The importance of partnerships in estate planning – considerations for your will

We often come across partnerships in the context of farming families. Partnerships can significantly impact how you draft your will, therefore a co-ordinated approach involving both the commercial lawyer and will-drafter is required to ensure that your assets are distributed according to your wishes after you pass away.

Understanding partnerships

Partnerships are chosen as they offer both flexibility and tax-efficiency without the need for a corporate structure.

It is possible for a partnership to exist without a written agreement; in these circumstances the partnership would be governed by the terms of the Partnership Act 1890.

However, we would always advise drawing up a written partnership agreement that outlines each partner’s rights and responsibilities, including what happens upon a partner’s death. This is because Partnership Act 1890 is outdated and generally does not reflect the requirements of modern partnerships.

The death of a partner and the provision of their will

A will is subject to any pre-existing agreement, and consequently the terms of any agreement will prevail over the provisions of a will. The drafter of the will should review the existing partnership agreement to ensure that the provisions of the will dovetail with it. Moreover, a partner should understand what they can give away under the terms of the will.

Ideally, the partnership agreement should specify what should happen on the death of a partner and whether the partnership shall continue. However in practice, that is not always the case, accordingly there are various ways that this could be dealt with:

1. Where there is a partnership agreement, which provides for the partnership to continue, notwithstanding the death of a partner, the surviving partners could pay out the value of the deceased’s share to the executors of the estate in accordance with mechanisms set out in the agreement, if applicable. Alternatively, the partners may agree to distribute assets to the value of the partnership share
2. If there is an a provision which states that the partnership shall continue notwithstanding the death of a partner, the partnership agreement may also provide that a named beneficiary of the will or a named executor may become partners in their place. In these circumstances, a named beneficiary or the named executor would enter into a deed of adherence. If there was no named beneficiary, the partners would need to specify which of the beneficiaries is to be and execute a deed of adherence
3. Finally, if the partnership agreement is silent on what happens on the death of a partner, or there is no partnership agreement in place, then there would be a technical dissolution of the partnership. The continuing partners and the dissolved partnership would pay out the deceased’s share to the partner’s estate. Typically, the continuing partners will prefer for the share to be paid in instalments over a period of time to manage the cash flow of the partnership or distribution of partnership assets – land, for example. If there is to be a payment out over time, however, this will need to be separately negotiated with the executors or beneficiaries.

Tax consequences

Partnership assets should be ascertained from practical point of view. However, it is also important to ascertain which assets are partnership assets for tax purposes.

A share in a partnership which is wholly and mainly trading will benefit from relief for Inheritance Tax purposes at the full rate of relief of 100%. However, land or buildings or plant and machinery held outside of the partnership but used by the partnership will receive the lesser rate of 50% .

This is particularly important concept in the context of farming partnerships which will usually benefit from Agricultural Relief at the rate of 100%. However, Agricultural Relief will be limited to the agricultural value of the land which takes no account of any development value. Business Relief will cover the development value of land and ideally this will be at the full rate.

Key considerations

In summary, there are three key practical steps you should take when drawing up your will:

1. Review and regularly update your legal documents:

Ensure that all legal documents, including your will, partnership agreements, property deeds and other estate planning documents are up to date and reflect your current situation. Keep your advisers informed of changes in circumstance so your legal documents are current.

2. Communicate with partners:

Discuss your estate plans with both personal and business partners to ensure everyone understands your wishes.

3. Consult professionals:

To achieve the best outcome your lawyers should work in close consultation with your accountant, financial adviser or land agent, where applicable. This will ensure that the land ownership arrangements are clear and that the accounts, will and partnership agreement all work together in harmony to achieve your wishes in the most tax efficient manner.