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Deceased estates are often a complex situation to navigate, especially when the death of the individual was unexpected, leaving behind issues which can lead to spouses, siblings, extended family, friends and business partners entering into a dispute over the assets to be distributed.
The resolution of an estate dispute in a timely and cost-effective manner often requires expert assistance in relation to financial issues, such as the valuation of assets and potential taxation consequences. Matters can often go awry or escalate when these issues are not considered broadly from the perspective of all potential beneficiaries. Obtaining independent transparent advice early from a forensic accountant can assist executors in discharging their duties and reduce any concerns held by beneficiaries.
Together with Andrew Simpson, National Head of Wills and Estate Planning at Maurice Blackburn Lawyers, we look at the role forensic accountants play in matters involving contested estates.
According to Andrew, valuations of estate assets – whether they are business or real estate assets – are essential for reaching a settlement of an estate dispute.
Often estate disputes do not settle because there is a lack of clarity on issues, such as the business value, and the mediation needs to be adjourned so that valuations can be sought. The cost of obtaining such advice is the primary reason why a business valuation is not sort prior to mediation.
However, stopping a mediation to obtain a valuation and then re-convening is an expensive exercise. In Andrew’s opinion, had a more proactive approach been taken and valuation and tax advice obtained at the outset, this could save all parties significant time and money.
The executor(s) can appoint their own business valuation expert which, according to Andrew, can be problematic as the beneficiaries of the estate may not accept the findings of the report. Andrew recommends that parties to the dispute agree to appoint a single expert whose findings can inform settlement discussions at mediation.
It can be common in estate disputes for the emotional attachment to – and/or uncertainty as to the value of a particular asset – to override the commerciality of the dispute at hand, causing significant angst between the beneficiaries of the estate. By instructing an independent business valuation expert to prepare a valuation report of the business asset, disputing parties are provided with a basis upon which to begin their negotiations.
Jody and Karen run a successful hairdressing business, each owning half of the business. They have five salons across the Mornington Peninsula and employ more than 20 staff. Karen suddenly passes away, leaving her interest in the business equally to her son and daughter who have no attachment and wish to sell their mother’s share in the business.
Jody and Karen did not have an agreement (such as a buy-sell agreement) detailing how the process of the acquisition of the other’s half share would take place in such tragic or unforeseen circumstances. Since Karen’s death, Jody has struggled to run the operations of business, as well as administrative side Karen managed that area. Jody had no immediate desire to acquire Karen’s share, but may consider doing so ‘at a fair price’ in her eyes.
In this case, a business valuation would assist Jody and Karen’s children in achieving a successful settlement by providing a report detailing the worth of the business from which negotiations could commence.
The valuation of a business for the purpose of a probate application or deceased estate poses a unique challenges that is not faced (or even need to be considered) in other valuations – the death of a proprietor.
In many SMEs, there is likely to be a sole or joint proprietors, who wear all of the hats of CEO, COO, General Manager, Head of the Sales Department and so on. They have a strong rapport with both their customers and employees and (from a legal standpoint) are often the owner(s) and controlling party(s) of the corporate structure from which the business operates. In many respects, the proprietor(s) are the most important people within a business.
So, it goes without saying, that in deceased estate valuation, the major consideration for a business valuation expert is around the effect on the business following the death of a proprietor.
In some unique cases, the business may have time to plan for life after the individual. In these circumstances, the business valuer may need to understand:
Andrew says there may be the need for more than one valuation of a business asset during an estate administration. For estate purposes, the date of death valuation is what is used for the purpose of applying for probate. However, some estate administrations – particularly those that end up in dispute –can take a number of years to resolve. A lot can happen to a business throughout this administration period that can impact its value. An updated valuation will give a snapshot of the current business value for the purpose of settlement negotiations or the sale of the business to a third party.
The unique skillset possessed by forensic accountants can assist disputing parties in other ways throughout an estate dispute.
Forensic accountants are able to examine historical financial information, such as bank statements, to assist disputing parties in providing evidence to assist in settlement.
Jack, Jill and Mary are the three children of Henry. Henry was divorced more than 20 years ago (from his children’s mother) and entered into a de facto relationship with Kathryn. Kathryn and Henry were together for more than 15 years and lived in a house owned by Henry.
In his will, Henry left a life interest in the property to Kathryn (87 years old) but the equitable interest in the property to his three children. Kathryn is disputing the equitable interest, stating that she has funded a significant amount of the renovation and running costs of the property and that she should be entitled to an equitable interest. The three children disagree with Kathryn’s claim.
In this matter, a forensic accountant could be engaged to assist the disputing parties in determining the contribution made by Henry and Kathryn during the course of their de facto relationship in regards to Henry’s house to determine the legitimacy of Kathryn’s claim and assist in helping the parties reach a settlement.
Andrew believes that the change in the nature of the ‘typical’ family has brought with it a range of potential legal issues that arise when there is a death in the family. These issues can be magnified where there is a business involved. Andrew said that in his experience, it is always a challenge to balance the interests of the second partner with the expectations of children of the first marriage, particularly where one or more of the children are involved in the business.
To wrap up
