Estate planning in the case of sudden demise
Mike Lynch, a notable tech entrepreneur and co-founder of US data software company Autonomy Corporation, faced numerous legal and financial complexities in the final years of his life.
Sudden Death Estate Planning: Key Lessons for UHNW Families
When he passed away suddenly with his family whilst yachting in a freak weather accident, there would be several pressing estate planning and tax issues to address. Wealth management and tax planning become especially critical in the event of sudden death to protect the financial interests of the deceased’s heirs and prevent tax problems.
Estate Planning Challenges in Sudden Death
Inheriting legal problems
Inheritance usually involves property and jewellery but one of the issues with Autonomy was multiple legal battles, including a high-profile lawsuit related to the sale of Autonomy to Hewlett-Packard (HP). Legal disputes obviously complicate estate administration in the event of sudden death. Although it had been resolved and was the reason Lynch, his family and advisors were on the yacht (Bayesian), an appeal is likely on the cards which means claims may continue after their death. The estate could potentially become liable for damages or settlements. In Lynch’s case, this would include the previous $5 billion fraud case HP pursued, which would significantly impact his estate and distribution of assets.
Inheritance Disputes and Legal Complications
Family trust structures to hold business assets
Camilla Wallace, Senior Partner, Wedlake Bell says, “From a business perspective, decisions will now rest with the remaining directors, which emphasises the importance of having a clear succession plan for the business at an early stage including controls over who has the right to appoint additional directors to the Board, so that the right family members can be brought on board. If the company’s articles of association do not adequately cater for this type of situation, the company is likely to face operational difficulties as well as potential family disputes. From the point of view of succession to personally held shareholdings, the initial decision makers will be the executors (or administrators) of the deceased shareholders’ estates. It is therefore vital for shareholders to have up to date Wills dealing with the succession to their shares, along with regularly reviewed shareholder agreements to provide, where relevant, options for surviving shareholders to purchase deceased shareholders’ holdings. Where shares are held in trust, the succession is far smoother as the trustees remain in place to manage the shareholdings both before and after the death of family members. This is one important advantage of using family trust structures to hold business assets.”
The Importance of Contingency Planning
Joshua Rubenstein, Managing Partner, Katten Muchin Rosenman, New York said, “The tragic and anticipatable death of Mike Lynch and some of his family and advisors was as poignant a reminder as I can think of why it is so important to have continency planning in place, particularly for the UHNW client. Sudden death and simultaneous death are rare, but they happen and can be cataclysmic if not planned for and always included in one’s dispositive documents.”
“Wills and trusts should always be in place to assure the orderly disposition of assets upon death, even if actuarily the client is not likely to die for many decades. And there should be “wipeout” bequests and designations of successor executors and trustees in place in case immediate family and trusted advisors all die at the same time.”
The problem of relinquishing control
“Even a young to middle aged owner of a large family business should have contingency management and leadership designations in place. This is particularly hard for the business creator who never wants to turn over control and therefore does not like thinking about it. But the cemeteries are filled with indispensable people.”
Managing Tax Liabilities and Instalment Reliefs
“Certainly, in the United States, there are statutory relief provisions that enable one to pay estate taxes over a 15-year period, if certain kinds of assets exceed a certain percentage of one’s estate. This avoids the need to sell business and certain other assets at a fire sale to pay estate and inheritance taxes upon death. But it is critical that one’s assets be always organized in a fashion to qualify for those relief provisions.”
“Most UHNW clients should have a media advisor/crisis manager on retainer. They should have their obituaries pre-written, so that positive obituaries are ready to be released on a moment’s notice and won’t have content that might prove damaging or embarrassing. Estate planning is like playing chess. You must plan multiple moves ahead, as you cannot control, and must be prepared for, whatever the next move will be.”
London based, Wallace agrees saying, “Inheritance tax can mean that valuable assets such as art collections and properties need to be sold to raise sufficient liquid assets to meet the tax bill, but this does not need to be the case with careful estate planning. There is an instalment option available for inheritance tax payments in respect of land/ property, shareholdings and business interests whereby the tax can be spread over ten equal yearly instalments. There are various conditions involved and interest will run on the unpaid balance, but this option should be investigated and considered as part of an individual’s estate planning. There are also inheritance tax reliefs and exemptions available for art collections and other heritage assets of national or cultural importance and these too should be investigated at the estate planning stage. Aside from these options, inheritance tax efficient Wills are key, making use the of the tax exemption between spouses and civil partners for example, as is lifetime giving, either outright or through trusts or other asset preservation structures, to move assets down a generation without the inheritance tax charge on death.”
Stewart Gibson, senior associate, Brodies LLP based in Edinburgh, added, “Inheritance tax (IHT) can create potential complications, particularly if there is no liquidity in the estate to meet the IHT liability. IHT becomes payable at the end of the sixth month after the death, so UNHW individuals should seek during their lifetime to understand their potential exposure and plan for funding any liability. Again, forward planning is key to mitigation these challenges. Certain assets which are of historical or cultural importance may be protected from IHT. “
Insurance for Estate and Business Protection
Accompanying all of this, consideration can be given to life insurance to provide funds for an expected inheritance tax liability where the estate includes insufficient liquid assets to meet it. Gibson adds, “It’s important for UHNW families to get the “business basics” rights when it comes to succession. Their lawyers can help with that. They should make sure the key people in the business have wills and (both business and personal) powers of attorney. Considering key-person insurance, and a cross-option agreement where that may be relevant, is also essential. These simple steps help ensure that there is both a sound legal basis, and sufficient liquidity, for the business to continue in the immediate aftermath of a bereavement. It also means that everyone has comfort and clarity on how the business will continue to operate –and indeed that it will be able to continue to operate – if one or more of the key people dies or is incapacitated. This ensures business continuity and enables the business and the family to control messaging in the media where that is relevant.”
Creating a Family Succession Plan
Wallace adds, “Aside from insurance to help with the financial impact of the loss of a key individual within the business, family businesses must consider their succession planning at an early stage to ensure there is a smooth transition, whether the succession happens naturally over time or must happen quickly after an unexpected event. A succession plan will be specific to the business in question but would usually include training for younger generations of the family, both formal and on-the-job, along with conversations around the purpose of the family’s wealth and the importance of asset preservation and family cohesion.”
“A succession plan would also include structuring for the wealth transfer, often using trusts or family investment companies both of which can help with passing on economic value in a controlled and managed way for the current and future generations. Pending such a wealth transfer and whilst shares are held outright by a business owner, a tax efficient Will and letter of wishes are vital, as well as a business “lasting power of attorney” to give control over who steps in to manage the individual’s business affairs if that individual loses mental capacity or is lost in a tragic accident.”
The sad demise of Lynch, his family and advisors offer a prompt reminder for those with business interests or large estates to consider the issues that could arise in the event of an untimely accident. As Benjamin Franklin said “Nothing is certain except death and taxes” but sudden demise can also be layered with grief, tax bills and uncertainty.
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