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Smart directors insure their most valuable assets
Why insure shareholders & key personnel?
Owning a business can be a very rewarding experience. But when an owner, partner or key person dies (or falls seriously ill) devastating consequences for the business can result if an adequate and sensible strategy has not been planned for!! - this is where shareholder and keyman business protection proves iinvaluable.
What actually happens to the business will depend on the type of business that you have and its legal entity.
The most common structures are :
• Sole trader
• Partnersh
• Limited company
Preventing a company collapse
Unless there has been some advance planning, the chances are that what remains may simply collapse or worse still end up in the wrong hands.
If you are a business owner, business life assurance is vitally important.
It is a simple process of planning for what you want to happen if you or your co-owner (if you have one) die or fall seriously ill.
Lets look at each of the business structures below.
Types of businesses
• A sole trader's business will automatically comes to an end. The business may still have a value – stock, buildings, or assets such as equipment and vehicles and goodwill, but the business itself will legally cease.
• A partnership may come to an end if the partnership agreement does not set out that the business should continue - its a sad fact too that most partnerships fail to even effect a partnership agreement.
• A limited company continues but the shares held by the business owner will pass on to beneficiaries through their state.
These scenarios are invariably not the outcomes that you would seek.
Watch the following videos to learn more about keyman insurance and how it can protect your business.
The Dean Stockwell video clearly demonstrates what the impact of a sudden stroke can have on both the individual and the business - at aged just 47, Dean Stockwell was that person - essential viewing for all business owners.
Business structures
The issues facing sole proprietors, partnerships and limited companies are similar in concept but there are significant differences between each of them.
In order for you to gain an understanding of these differences click the buttons below.
Stress can be all consuming
Issues for sole traders
When a sole trader dies, the business dies with them. The business’s assets will form part of the sole owner’s estate and pass on to beneficiaries under the terms of their will.
If the owner has not made a will, the laws of intestacy will apply – in effect, the state lays down who the estate should pass to.
If the estate is large enough (in the UK and over £325,000 in 2019/20, including the value of any homes, business and other assets) and is not left to a spouse or civil partner, inheritance tax (IHT) is payable on all assets above £325,000.
However two issues can arise:
• Having to pay the Inheritance Tax bill (IHT) - life assurance can be invaluable in this respect
• Passing on the business - perhaps to an employee or business partner - a suitably drafted Will should be organised for these purposes.
Always ensure a Partnership Agreement is in force
Issues for partnerships
A partnership is a business owned by two or more people. Unless specific provision is made in the partnership agreement (and very many partnerships have no formal agreement), the partnership will cease on the death of a partner. When that happens, the deceased partner’s estate becomes entitled to their share of the business.
• The remaining partner or partners pay the deceased partner’s estate a sum of money agreed to be the value of the deceased partner’s share.
• The surviving partner or partners and the deceased partner’s beneficiary carry on in business together – perhaps with the new partner having little interest or skills in the business.
For example, John and Jane are in partnership and Jane dies. Jane’s sole beneficiary, her daughter Kylie, is keen for the business to continue, and so is John, who could not afford to buy out Kylie’s interest anyway.
Unfortunately, Kylie is unable to play any active part in the business, and John resents having to split the partnership’s income with a sleeping partner who contributes nothing other than capital to the business.
The solution
Two main options are available to meet such needs, and are illustrated below using the example of a simple two partner business owned by A and B. (Other options are available, but are generally not as attractive):
• A double option agreement - Under this agreement, the surviving partner has the option to buy the share in the business from the deceased partner’s estate – in other words, they can make the estate sell the share. The deceased partner’s estate can also exercise an option to force the surviving partner to buy. There must be an agreed basis for valuing the business.Generally, each partner takes out a life insurance policy on their own life, written under trust to benefit the other partner.
So if A dies, B can decide to buy out A’s share from the proceeds of the policy on A’s life.
• Automatic accrual - On A’s death, the business passes automatically onto B. No buyout is involved. Instead A’s beneficiaries get the proceeds from a life insurance policy A took out on his or her own life, written in trust for his or her beneficiaries.
The end result of both solutions is that the remaining partner continues to run the business and the deceased partners’ beneficiaries receive a fair price. Without these arrangements, the business could be in danger and the beneficiaries might receive little or nothing.
Angry Board members
Issues for limited companies
Companies continue after a shareholder’s death, but the basic succession issues are similar to those facing a partnership. The key is to make sure that the shares end up with the surviving shareholders and that the deceased shareholder’s family receive the monetary value of those shares in cash.
Generally, the deceased shareholder’s beneficiaries will want financial compensation in return for their shares, assuming that they do not plan to continue in the business.
The solution
A double or cross option agreement is often used for company shareholder succession planning.
If shareholder A dies, their beneficiaries can require the remaining shareholders to buy them out or the remaining shareholders can require the beneficiaries to sell their shares.
To provide the funds, each shareholder takes out an own life policy written under a special business trust to benefit the other shareholders.
Cross Option Agreement
Serious illness
It is not just the death of a business owner that can stop a business. If a business owner suffers a critical illness such as a heart attack, stroke or cancer, it may not be possible to continue in the business either temporarily or permanently as in the case of Dean Stockwell in the video above.
A suitable critical illness insurance policy is probably the best way to provide protection against the financial consequences of having a serious illness. These policies pay a cash lump sum upon diagnosis of a range critical illness's or disabilities.
The policies are normally written in trust for the other business owners, and there needs to be a formal legal agreement between the business owners about the circumstances in which the share in the business should be transferred.
What should I do now?
Start the process of protecting your livelihood and your business and contact us today.
We help advise, guide and effect the plans that you need to ensure your business interests are safeguarded.