The duties of professional advisers whose clients have controlling interests in family companies can be extremely onerous when the clients want to make gifts inter vivos of part of the holding with the rest being given on death.
There are many traps for the unwary solicitor, barrister or accountant caused by the unforeseen consequences of altering the balance of control and losing the client the ability to secure the continuing availability of reliefs, such as business relief, in relation to the shares.
A common scenario involves a client trying to take advantage of PET (potentially exempt transfer) legislation and making a substantial gift of shares to the company controller's son. This act, however, could have serious consequences for the beneficiaries of the estate if the shares are disposed of by the donee and the client dies within seven years.
Business relief may be lost with the result that the burden of tax recoverable from the estate will make it insolvent. The immediate result of insolvency will be to frustrate the client's intention to give his or her spouse financial security by a life interest in the company.
Insolvency itself may then make other inter vivos settlements or transactions voidable. Potentially, there could be a number of claimants alleging negligence, each with a deserving case.
There are further complications arising from other inter vivos gifts such as what used to be called, in equity, “portions” – early payments to set up one or other member of the family in life. In addition, the fact that a family's company shares may fluctuate in value over the period between advice, transaction, will and death, makes claims for so-called “losses” potentially colossal.
There are also problems over losing control of a company because of family disagreements. For example, if the client and his son fall out and the son sells his shares and leaves the country, the consequences may be catastrophic. Or the son might not willingly sell his shares but be forced to sell them because of a divorce settlement.
To avoid these potentially disastrous problems, the solicitor or other adviser involved must ensure that not only the incidence of tax between the donee and the donor/estate is expressly provided for, but that the consequences of an unforeseen disposition and death are dealt with, perhaps by insurance or by making certain that any transaction which may take place after the gift cannot result in a serious deficiency in the estate. Obviously, if the solicitor fails to draw up a watertight agreement, substantial claims for negligence could be made against him.
So it is crucial that these cases are approached with great care. Advice to a client cannot deal with PETs and inter vivos transactions in isolation from the will and advice must be given in relation to the plans for the whole estate.
These considerations raise a question about the direction in which the courts seem to be moving in finding professional liability where none was thought to exist before.
First, why is it “just” to allow recovery by an action brought by one family member in negligence against the professional and his insurance company while also permitting another beneficiary from the family to retain a benefit which the donor/testator never intended him or her to receive. This appears to allow enrichment of the “family” in unjust circumstances. Perhaps there should be a restitutionary right granted against the recipient.
Second, the extended liability of professionals not only raises the cost of seeking legal advice to the public, but it may also restrict the availability of advice to the client if there is a possibility that it may cause liability problems.
Unfortunately, it is unlikely that a waiver or exemption from liability from the client will protect the lawyer from claimants after the client's death. It is also difficult to fully insure against such claims.
Bearing in mind the colossal claims being made against accountants and solicitors it is striking that organisations representing the professions are not pushing for changes which would restrict liability and keep claims within reasonable bounds.
There is a clear difference between earning professional fees and being a participator in a commercial venture with a built-in risk/profit element. In the US, for example, law firms are now seeking limited liability through new limited liability partnerships (LLPs) and limited liability companies (LLCs).