The immediate effects of a divorce on a family business are obvious. There is the stress of keeping the business going on top of dealing with the emotional strain of a divorce. The business may need to be sold or one spouse may need to buy the other’s shares. These are difficult times that require difficult decisions but what happens once the divorce has been finalised?
Many business owners fail to consider what happens to their business after a divorce. You have bought your spouse’s shares and you now either own the business outright or you have shares with a business partner or partners.
You think it is a done deal and everything is now sorted. But is it? Some businesses will flounder and may even collapse due to a simple oversight: What happens when the business owner or one of the partner dies?
Few partnerships and companies have a Business Will in place. A Business Will is an agreement that usually takes the form of a buy and sell option. It ensures the smooth transition of the ownership and running of the business in the event of the owner’s or a partner’s death or their permanent disability (e.g. dementia). It is an important document which answers all types of questions including how the business is valued and how it will be run.
Let’s focus on just one very important thing- what happens to your business or your shares when you die? Surely your ex-spouse has no claim on your business or your shares. Or do they?
How Divorce Can Have an Unexpected Lasting Effect on Your Business
Your ex-spouse may be able to make a claim on your business shares after your death, especially if you leave no Will. This can have catastrophic effects for your business. Your ex-spouse may suddenly become a partner in your business or become the owner or controlling stakeholder even though you wanted to leave your business or shares to your children or someone else.
It may be that your ex-spouse sells your business leaving nothing for future generations. It may be that your business partners don’t want to work with your ex-spouse. Your ex-spouse may even work against your business partners to ensure its demise. This is rare but it can happen where emotions have run high, especially if the other business partners are members of your family or friends that your ex-spouse has a grievance against.
So how does this happen? An ex-spouse cannot, under the rules of intestacy, inherit from your estate. The rules of intestacy determine what happens when you die without a valid Will in place.
However, they can make a claim against your estate, whether you have a Will or not, under the Inheritance (Provision for Family and Dependants) Act 1975. This Act can make provision for a former spouse or former civil partner who has not remarried or entered another civil partnership.
Your former spouse can make a claim for maintenance from your estate. This is easier for them if your ex-spouse is receiving maintenance as part of your divorce settlement but a claim could be made without this being in place.
Provision for their maintenance can be derived not just from monetary assets but from any other assets forming part of the estate or which have been disposed of in the six years prior to the death. This includes shares in your business.
A judge has a wide discretion on how to redistribute your assets and can make orders for:
- Regular payment from your estate for as much and as long as the judge considers reasonable;
- A single lump sum payment from your estate;
- A property owned by the deceased to be transferred to the applicant;
- A property to be bought using the assets of the estate which is transferred to the applicant;
- The sale of any property for the benefit of the applicant.
This can lead to your business or shares being given to your ex-partner.
The Court in considering such an application takes into consideration the financial resources and financial needs which:
- Your former spouse has or is likely to have in the foreseeable future;
- Any other applicant for an order under the Inheritance Act from your estate has or is likely to have in the foreseeable future;
- Any beneficiary your estate has or is likely to have in the foreseeable future;
They will also consider:
- Any obligations and responsibilities which you had towards your former spouse
- The size and nature of your estate
- Any other matter
The law on this is subjective. Two different judges could reach very different conclusions about the same case, and still be quite correct in their interpretation of the law. However, the fact remains that your business and shares are at risk from a claim by a former spouse who has not remarried or entered a civil partnership.
You can prevent your business or shares being awarded to your ex-spouse by taking several simple steps:
- Make it a clean break divorce with no-ongoing maintenance
- Your divorce order should state that no claim may be brought under the Inheritance (Provision for Family and Dependents) Act 1975
- Have a valid Will in place
It is vital that business partners and owners have a valid Will in place. This helps to ensure that your personal and business assets go to your chosen beneficiaries.
A Will gives you peace of mind that your wishes will be respected and the business that you have worked hard to build will be distributed as you want. Your wishes could be that your remaining partners buy your shares and the money forms part of your estate or that your part of the business or shares are bequeathed to one of your family. If you are the sole owner, you may bequeath your entire business to a family member or request that it is sold to form part of your estate.
You have many options but these must take into account your business documentation. For example, your shareholder agreement may forbid you from bequeathing your shares and state that they must be sold to the remaining partners.
It is important that you have a commercially-aware solicitor draw up your Will as it must dovetail with your business documentation. If you want to ensure that your wishes are respected and that your business, as well as personal assets, are properly handled, contact Kathryn Caple, Head of Wills and Probate, on 01283 526230 or at kathryn.caple@elselaw.co.uk.