10 May 2002

Partnership protection

As the farming population

ages, a significant number

of partnerships are heading

for trouble by ignoring the

inevitable. But safeguards

are easily put in place, as

this special report shows

WHILE we have no control over when we die, in a business where partners are involved, planning for the inevitable is the key to avoiding serious financial and legal problems.

Farming partnerships are a common form of trading entity within agriculture, particularly between family members. On the whole partnerships work well, but they can suffer their own special problems, says Tyrone Courtman, of business advisory firm Cooper Parry.

"Emotions can run high when a partner who dies is also a family member," he says. "And this might lead to the business entering a financial and managerial crisis. The key must be to minimise the adverse effects on the business and ultimately protect the familys wealth and home."

According to solicitor Tom Watkinson, of Roythorne and Co, partnerships are regulated by either a partnership deed or partnership agreement, which are legally binding contracts between the parties concerned.

"If neither have been entered into, the provisions of the Partnership Act 1890 automatically apply," he says. "If there is no partnership agreement to the contrary, death will automatically lead to the dissolution of the partnership. If it involves two partners the business will automatically have a sole-trader status, but where there are three or more partners a new partnership starts.

"First line of defence in the event of a partnership facing problems associated with death is to protect the business by getting a partnership agreement signed, or having it reviewed and/or amended regularly.

"Secondly, the main requirement for regularising what will happen from a financial perspective is to draw up a will for each partner, again reviewed on a regular basis."

In a husband-and-wife partnership, financial interest will normally automatically pass to the spouse without any tax complications or cash consequences, says Mr Courtman. But with husbands and brother the outcome can be different.

In a husband-and-brother partnership, where the husband dies, the brother – subject to the terms of any partnership agreement – has to effectively pay out the market value of the wifes share.

"It is vitally important to take out insurance against this situation or the brother will face the prospect of having to raise the finance to buy out the spouse or to sell assets. A significant number of businesses break up because the right insurance has not been taken out," says Mr Courtman.

But if insurance is in place for the benefit of the business, then unless the policies are written in trust for the beneficiaries – ideally the spouse – and tax relief has been claimed on the premiums paid, then the eventual pay out may be subject to income tax, so beware, he warns.

If both husband and wife die concurrently there will be significant issues for any surviving children, says Mr Watkinson. This could lead to inheritance tax and trust issues. "Comprehensive advice and planning is a must where children are concerned."

However, cash from insurance to deal with financial issues is only part of the story, he adds. The remaining partners are still left with the challenge of running the business on a day-to-day basis.

"If theres no immediate family member in the wings to take over when the lead partner dies, or he or she has to retire on health grounds, plans need to be put in place for the protection and maintenance of the business. Unfortunately, there is an inevitable but necessary cost to implementing progression planning.

"Failing to deal with any of the above issues, could lead to creditors, particularly the banks, taking the initiative in protecting their own position, rather than that of the family," says Mr Watkinson. &#42

Tyrone Courtman:Ultimate aim is to protect the familys wealth and home.

&#8226 Sign partnership agreement.

&#8226 Draw up will for each partner.

&#8226 Take out insurance where needed.

&#8226 Plan to protect and maintain business.