Rural legacy succession planning

Recent court cases such as Sargeant v Sargeant [2018] EWHC 8 (Ch) and James v James [2018] EWHC 43 (Ch) have turned the spotlight on legacy planning. With an increase in the number of people having second families, a reliance on inherited wealth and an increase in the value of estates all playing their part, getting the process right is crucial.

Farming estates can throw up several practical difficulties for succession planning. Estates are often asset-rich and cash-poor, and land may have the potential for further redevelopment that could boost its value. The lack of liquidity often means that there is no readily available money that can be used to settle possible claims, though. Often, the main aim of estate planning is to guarantee that the farming business is preserved for future generations. Yet striking a balance between preserving the farm and making adequate provision for family members can be difficult, particularly when some are not involved in the day-to-day farming business.

The best place to start is to prepare a clear and unambiguous will. Instructing a professional to draft a will is money well spent, even for the most straightforward estates, and ensures that the document is properly written and executed. It also allows the tax position to be given full consideration. By the same token, getting the will wrong can be a costly mistake.

Start thinking about legacy planning from an early age. Bear in mind that wills don't just deal with the transfer of assets; for example, they can also set out who would be responsible for any children in the event of a death. Once you do have a framework for passing on assets and capital then it's easier to update it, and you should do this at least every five years or after a significant life event, such as the birth of a child or the addition of a new business stream.

If no will is made, there are still clearly defined inheritance rules, although these are often not fit for purpose. Spouses and civil partners receive the first £250,000 of the estate, with everything else divided equally between the children and the spouse. However, while the myth of the common-law spouse persists, it remains a myth. Cohabitees do not have automatic rights, so they will not inherit anything by default. A cohabitee can therefore be faced with expensive court action to seek provision from an estate.

The application of the intestacy rules can often prove fairly crude, as they simply cover the financial value of the estate rather than individual assets. You can therefore end up with split assets, causing complications and often resulting in those assets having to be sold. This can be particularly difficult in the context of a farming business, so serious thought must be given to considering which beneficiaries should inherit which asset, and to ensuring that those wishes are set out in a valid will.

Sitting down with family members and other beneficiaries to inform them how you want the estate to be split can help avoid misinterpretation and misunderstanding. One option is to pool assets and divide the overall value between beneficiaries in percentage shares; this can, however, result in assets having to be sold, if the beneficiaries can't agree.

In terms of succession planning, the trend towards diversification into other business activities has proved both positive and negative. Other revenue streams and discrete business interests can be used to settle potential claims, but they can also result in increasingly complex business structures that can make estates even harder to unravel in the event of a dispute.

Setting up a life interest trust can be another option, if families are sure that someone is keen to work on the farm in the future. This gives the farm to someone for their lifetime, and when they pass away the farm is sold. Proceeds are divided among the entire family, an option that can keep the farm functioning as a business. Crucially, this depends on people being prepared to wait for their share – inheritances can skip generations, which may not suit every family.

Many farms are still run through partnerships, with expenditure both business and personal being run through the business. This raises difficult issues about whether or not assets belong to the partnership. Land is often kept outside the partnership, but this doesn't always work. If this is the intention, it is important to formalise it by, for example, the landowners and the partnership entering into a tenancy agreement. The terms of that agreement should then be followed, with any rent being paid and the respective parties fulfilling their obligations under the lease. Ensure that the terms of the partnership agreement make it clear what happens when one of the partners passes away.

Being an executor involves managing and distributing a person's estate. Choosing an executor, and indeed being one, is not without challenges. Responsibilities include calculating the assets, identifying any debts that need to be paid and any inheritance liabilities that might be due, before finally paying out and distributing the estate to the beneficiaries named in the will.

It is not uncommon to instruct a solicitor to help administer an individual's estate because, for example, inheritance tax calculations can be complicated. It is good practice to inform executors that they have been chosen to administer the estate; however, there is no legal obligation to do so. It is also useful for an executor to know where the will and other important paperwork is kept.

Executors can be caught in the crossfire of disputes about estates. They do have the right to give the position up, a step known as renouncing probate, and for this reason you should consider naming alternative executors when writing a will. If there is no alternative executor or a nominated executor passes up the opportunity to take control of the estate, the responsibility automatically falls to the beneficiaries.

There is no simple way of legacy planning and, sadly, families often fall out over wills. The key is communication – talking about the future with your family and what will happen on your death. This allows disputes to be kept to a minimum and, in the case of farming families, the long-term future of the business can be guaranteed.

Andrew Wilkinson is a partner at Shakespeare Martineau andrew.wilkinson@shma.co.uk