Wealth Planning for Entrepreneurs
13 / 04 / 2016
The founders of SwiftKey (a British technology company) recently agreed to sell their London-based business to Microsoft for £174 million ($247 million). The founders are in their 30s and will be coming into a significant amount of money at a relatively young age, but this is not an uncommon (or unwelcome) problem for many entrepreneurs. Alexandra Pike, a senior associate in the Private Client team at Wedlake Bell, wrote in Wealth Briefing (www.wealthbriefing.com) on this issue, setting out the dos and don’ts for those who come into wealth at a young age. Below is a summary of her article which first appeared in the publication on 15 March 2016.
Make a Will
Without a Will, your assets are distributed according to the Intestacy Rules. These are designed to deal with the average estate and do not take into account personal circumstances, and are rarely adequate for high net worth individuals who usually require a Will that deals with long-term wealth protection. For instance, the Intestacy Rules do not allow your spouse/civil partner access to the whole estate; they allow children to inherit at age 18; and do not take into account any surviving unmarried partner or cohabitant.
A Will enables you to specify to whom your assets will be given on your death. It allows you to create trusts within the Will to hold assets for family members, which can be particularly advantageous if you wish to exercise control over monies passing to younger children or to protect assets that are at risk from third party claims, such as on a divorce.
A Will can be structured to minimise your estate’s exposure to inheritance tax (“IHT”). Of particular importance to entrepreneurs are provisions to utilise IHT relief for trading businesses (Business Property Relief).
Pre- or Post-Nuptial Agreements
Nuptial agreements can be made by spouses before or after marriage in order to agree how wealth should be split should the marriage breakdown. This is vital for high net worth individuals, particularly if the respective wealth of the parties is uneven. The starting point when the Courts are considering how assets should be divided upon divorce, is usually a 50:50 split.
While the Courts still retain their discretion to determine financial provision on divorce, recent case-law shows that the Courts are willing to give effect to pre- and post-nuptial agreements to the extent they consider it would be fair to do so. Consequently, although one does not want to think about marriage not having a happy ending, it is prudent for entrepreneurs who have come into significant wealth to do so.
Trusts and other structures
With significant wealth usually comes IHT: 40% on death subject to your available nil-rate band (a maximum of £325,000) and any available reliefs and nil-rate band for the family home. However, giving away wealth early to younger family members is efficient IHT planning.
Gifting assets outright is not always a wise move, especially if the recipients are young or you are concerned about the assets being claimed by a third party, such as on a divorce. Trusts, family partnerships and family investment companies allow you to house your wealth for the wider family, maximise wealth protection opportunities, preserve assets and give you the ability to control the succession to your wealth so that it can pass down the generations.
Plan the structure of new business ventures
If you plan to set up a new business, consider structuring it through a vehicle which offers limited liability (such as a limited liability company or partnership) in order to protect your personal assets from claims by any creditors of the new business.
It can also pay to consider IHT planning for your share of the business. Consider putting some of the shares directly into a trust for your children rather than retaining all the shares in your name; any appreciation and/or the sale proceeds are then under the shelter of the trust and should not be subject to IHT at your death.
Lasting Powers of Attorney
Under a Lasting Power of Attorney (“LPA”) you can grant someone the power to make financial or health decisions on your behalf if, at any time, you are no longer able to do so yourself (whether through illness, injury or other condition which might affect your mental capacity).
LPAs are vital for those with considerable wealth, especially for assets which are not held jointly with your spouse or civil partner, as if you later lose mental capacity, such assets will be frozen and someone will have to make an application to the Court to make financial decisions on your behalf. This can be a costly and time-consuming process. An LPA gives you control over who accesses and manages your assets, and how they should do so.
For further information on any of the issues covered in this article, or to discuss your wealth planning generally, please contact Alexandra, or your usual Wedlake Bell adviser.