in their name;
Staff – while the TUPE regulations will ensure that the staff will still be employed by the business, the executor will need to notify them of the change;
Health & Safety – the executors will be personally liable for this. They will, therefore, need to ensure that all provisions are being met and possibly even carry out a risk assessment. Are your clients already up to date with the Health and Safety Regulations?
Insurance – this needs to be transferred into the name of the executors – this is something that could easily be overlooked with disastrous consequences;
Unique business – if the business is unique in any way then specialist advice may be needed.

Selling the business

The surviving family members may not be in a position to carry on your client’s business, or they may not want to get involved at all. The business may not have been specifically left in your client’s will. Whatever the reason, selling the business may be an option that you need to advise on, whether pre- or post-death, to the executors. However, this in itself may not be as easy as it sounds.

If the executors are not running the business while looking for a buyer, then the value of the good will may depreciate over time, or the values of the shares may not be worth much, especially after the death your client.

If the shares do hold some value, then it will be worth selling them as soon as possible. The base cost of the shares are re-valued at the date of death and so if the shares are sold soon after your client’s death, then there should only be a small capital-gains-tax liability, if any.

Also bear in mind the trustee’s annual exemption can be used for the year of death and for two years following. This is at half the rate of an individual’s annual exemption.

The executors may find it hard to sell the business as a whole. They’ve got to find a market for it. This may not be an easy task, if it is a fairly specialist business. It is possible to approach the employees or other shareholders and see if they would want to buy the business or part of it. But what if they are not interested? The clock would be ticking; the IHT forms would need to be in soon; the wages need to be paid; and overheads need to be kept going.

One option may be to approach the competitors. They may not be interested and may happily want to watch the business go ‘down the pan’. But what if they are interested? What if they are the only people you can sell too? Are you likely to get a fair market price? More to the point, what are the implications, if any, of selling to competitors? The point is, it is crucial that you find out your client’s wishes beforehand, so as not to end up with a very happy competitor, but a very unhappy family.

Looking to the future

Once the executors have either sold, transferred or wound up the business, they cannot then carry on administering the rest of the estate and forget about the business.

There may be claims made against the business for any time up six years after the date of death and, in the case of professional partnerships, possibly indefinitely.

A normal civil action would need to be commenced within six years of the date of the action or the date of knowledge that an action is possible. Assuming the executors themselves have not been negligent while winding up the estate, they need to be aware of the potential for claims up to six years after the death of your client. So how can they sleep in peace?

Well, firstly, they can advertise the death under the provisions of s27 Trustee Act 1925. This will protect the estate (and them) from any claims from possible creditors following distribution. This will not, needless to say, protect them from creditors they were aware of prior to distribution.

If your client is a professional then they will have professional-indemnity insurance. If this ceased on the death of your client, then the executors should consider renewing it. If your clients are in a partnership then this will be the responsibility of the remaining partners and their existing policy should cover your client to their grave and beyond, if necessary. However, the finer details of this will need to be checked by you or the executors.

If your client is adamant on appointing a ‘non expert’ executor, then they need to get their affairs in order to ensure that the estate can be administered as smoothly as possible. If, after reading this article, you would still recommend yourself as your client’s executor then, more than ever, you need to ensure that all is ship shape.

Kam Samji is a solicitor at Wrigley’s –who can be contacted on 0114 267 5588