Jim owned 60 per cent of the engineering business he started and effectively grew from scratch. His two fellow directors worked in the business rather than driving it forward and Jim had been responsible for the firm being in the good shape it was. He was 58, married and had no dependent children. However, out of the blue he had a massive coronary and died instantly. I had been dealing with Jim for 18 months and had met his wife, Jane, twice for brief meetings. The family turned to me to help them through the financial issues and to ensure that Jim's widow was financially secure. What followed gave me the opportunity to save the family a lot of potential inheritance tax but also taught me some valuable lessons of my own for the future of my business.
I enjoyed dealing with Jim. I had known him for a few years through sport and he had phoned me one day and asked me to look at his Financial Planning. He had a good business with recurring work and income built up and he owned 60 per cent of the business. His two fellow directors seemed to have been brought in at the bank's insistence however did not contribute significantly to the business growth or big contracts. It was Jim's business, to all concerned.
We were planning and working towards Jim's retirement at age 65 when his sudden and untimely death happened one weekend. His daughter phoned me on the Monday morning to let me know and to request help. Like a good number of cases that we deal with the man dies first and within that generation he usually looked after the finances and the widow in many cases was unsure of what was in place or how things worked. The family had made appointments with the family solicitor and the business solicitor and asked metoattendtoactontheirbehalfandgivethem advice. It was the start of a slow process to tidy up Jim's financial affairs and to ensure Jane had sufficient to provide the lifestyle she wanted.
Our first meeting with Jane and the two children took the form of informing them of what pension, investments and life cover Jim had and the likely processes and timescales for it to be paid out. I noted updated cash values, mortgage debt and other borrowing. Jane had a substantial civil service pension and cash in her own name so there was no need for immediate funds. A later meeting would involve planning for the future and cash needs; now was not the right time.
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We met the family solicitor and provided the up to date information to her. She supplied copies of Jim's will; everything was to be left to Jane. We discussed inheritance tax planning a little and it was obvious given the value of the house, pensions and company that there could be an IHT liability in the future. I advised Jane I would look into this and provide advice.
We also met the company solicitor and he provided copies of the shareholder agreement and discussed the process of what happened next with the company. The shares would pass to Jane however she did not want to work in the company as she did not fully understand it and she had worked in a different sector. She wanted to sell the shares. It was after this meeting that some difficulties started to arise.
Jim had previously put substantial shareholder protection and keyman in place in respect of the company. The solicitor had looked after the Shareholder Agreement and Double Option Agreement. Jim was a new client; I did not want to appear awkward so I took his word for it. I did not ask for any copies. It transpired that while the Shareholder Agreement was in place there was no agreed mechanism for company valuation and there was no signed Double Option Agreement in place. It had been issued by the solicitor but was sitting unsigned in Jim's filing cabinet. There was no compulsion for the other directors to buy the shares and no pre-agreed method to value the shares. I should have asked for a copy of the documents and I hadn't; lesson number one.
It was then agreed by the directors and the widow that a locally respected accounting firm would produce the valuation of the company, which they did. However in addition to this valuation the deceased's family felt that they should be entitled to a portion (60 per cent) of the keyman cover that was being paid to the company and would be on the books as a value.
I explained the principle of keyman cover and how it was there to help the company survive the loss of a keyperson, replace them and replace lost profits. But they felt they were entitled and wanted to negotiate a higher figure than the accountants valued the business at.
This was with a background of no Double Option Agreement in place and I advised the family to be careful in case the other directors just walked away from any purchase. They did not have to buy the shares and would receive substantial money from the life cover.
Meanwhile, conflicts of interests were starting to arise. The two remaining directors had decided to ask my advice about what they should do in respect of the company valuation and the family were asking for more money.
On one side the family was asking me if they were right asking for more money and my advice, and on the other side the directors were asking should they pay this extra money and what was my advice. Before this I had supplied information to both parties and given advice in relation to their best interests as there had been no conflict. Now a conflict was arising as both parties wanted my advice on this area of conflict between them. I had to walk away from one of them. In the end I decided to advise Jane and I pointed the two directors to their own accountant. I had not previously dealt with them and any dealings I had had with the company were with Jim so I felt more loyalty to Jane. I was tempted to protect her by advising both sides but I knew I was uncomfortable with this so declared it to them and only advised Jane after that.
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Eventually a price was agreed; but not one that the family was happy with given that the company had also received the keyman money. However they received more than the 60 per cent of the value of the company so I felt a fair price was paid.
This was the only time a conflict of interest has arisen for me and I acted as soon as I became uncomfortable with the situation so lesson number two for me was to continue to trust my instinct on these things and to act on it.
As the process of the company valuation and price negotiation was being carried out I met with Jane to discuss the way forward and what she wanted. This was a difficult meeting as she had no real idea of the income needed or what she wanted to do with the rest of her life.
She advised that she wanted to give the children £20,000 each as a gift and that she wanted to buy a static caravan in a local holiday resort. Income wise, she was not sure so we agreed to monitor her expenditure over the next year and then look again.
We discussed IHT planning and she wanted to protect what Jim had left for her and what they had built up over the years. As much of it was to go to the two children as was possible.
The value of the company shares was bringing the whole estate into a potential IHT paying situation so I suggested that as Jane was the only beneficiary to Jim's will, she should consider a Deed of Variation (it was within two years of his death). This would change his will so that the company shares would be transferred to a Discretionary Trust on his death and the will would also note that the Trust should be set up on death. The shares would be transferred into the Trust, the other shareholders would pay the Trust for the shares and the money would be outside the estate. There was no liability to IHT on the way in because of Business Property Relief however there may be a liability at any 10- year review. Jane agreed with this and asked me to action it.
I also recommended that the values of Jim's pensions were paid to a Trust that was set up from the personal life cover Jim had previously put in place. This would mean that this money would also be outside the estate. Again this was agreed and I would arrange for this to take place.
I contacted the family solicitor about the Deed of Variation and putting a Trust in place and it very quickly became obvious that she did not understand it and she was out of her depth. I was therefore left trying to find someone else who would both understand this and would action it on my instructions and information. Looking back I did not have a good network of trusted professionals at that time and this is something I have worked to put right since. I found a good solicitor who was able to do this with minimal fuss and understood exactly what was needed. Noted for next time.
Jim's pensions were with two different life company and the nomination forms had been completed for Jane's benefit. We approached both life companies with a copy of the new will and a letter from Jane saying she had sufficient assets and requesting the pension money was paid to a Trust of which she was a potential beneficiary. I did not think this was an issue and one of the life companies agreed with me and paid the money to the Trust. The other one refused to consider Jane's wishes and its legal department insisted the money was paid to Jane – again noted for the future!
Jane received this money and then used it to give gifts to the children. She was aware there was a seven year period on these gifts however she was still relatively young and her estate was of a lower value given the value of the shares going into a Trust. She also bought a caravan with this pension money.
We met a number of times over that first year and based on her income needs we completed some cashflow scenarios. As we had suspected, Jane had more than enough money and it was clear she would not need to draw on the Trust money for income purposes. The money was invested on an agreed structure within an offshore bond and I have met the Trustees each year to review this.

What happened next
This year (four years after the Trust was set up) Jane wanted 40 per cent of the Trust money to buy a new house as the family home was too big but was slow to sell. One of her children moved into the family home and Jane found a new smaller home for herself.
The unravelling of the investment within an Offshore Investment Bond within a Trust in the most tax- efficient manner was interesting and in the end the Trust loaned the money to Jane and part of the Bond was assigned to her and then encashed in her name as she was a basic rate tax payer.

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