Family Business & Divorce: Integrating personal and business planning

Boodle Hatfield has recently released A Legacy Intact: safeguarding your family business in the event of divorce, the first in a series of publications to mark the firm’s 300th anniversary.

It is written by Partner Katie O’Callaghan, with contributions from me, and colleagues across the firm. It is a practical prompt for family businesses – taking them through the ways in which a divorce can destabilise the business and jeopardise its future, as well as the protections they can put in place in advance to mitigate these all-too-real risks.

The nature of a family business is such that long-term planning means more than crafting an effective corporate strategy covering 1, 5 or even 10 years. As a firm, it is our privilege to work with many successful family businesses, and we know that the leaders of enterprises like these think generationally, rather than in terms of years or even decades.

This ability to plan with an eye to how the businesses will still thrive under the ownership of children, grandchildren, or even great grandchildren, as much as returning a profit in the short term, is just one of the attributes that sets family businesses apart from other enterprises. But, in some circumstances the family relationships at the heart of the business can create risk as much as it is a blessing. If conflict arises between a shareholder and their spouse, the knock-on effect for the business can be profound.

Careful planning and family governance can limit these risks. One of the key issues is managing the intersection between personal planning, and planning made to safeguard the future of the business as a whole – especially in the event of a divorce. In A Legacy Intact, we explore some of the considerations around this balance.

Integrating personal and business planning

Wills, trusts, life assurance and pensions are all mechanisms that must be reviewed at regular intervals and especially if a relationship ends, if they are to remain fit for purpose.

Everyone is entitled to make personal decisions about their own finances: for example, how they plan to provide for their retirement, or who might inherit in the event of their death. For shareholders in a family business however, this process is more complex and multi-faceted.

Each and every time they review or update their planning, a shareholder in a family business must ensure that his or her personal objectives do not conflict with those agreed by other family shareholders, and examine the ramifications for the business of any personal financial, tax or testamentary decisions. For example, if a shareholder leverages his or her own assets substantially, will that put their interest in the family business at more risk if their marriage broke down?

In A Legacy Intact we examine some of the issues that can arise in relation to specific mechanisms.

Shareholders may choose to include special provisions in their Wills to deal with their shareholding. They may have a view about what should happen to their wealth upon their death – but they must consider this personal planning in the context of the wider family succession plan. They must make sure that their Will does not conflict with the company’s articles of association, or provisions within any existing nuptial agreements. The Will should not breach any agreement reached at a family level about family business interests and should protect family interests in the event of a dispute. Shareholders must review their Wills regularly and especially if their marriage breaks down. It is also worth noting that more than one generation of shareholder may have provided for a departing spouse under their Will – so all relevant Wills should be reviewed.

If shareholders in a family business have life assurance and death benefit arrangements, it is likely that they would be nominated in favour of a family member which may include or be limited to the shareholder’s spouse. It is also possible that shareholders might create lifetime trusts to receive these benefits. In the event of a divorce, it is therefore important that any such arrangements for the divorcing shareholder are reviewed, with consideration given to the separating spouse being removed as trustee of life assurance and/or death benefit trusts and also, perhaps, removed as beneficiary.

In many cases a lifetime trust will be accompanied by a Letter of Wishes. That Letter of Wishes might make reference to the provisions of the Will or be entirely separate, perhaps suggesting how the life assurance might be utilised for the benefit of the spouse, to meet any Inheritance Tax liability or to repay any mortgage. Trusts, nominations and any associated Letters of Wishes should be reviewed upon divorce. The ability to provide security via such death benefits and life assurance can prove useful in the matrimonial context so as to provide for a spouse and/or children who have the benefit of a maintenance order.

Pensions advice is outside the scope of A Legacy Intact but it is worth being aware that the Family Court has the power to share a pension fund with a spouse. Any shareholder who is entitled to a company pension should therefore take advice and the form of scheme considered and the discretions of the pension trustees reviewed in relation to their ability to provide for a spouse.

Communication is key

The process of disentangling the lives and finances of a couple in the event of divorce is rarely straightforward – and even more so if a business is intertwined.

These are complex issues, and in the event of relationship breakdown, family business shareholders should raise any steps taken in relation to Wills, trusts, life assurance and pension arrangements with a specialist matrimonial adviser before they make changes that could have lasting repercussions.

Where business and family overlap – communication is key and must be constant. Wealth protection mechanisms such as wills and life assurance cannot be signed off and forgotten – they must evolve with the individual, the family and the business and reflect major life events including marriage and divorce. For those within a family business, it helps if there is an open dialogue about future intentions and a conscious effort to identify shared values that resonate with all shareholders, which can then act as a guide for core decisions affecting the legacy of the business as a whole.