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What would happen to your business if you or your business partner died?
Is it realistic, or desired, for a spouse or child of a deceased partner to become a new part of the business? Or will the business have funds available to provide them with a replacement income to maintain their standard of living?
Business share protection can help to ensure the outcomes that you, your business partners and your respective families would prefer in the event of one of the business owners dying or becoming seriously ill and being unable to contribute to the business.
What is the aim of Business share protection?
In the event of the death (or a serious illness – see later) of a company’s owner, this type of insurance will enable surviving shareholders to purchase the deceased’s shares.
This can benefit the business, helping surviving owners to retain ownership and control and to minimise the impact of the loss on the business.
It also benefits the beneficiaries of the deceased; they benefit from cash rather than shares in a business in which they may have little interest.
How does it work?
One way is for each of the business’ owners to arrange a life insurance policy written in trust for the benefit of the other owners. This would be backed up by a ‘Cross Option Agreement’.
This agreement gives the personal representative of the deceased the option to sell the deceased’s shares to surviving business owners.
And it gives the surviving owners the option to buy the deceased shares from the personal representative. Plus, the life policy provides a lump sum for the business to pay for those shares.
Either party can exercise the Option, but if they do, the other party is bound by it. This provides security, knowing that either parties wishes will be catered for.
An alternative way to secure the business ownership for its remaining owners is to exercise a ‘Buy and Sell Agreement’. Again, a life insurance policy would fund a pre-agreed sale of the deceased’s shares to the remaining shareholders.
The downside for the deceased’s beneficiaries is that under a Buy and Sell Agreement, there would be no Business Property Relief available in the Inheritance Tax calculation on the estate – due to there being a binding contract for sale of the shares on death – which will mean there is a potentially a greater Inheritance Tax bill to be paid.
Death or Illness?
It is possible to arrange similar insurances that can help the business continue in the event of one of the owners being critically ill, which may mean they are no longer able to contribute to the business, or that they choose to re-prioritise how they spend their time.
The insurance policies would cover a situation where the insured was diagnosed with one of the critical illnesses covered by the particular insurance policy.
We will be happy to provide advice to business owners looking for this form of protection. Please contact John Croasdale, who can offer is expertise, on 0151 346 5460, should you have any questions, queries or just want to know more. John Croasdale
Financial Planning Director (UK) Alexander Beard Global Services Ltd