Estate claims present a key family threat

Most businesses are unprotected against estate claims, but proper planning can avert them.

The close interconnection between family and business is often the very key to its success. However, it can also be the source of complex challenges.

One such challenge is having to contemplate what will happen if a member of a family who holds an interest, or is involved in the family business, passes away.

Surveys have shown that the average family business owner is 55 years-old, and that 20 per cent of family businesses have chief executives that are 65-plus.

However, more than half of all family businesses have no succession plan. Discussions have either not been held in respect of the future of the business during the deceased’s lifetime, or the business owners’ will does not adequately address how the business is to be dealt with upon their death.

At the same time, we are seeing that the number of claims involving deceased estates continues to rise and family disputes relating to such assets are becoming more common.

Family businesses are particularly vulnerable to such disputes due to the inherent connection between the family and the business. If businesses do not take steps to protect themselves, such disputes can have a very significant and sometimes devastating effect on ongoing profitability, and even, survival.

How can an estate claim affect your business?

If a person holds an interest in a business or a business’ key assets, that interest is likely to form part of the person’s estate when they pass away.

In this instance, a claim involving that estate risks affecting that interest and, consequently, risks affecting the ownership structure and the value of the business.

What claims can be made?

There are numerous grounds on which an estate and its assets can become the subject of legal challenge. If successful, such claims could require assets to be liquidated to satisfy the claim, or see the claimant acquire a particular asset or a greater interest in the family business.

Preparing and executing a will is extremely important. However, and surprisingly, this alone does not always protect a person’s estate from potential claims.

By way of example, an estate may be attacked in the following ways:

  • A person’s will may be challenged on the basis that the deceased:
    • Did not have requisite testamentary capacity at the time that they executed the document;
    • Was unduly or overtly influenced to execute it in a particular manner; or
    • Did not execute it in accordance with necessary legal formalities.
  • Even if a will is valid, Australian family provision laws such as the South Australian Inheritance (Family Provision) Act 1972 permit certain family members to make claims against a person’s estate on grounds that the deceased failed to leave the claimant with “adequate provision”.
  • An estate’s assets may also be the subject of a claim by reason of certain conduct of, or agreements between, the deceased and/or the claimant during the deceased’s lifetime.

In an environment where 35 per cent of family members involved in the day-to-day running of businesses are sons, compared to 7 per cent that are daughters, an example of this may be a son of a deceased seeking a greater interest in a business because he claims to have invested more effort in operating the business than his sister.

Another example is where a deceased may have promised a business asset or an entire business to an adult child, however this is not reflected in their will.

Who pays the costs?

What many people do not realise is that courts rarely make orders that unsuccessful claimants in estate disputes pay legal costs. In fact, courts often make orders that a claimant’s costs be paid out of the estate, even where his or her claim is ultimately unsuccessful. Such costs orders can significantly deplete hard-earned family assets and may prejudice the future viability of the business.

What can you do?

Plan

Regularly review and, if necessary and appropriate, update your will.

Constantly review the structure of the business and develop (or update) a succession plan. Ideally, include family members and relevant stakeholders in agreeing or confirming the structure and plan, and clearly and precisely document visions and goals for the business into the future.

Acknowledge and address claims

Address any potential ownership claims or conflicts as soon as they arise. Be proactive and take steps to tackle any such claims early.

Seek advice

Seek legal advice to ensure that your will is effective.

You may also wish to involve a trusted advisor, such as your family accountant or lawyer, in preparing your business succession plan. For example, this plan may involve the creation of new family trusts or the transfer of assets, which may have taxation and legal impacts that you need to be aware of.

If an estate claim does arise, seek legal advice as soon as possible. This will assist the family members to resolve disputes before they become entrenched in their positions, and may protect the business from the associated risks and costs.

Communicate

Estate disputes will often arise from a misalignment of expectations or a misunderstanding as to the members’ respective entitlements. Increased transparency about the ownership of the family business, now and into the future, will assist to manage those expectations, address frictions and avoid future claims. Communication is paramount.

Stephen Dickinson is a partner, and Lina Kolomoitseva, a senior associate, Litigation and Dispute Resolution, Wallmans Lawyers.

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