Partnership Agreements – The importance of dealing with death

When setting up a partnership, death is generally not the first item on the agenda to discuss with your prospective partners.  However, it is something that needs to be considered and documented carefully.

If a partnership does not have an agreement in place, or its existing agreement is silent on what happens on the death of a partner, then under the Partnership Act 1890 (“Act”) a partnership is dissolved by the death of any one partner.

If a partnership wishes to continue following the death of a partner, it is important to have a partnership agreement which provides for the three items mentioned below.

1. Dissolution of the partnership not to occur on death. The purpose of this is so that the Act does not apply to the partnership.
2. A consensus on what happens to a partner’s “share” in the partnership. There are various ways in which a “share” in the partnership can be dealt with on death.  As mentioned further below, it is possible to leave the share in a will.  A specific bequest of a share will not entitle the beneficiary to become a partner.  However, a provision can be included in a partnership agreement which states that a beneficiary is entitled to become a partner. Another option is for the deceased partner’s share to automatically vest in the continuing partners on the date of death.  Alternatively, the partnership agreement can provide the continuing partners with an option to purchase the deceased’s share. Partners should have an open discussion to agree on how their shares will be dealt with on death, and to ensure that the partners’ wills complement each other.
3. A mechanism for valuing the deceased partner’s share and payment to their personal representatives.

It is common for partners to take out life assurance cover (also known as keyman insurance) to help the partnership to pay for the deceased’s share on death.  Partners will also need to consider if the payment to PRs will be made in one lump sum, or if the payments will be spread over a period of time.   It is important to consider such provisions with your accountant to ensure that the death does not have an adverse impact on the financial position of the partnership.

It is important that partners review their existing partnership agreement to check that it reflects the terms on which the partnership operates and the wishes of the partners.  If you do not have a partnership agreement then you should consider the impact of the Act applying to your partnership.

As mentioned above, when putting a partnership agreement in place it is important that a partner’s will reflects their wishes for their share in the partnership and that the partnership agreement also reflects this.  The terms of a partnership agreement would override the provisions of a partner’s will where they both make provision for the same interest or asset in a different way.  Considering such issues now, rather than leaving it for the continuing partners and families to death with, is likely to ensure that your wishes are followed, and reduce the likelihood of disputes.

For more information please view our Corporate Law page.

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