Family business: avoid probate litigation

Why communication in family businesses is key to avoiding probate litigation.

As a litigator in this field, let me begin with the case of Rachel and David Bennett, a couple who started their childminding business in their family home while raising four children.

With a passion for early childhood education, they transformed their business into a nationally recognised chain of nurseries with a USP in innovative teaching methods.

Their eldest son, Jake, joined them early, managing operations and expanding the curriculum. Deeply invested, Jake assumed he would one day take over. Meanwhile, his siblings pursued their own ventures in unrelated fields while witnessing their parents’ success.

As Rachel and David grew older, tensions grew. Jake’s siblings, increasingly aware of the value of their parents’ legacy, started to view the business not only as a source of profit but also as a platform for influence.

As they aged, disputes over leadership and fairness intensified, leaving Rachel and David struggling to mediate between their children, while striving to maintain the success of the business, and ensure their children each receive what they believed to be a fair share of their estate.

In an effort to prevent division, they choose not to extinguish the issues during their lifetime but to place the business shares in a trust upon their deaths. There was no direction or consensus between the family on how the business should be run after Rachel and David’s passing.

Without clear leadership or a unified vision, chaos and infighting ensued and the nurseries faltered. Legal delays paralysed decisions, staff turnover soared, competitors capitalised on the turmoil and their life’s work devalued amongst the siblings’ quarrels.

What can you do to avoid divisions?

Family businesses face some unique challenges, including blended interests, generational transitions, and emotional dynamics, sometimes tracking back to childhood.

These issues should be addressed in the founders’ lifetime. Proactive communication and estate planning should be embraced to avoid costly and emotionally draining probate battles.

Resolving conflict during the succession process – and safeguarding against future disputes – requires thoughtful planning. The first step is to have open discussions.

Begin by addressing emotionally charged issues early. Proactively identify areas where family members may have differing business philosophies or expectations about roles and responsibilities.

Understanding these differences at the outset can prevent misunderstandings and set the tone for constructive dialogue.

• Encourage regular, inclusive discussions to ensure every family member feels heard, valued and respected.
• Open communication helps create an environment where differences can be addressed collaboratively rather than becoming sources of contention.
• Develop a structured approach to managing disagreements. Set up clear mechanisms for resolving disputes, such as regular family meetings or designated forums, ensuring that issues are addressed constructively and do not linger.
• If conflicts become too challenging to resolve internally, bring in a professional mediator. A neutral third party can help diffuse tensions, offer impartial solutions and prevent disputes from escalating into full-blown crises.
• To ensure fairness, encourage all family members to seek independent legal and financial advice. This can reduce perceived biases and build confidence in the succession process.

Family dynamics, business valuations and tax laws evolve over time. Make sure your estate plan reflects these changes to avoid future complications.

How to tackle some of the most commonly litigious issues:

1. Dividing the overlapping roles of family and business: A good starting point is to identify who will take over leadership when you are no longer able to lead. Have you identified potential successors within the family or key employees? Are there clear plans for leadership roles and responsibilities after your passing? Consider both roles inside and outside of the business (i.e. caring roles) that might be important to you and the wider family and where conflict might occur.
2. Addressing the complexities of categorising and dividing assets and income: Consider how to fairly distribute shares or ownership in the business among your children while balancing their involvement in the company. Be clear about the expectations regarding cash inheritance and its timing. How will the ownership of the business be divided?  Will dividend payments be used to pay what would ordinarily be a cash inheritance?
3. Discussing the long-term goals for the business: Consider plans for expansion, changes, or an eventual exit strategy now. What you agree will inform your route forward.
4. Acknowledging stakeholder requirements: It’s crucial to understand stakeholder requirements if the goal is to ensure continuity and preserve value. For instance, in the case of Rachel and David, the local authority and Ofsted deemed one of their children unsuitable to hold a position within the nursery setting, which highlighted the importance of aligning leadership with regulatory expectations.

The points outlined can be reinforced by ensuring the right legal documents are in place to facilitate a smooth transition. Wills, trusts, and shareholder agreements are invaluable tools in preventing disputes or, at the very least, limiting their scope and cost.

Contesting a Will or unresolved succession disputes can easily cost hundreds of thousands of pounds, significantly diminishing the estate’s value. Beyond monetary loss, such conflicts can have a devastating impact on employee morale within the family business, disrupt productivity and can take years to resolve.

The emotional strain on family relationships, often irreparable, can be the most lasting consequence. It is crucial to balance the cost of proactive estate planning against the potential financial and emotional burden of litigation, as well as the inevitable delays in resolving disputes.

Over time, delays can lead to further losses, exacerbating the challenges for families.  The new Labour Government has set a cap of £1m on inheritance tax relief for farms and businesses that will have severe implications for family business owners, who now face a 20% levy on assets exceeding the £1 million threshold.

That inheritance tax is calculated based on the value of assets, such as shares, at the time of death. Yet, the death of a key shareholder, as we have seen above, can lead to a sharp drop in share value.

In extreme cases, families may be left with a substantial tax bill, despite inheriting a business worth far less than its original valuation at the time of death. The new tax rules have effect from 6 April 2026 so planning now is important.

Silence and inaction cost far more than money – they can cost relationships and the legacy of your family business. Open communication and thoughtful planning are not just advisable but essential to preserving what you’ve built for future generations.

If your goal is to ensure that your family business not only survives, but thrives for years to come, now is the time to start the conversation.

How can Morr & Co help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Dispute Resolution team on 01737 854500 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.