Agriculture: Interaction of Partnership Agreements & Wills
Where there is a will there is a way, or is there…?
When considering making a will, if you farm in partnership, it is also necessary to consider the terms of the partnership agreement and it may be necessary to have a written partnership agreement drawn up or an existing one amended.
The key is whether or not land which may be farmed by the partnership is a partnership asset or not. It should be possible to ascertain this from the partnership accounts, although, it is not always clearly stated.
If particular partners own the land it is important to set out clearly who takes the income from that land, if it is not to be all the partners and who is entitled to the capital value of the land.
Partnership agreements should clearly state what assets are partnership property. Partnership agreements often state that those assets shall belong to the partners in the proportions in which they share the profits of the partnership. This may defeat an attempt by a particular partner to leave assets under the terms of their will. It should not be forgotten that terms of a partnership agreement will take precedence over any provisions in as much as a partner cannot attempt to will assets which are not in their ownership, but instead are partnership property.
It is not unusual to see vague statements in a partnership agreement such as “all assets used for the purposes of partnership shall be partnership property”. Sadly, neither is it unusual to see wills where a partner has attempted to leave “the farm” under their will without it being clear as to whether or not this was intended to deal with their share of the farm business or to deal with property, or both.
It is also important to deal with ownership of assets from the perspective of tax relief. It may be sensible to bring on to the balance sheet of the partnership accounts assets which are not otherwise stated to be partnership assets. This is particularly the case with those assets which may not qualify for Agricultural Property Relief, as bringing them onto the balance sheet may mean that at least they qualify for Business Property Relief. Partnership Agreements can then clearly state what is to happen. Partnership agreements are just as much a tax planning tool as wills.
Therefore, when drafting a will, or indeed partnership ,agreement, it is very important to consider the provisions of both documents to ensure that they work together. If there is no written partnership agreement then the provisions of very old legislation in the form of the 1890 Partnership Act apply. This may result in unintended consequences, not least that unless there is a partnership agreement specifically stating that the partnership shall continue following the death of retirement of one partner, then the partnership will be dissolved.
The partnership agreement may state that a partnership share is to pass automatically to another member of the partnership e.g. a spouse, or a person nominated by the “outgoing” partner but failing that, more commonly, the continuing partners will have the right to purchase the share of an outgoing partner in the proportions of their partnership shares. In that case the sum received for that partnership share will fall to be dealt with under the will.
So in summary remember to:
- Make sure you have an up to date will and partnership agreement that work together
- Don’t amend your will or partnership agreement without considering the terms of both documents
- Make sure your accounts clearly identify partnership assets and that the income and capital treatment of land owned by particular partners is clearly set out
- Don’t lock your partnership agreement in the drawer or safe and forget about it! – make sure it is regularly reviewed
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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