This article by Peter Murrin featured in the UK Regional Focus section of the latest STEP Journal (Feb 2018). Peter examines how the Succession (Scotland) Act 2016 (the Act) changes the provisions for divorced spouses in relation to business succession.
The Act came into force in November 2016 and its first anniversary provides an opportunity to consider one of the key provisions of the Act relating to the area of business succession. Section 1 of the Act provides for the annulment of Will provisions in favour of a divorced spouse (other than for the guardianship of children).
In effect, the legislation treats the divorced spouse as having predeceased the testator, meaning that any appointment as an executor or trustee, and any benefit conferred, will fail. Depending on how a Will has been drafted, this might have significant implications. It is important to emphasise that the Will is not revoked; instead, provisions in favour of subsequently divorced spouses or civil partners fall.
Many family businesses encounter difficulties when transitioning between generations, and ensuring that appropriate planning is in place is a vital part of the foundation for getting that process right. One of the consequences of the 2016 Act will be to require some (perfectly sound) planning to be revisited.
So, what should be considered?
Executors and trustees
It might become necessary to petition the Sheriff Court to appoint an executor to give effect to the Will. Furthermore, it might also be the case that all or part of the deceased’s estate will fall to be dealt with in terms of the Scottish laws of intestacy. Notwithstanding the enactment of the 2016 Act, Scottish intestate succession is still governed by the Succession (Scotland) Act 1964. Under this scheme of division children are the principal or first-tier beneficiaries in an intestate estate, in the absence of a spouse.
This can lead to circumstances where individuals who might objectively be considered ill-prepared, financially and emotionally young are preferred by the Sheriff Court as executors, by virtue of being an adult at law in Scotland and the principal or main beneficiary of the estate. Or, where putative beneficiaries are minor children (i.e. children under 16), the role of executor-dative (executor appointed by court order) may necessarily, but unintentionally, fall to an ex-spouse, as a consequence of their being the surviving parent to such children.
Where there are no children, an intestacy situation will bring siblings and parents into the mix and, failing those, family members at a greater remove.
All of these scenarios may, in turn, foster operational issues for a business (and its other interested parties) where a court-appointed executor might be unsuitable, disinterested, subject to external influence, or bad faith. The potential for entanglement in function is clear.
An aside: the Will v business documents
Where agents are advising clients on business succession, the relationship and hierarchy between the documents governing personal and business succession must be considered.
Will provisions relating to company or partnership interests will, of course, be subject to the terms of any governance documents of the business. Accordingly, if the intention is for business assets to pass between generations, ensuring that nothing in a limited company’s Articles of Association or a partnership’s partnership agreement prevents that is crucial.
As regards partnerships where there is no formal agreement, there are particular legislative consequences of death, including termination of the partnership and division upon termination. It is vital that an agreement is in place and that it works in tandem with the succession intentions of each partner.
Financial maturity (at law)
When we consider the implications of the Act, we consider that, in Scotland, a (child) beneficiary will become absolutely entitled to an estate at 16 years old. Many families planning carefully for the transition of business interests might consider adolescence and corporate fiscal responsibility a poor marriage and, accordingly, this possible consequence of the Act is ordinarily unintended.
Where a principal beneficiary is a minor child (under 16), and where application of the Act means that there is either no Will or that those parts of the Will still standing are insufficient, businesses might find themselves in limbo. If partial or full intestacy abides, where there are no prescribed powers to protect and manage that child’s inheritance, there is a requirement to seek directions from the Accountant of Court where inheritance is in excess of GBP20,000 (per the Children (Scotland) Act 1995). The Office of the Accountant of Court (and the Court itself) may be pragmatic in approach; however, it is plausible that business capital and property could be temporarily held out of reach of business operators. A Will incorporating appropriate provisions can remove the need to involve the Accountant of Court at all. Such provisions will also ensure that trustees can manage the estate until such time as the beneficiary is financially mature.
When it comes to a family business, comprehensive trust provisions (i.e. discretionary powers in the right hands) in a Will can be the difference between business operations being seriously impaired by a death or not. The consequences being relevant beyond asset value or family legacy issues and potentially including employment, insurance, commercial relationships and reputations. Furthermore, businesses and business assets will often attract Business Property Relief from inheritance tax and due consideration should be given to Will structures and planning intentions to ensure efficiency.
In summary
The 2016 Act went some way to addressing some of the more exasperating impacts of the tendency of clients not to deal with their personal admin immediately on divorce. Nevertheless, the law can still create unintended consequences, particularly for business owners. Agents should be alive to the effect of the legislation and ensure that business clients are comprehensively advised in order to properly protect and direct family wealth.
