What does 'automatic accrual of goodwill' mean in a partnership?

In the context of a partnership, 'automatic accrual of goodwill' refers to the treatment of goodwill related to a partner's exit or death. The correct interpretation is that goodwill accrues to the deceased's estate. When a partner dies, their share of the goodwill, which represents the intangible value of the partnership, becomes a part of their estate and can be passed on to their beneficiaries.

This means that the value of goodwill does not simply disappear upon the death of a partner but is recognized as a valuable asset of the estate. By transferring this goodwill to the deceased's estate, it ensures that the partner's contribution and the reputation built during their time in the partnership are acknowledged and can be compensated accordingly.

The idea that “no payment made to estate for goodwill” overlooks the significance of goodwill as an asset. Goodwill is intrinsic to the partnership’s value and should naturally be included in the estate's assessment. The absence of compensation for goodwill would not accurately reflect the financial realities of the partnership.