Profit allocation to estate:
Given it is 29 January, I'm not expecting any detailed answers but I have an issue concerning the allocation of trading profits to the estate in administration of a deceased member. We're talking about accounts for a period starting after the member died - i.e. after he ceased to be a member by virtue of his death - and neither the personal representatives or his heirs have been appointed as members since his death. I'm struggling to see how trading profits can be allocated to the personal representatives (in the accounts and on the partnership tax return) as members of the LLP when they are not members. The person preparing the accounts seems to think it's fine. Given that the remaining members are liable at 40% or more and the estate is liable at 20%,and the profits allocated are almost £200k, the tax difference isn't small.
Any brief comments on whether this is, or isn't, possible would be gratefully received.
Thanks
Cathy
Replies (14)
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Yes it must be wrong but I am sure that the beneficiaries of the estate will be delighted.
No doubt the executor has provided the LLP with details of the bank account to transfer the distribution into.
Has the LLP been asked whether the LLP agreement specifies an end date to the distribution of profits to a deceased member's estate, or does it continue for all eternity?
I assume that the LLP has not claimed AIA, if they are treating the personal representatives (who are not an individual) as a member?
I think you should congratulate your deceased client's beneficiaries' on their good fortune, and not rock the boat, which for obvious reasons they would not thank you for.
Given the level of profits and assuming the partners are not all "close" family (and even then), someone, somewhere, ought to have thought about a partnership agreement; looks like one where the solicitors will do very well dealing with this, that is if they were not the party who advised on the setup of the partnership in the first place and should have considered this outcome.
Edited- since initial post have had a read of the 2000 Act, the provisions re the 1890 General Partnership Act only appear to bite if regulations passed to make them bite, so all as clear as mud.
Section 7:
7Ex-members.
(1)This section applies where a member of a limited liability partnership has either ceased to be a member or—
(a)has died,
(b)has become bankrupt or had his estate sequestrated or has been wound up,
(c)has granted a trust deed for the benefit of his creditors, or
(d)has assigned the whole or any part of his share in the limited liability partnership (absolutely or by way of charge or security).
(2)In such an event the former member or—
(a)his personal representative,
(b)his trustee in bankruptcy or permanent or interim trustee (within the meaning of the M1Bankruptcy (Scotland) Act 1985) or liquidator,
(c)his trustee under the trust deed for the benefit of his creditors, or
(d)his assignee,
may not interfere in the management or administration of any business or affairs of the limited liability partnership.
(3)But subsection (2) does not affect any right to receive an amount from the limited liability partnership in that event.
This part is silent except the right to receive an amount from the LLP, would want the opinion of a solicitor here before continuing as to what "amount" means here, in what form is this "amount" received?
You have no doubt done this, but have you checked on Companies House and viewed what details are within the most recent annual return?
Obviously the deceased may or may not, before his death have been a designated member, but presumably there are other designated members with responsibility to submit the return.
If the return shows the representatives as members then there is a reasonable argument that the other members have so accepted them as such. (albeit their agreement/consent might have reasonably been required)
If the deceased is no longer shown as a member but the representatives are also not shown as a member it may be slightly inferred that the representatives are not being offered the membership, in that someone has at least considered the position and done something but that something does not appoint them.
Of course if the deceased is still showing as a member then all that can be reasoned is maybe nobody has considered the issue/done anything!
There is an argument, I suppose, that if the accounts show the representatives receiving an allocation of profits, and the other members (but who/how many) have signed said accounts, then they have tacitly accepted the representatives are a member.
Found this online but sources not cited, but may be useful:
Death of an LLP Member
The lack of a members’ agreement is a particular concern when a member dies. Under statute and the Regulations there are no clear provisions dealing with how a deceased’s share of an LLP should be treated. The Regulations and statute prohibit the deceased member’s personal representatives (executors) from being able to:
• Participate in the management of the business. Hence neither they nor the beneficiaries of the deceased have any right to be appointed as a member of the LLP in the place of the deceased. They can only be appointed as a new member of the LLP with the consent of all of the remaining members. This can make it difficult for the personal representatives to deal with the share that belongs to the deceased’s estate.
• Demand the transfer or repayment of the deceased’s share of the value of the LLP to the estate until the other members are ready to account for it.
The personal representatives have an equitable right not to be treated unfairly, from a financial perspective, compared with the remaining members of the LLP. However, how would the personal representatives know if they are being disadvantaged if they are prohibited from any involvement in the business?
http://www.stephens-scown.co.uk/wills-and-inheritance-planning/death-and...
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Do update us re outcome as this is one of those topics where I would be really interested to hear the outcome, we operate two LLPs but at least one has a members agreement and the other has negligible worth (negative worth)
Cathy
If your only role is to advise the executors what to put on their tax return, the answer surely is that they just enter their share of the LLP's taxable profit, as shown on the LLP's partnership return. What could be simpler?
PS And if the LLP's members want to treat the executors as one of their number and distribute profits to them why should they not be allowed to do so?
As far as basis periods are concerned I would just treat the estate as continuous with the deceased, as that is what the LLP is doing.
Not sure what you mean by "everyone agrees isn't a member". The members of the LLP must agree that the estate is a member. Indeed the very fact they are sharing profits with it makes it a member.
With respect I believe you are over thinking. Yes it is odd tha an LLP wants to treat the estate of a deceased partner as a member and share profits with it. But that (i.e. to be odd) is their prerogative, and if you were advising them you would have a few things to think about very carefully. But you are not advising them you are advising the beneficiary of their largesse.
Oh! Well in that case you need to find out where in the accounts the estate's alleged profit share has been credited, and perhaps more importantly, when that profit is to be distributed to the estate.
PS
Or to put it another way, until the executors see accounts showing profit allocated to them, and due and payable to them, they should proceed on the basis that there is nothing for them to enter on tax returns or, even more so, to pay tax on. I confess that when you said that profit had been allocated to the estate I assumed you meant that that was shown in a set of LLP accounts. If there are no accounts showing the profit allocation it becomes an entirely different matter.