What Happens to a Partnership Interest When You Die?

Where a partnership has no written agreement, or its agreement does not address what happens on death, the default rule under the Partnership Act 1890 is that the partnership dissolves on the death of any partner. This means the business as a legal partnership comes to an end, its assets in principle need to be realised, and its debts settled, even if the surviving partners would much rather simply continue trading together.

This default rule catches out a surprising number of small partnerships that have never formalised their arrangement in writing, often because the business started informally between friends or family and no one thought to document what should happen in this situation.

A well-drafted partnership agreement will typically provide that the partnership continues between the surviving partners despite the death of one partner, avoiding automatic dissolution, and will set out a mechanism for valuing and paying out the deceased partner's share, often based on the partnership accounts or an independent valuation, with a specified timeframe for payment.

If your partnership does not have an agreement, or its existing agreement is silent or unclear on death, this is worth addressing urgently with your fellow partners, since it affects not only what happens to your own estate but the continuity of the business your partners depend on as well.

Generally, what passes to a deceased partner's estate is not a right for someone else to step into their shoes as a partner, since existing partners are not obliged to accept a new person into the business relationship, but rather the financial value of the deceased's share of the partnership, calculated according to the partnership agreement or, in its absence, general partnership law.

This value can include a share of partnership capital, undrawn profits, and goodwill if the agreement provides for this, though goodwill is often excluded or given a nominal value in smaller professional partnerships. Because this can significantly affect how much an estate actually receives, it is worth understanding exactly how your own partnership agreement values a departing partner's share.

Paying out a deceased partner's share can put a significant strain on a partnership's cash flow if funds are not available or planned for in advance. Life insurance held by, or for the benefit of, the partnership, sometimes structured through a cross-option style arrangement, is a common way to make sure funds are available to pay the deceased's estate promptly without forcing the surviving partners to sell business assets or take on unwanted debt.

This kind of arrangement needs to be set up carefully, coordinated with the partnership agreement, and reviewed periodically as the value of the business and its partners' shares change over time.

Your will should be consistent with what your partnership agreement actually provides, rather than assuming your partnership interest will simply pass as you wish. If your agreement entitles your estate only to a cash payout, your will should deal with that payout as an asset of your estate, rather than attempting to leave 'my share of the partnership' to a specific person as though it were a right to become a partner.

Because partnership succession touches company law style issues, valuation, tax and the interests of other people who are not party to your will, this is an area where a solicitor's advice is particularly valuable, both when setting up or reviewing a partnership agreement and when making sure your own will fits with it.