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What happens to my share in the family farming business partnership when I die?
- AuthorSusie Mortonson
Traditionally, farming businesses have relied on a legal structure of family farming partnerships, often without formal written partnership agreements in place.
In this case provisions of the Partnership Act 1890 would apply but this Act is unable to account for the realities of modern farming and 21st century family dynamics. A key problem with partnerships which do not have a written partnership agreement arises when a partner leaves the partnership. This can affect succession plans and continuity of the business.
Examples of when a partner can leave a partnership:
- Voluntary retirement
- Compulsory retirement
When leaving a partnership for any reason, the remaining partners will need to ensure the formalities of the exiting partner’s ownership in the partnership are dealt with appropriately and as per the partnership agreement, if there is one. This could include buying the exiting partner’s share of the partnership. However, without a partnership agreement in place which specifies the process and mechanism for leaving, limited options are available.
Partnerships without a partnership agreement are automatically dissolved if one of the partners dies or is declared bankrupt. If there is no agreement in place, the partners cannot exit, retire or be expelled on their own terms, meaning that legally the partnership can only be dissolved. It cannot be carried on.
In other scenarios where there is a written partnership agreement but it is not absolutely clear on the position when a partner leaves, a leaving partner’s share of the partnership business can accrue to other parties. For example, a deceased partner’s share of the partnership business can become part of their estate, and the estate has a right to the value of that share of the partnership. The personal representatives can request the partnership is wound up if the value of that share is not paid, and in certain circumstances the personal representatives may be entitled to become partners in the partnership business themselves. This can cause unwanted conflict and confusion as to how to proceed with the partnership business. There are also specific inheritance and business tax issues to consider which may be affected by a partner’s death.
A written partnership agreement can help avoid a lot of these issues. It is common to have a clause written in the agreement that allows the partnership to continue if a partner dies or leaves, as well as clauses that deal with the formalities relating to an exiting partner and their share of the partnership business. This ensures that the farming business can still continue and any disputes over exiting partners can be dealt with in an agreed manner. It is also important to keep your wills up to date to reflect any changes in the partnership arrangements, to ensure that the deceased’s wishes are consistent with the understanding of the other partners in the business.
It’s important to plan for the future and ensure that your farming partnership prepares the next generation with all the information they need to carry on the business and deal with any potential obstacles they may face. If you would like advice on updating your farming partnership agreement, please get in touch with our Corporate and Commercial team.
Our articles are intended for general information purposes only and are not a substitute for professional advice tailored to your specific circumstances. We are always very happy to discuss any plans, issues or concerns you may have and to clarify how we might be able to help. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.