Trust Estate

GUEST ARTICLE: What To Consider For Wealth Creators Who Are Young

Alexandra Pike Wedlake Bell Senior Associate 15 March 2016

GUEST ARTICLE: What To Consider For Wealth Creators Who Are Young

When entrepreneurs make a fortune at a young age, this can create a number of wealth structuring issues, and getting a robust and suitable will drawn up is vital. Complexities abound. This article considers the issues.

Considering all the complex wealth structuring issues facing high net worth individuals, the lack of basics such as a workable, up-to-date will remain a serious concern. Creating a will, however, is not straightforward as it might appear. Complexities can arise, for example, when young business owners suddenly come in to a great deal of money and yet face decades of (hopefully) healthy life ahead before deciding to retire. Alexandra Pike, a senior associate, Wedlake Bell, a law firm, sets out a list of dos and don’ts for those who come into wealth at a young age. As ever, the editors of this news service invite readers to respond.

The founders of SwiftKey (a British technology company) have recently agreed to sell their London-based business to Microsoft for £174 million ($247 million). The founders are in their 30s and they will now face the question of what to do with their wealth following this lucrative deal.  

We summarise here some of the key housekeeping steps young entrepreneurs should consider when looking to preserve and protect wealth realised on the sale of a business.

Put wills in place
If you die without a Will in place, your assets will be distributed according to the intestacy rules.  These rules are rigid and are designed to deal with the average estate, rather than taking account of individual 
circumstances, especially those of high net worth individuals.  Among other things, they: 

-- severely limit the amount that your spouse or civil partner will receive;
-- do not make provision for unmarried partners /  co-habitants;
-- allow children to inherit large sums outright at age 18;
-- do not provide for long term wealth protection.

Making a will enables you to specify to whom your assets will be given on your death.  Assets may also be left in will trusts for family members rather than outright, which can be 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.

Having a will also allows the distribution of your assets to be structured in the most tax efficient way and can minimise your estate’s exposure to inheritance tax (IHT). This is a significant benefit.  Of particular importance to entrepreneurs are provisions under a Will designed to utilise IHT relief for trading businesses (Business Property Relief).

Engaged or married? Invest in 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 on a divorce.  While often a difficult subject to broach, these agreements are increasingly popular and invaluable in protecting assets on a marital breakdown.

While the courts still retain their discretion to determine financial provision on a divorce, recent decisions show that they are now 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 to do so.

Moreover, given recent consultation papers, it is likely that the status of such agreements will be bolstered further in the future, to the extent that they may well be regarded as binding by the courts. This would be significant.

Take advice on different structures to house your wealth 
Trusts, family partnerships and family investment companies allow you to house your wealth in order to maximise wealth protection opportunities and preserve assets over the long term. Where substantial wealth is concerned, you are never too young to consider reducing the value of your estate for IHT purposes by making gifts to your children. However, while your children are too young to manage large funds themselves, it could be appropriate to create a vehicle, such as a trust, to hold assets on their behalf.  Holding assets in such vehicles can help protect those assets from third party claims and depletion by young or unwise beneficiaries. 

Starting again? Plan the structure of your new business ventures
Going forwards, businesses should be structured through a vehicle which offers limited liability (such as a limited liability company or limited liability partnership) in order to protect your personal assets from claims by any creditors of the new business.

Structuring the ownership of new business ventures appropriately from the outset can also be an effective way of reducing a future IHT liability. For example, when setting up a new venture you may wish to put some of the shares directly into a trust for your children rather than retaining all the shares in your name.  Any growth in the assets and/or the sale proceeds are then under the shelter of the trust and no longer form part of your estate for IHT purposes.     

If you tell your professional adviser about your plans and timelines for a future exit from the business, they will be able to guide you as to how best to structure your exit to maximise any tax opportunities available.

Make 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).

If you do not have any LPA in place and you become unable to deal with your affairs, your 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, and means that you have no control over who accesses your investments, real estate and who makes decisions. 


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