As a company director, shareholder or partner your business is often one of your major assets. It is therefore important to safeguard the ownership of the company in the event of the death of either you or one of your business partners.
Have you thought about what would happen if one of you were to die or become critically ill?
Would the remaining partners or shareholders have sufficient funds to buy your share in the business?
Would your dependents want to sell your share or become involved in the business?
If you or another owner of the business became critically ill, could somebody else purchase your share so that you could give up work?
You can ensure that the future of your business is taken care of by taking out either a Partnership Protection Plan or a Shareholder Protection Plan depending on your company status. This involves a legal agreement regarding future ownership of the business in the event of the death or critical illness of either you or another owner in the business. This is known as a cross option agreement.
This is also known as Partner Protection Insurance, Partner Share Protection or a Share Protection Plan. By taking out this type of plan you can ensure that if a partner dies the remaining partners will receive a lump sum from the insurance company to enable them to purchase his share of the business.
With succession planning of this nature you should take out a Share Purchase Agreement as well as life insurance. This agreement would stipulate that the partnership will continue. Without this type of agreement in place, if one of the partners was to die the partnership would become dissolved, in accordance with the law in England, Wales and Northern Ireland.
The procedure is as follows:
- Set up life insurance for each partner with a sum insured equal to their share in the business.
- Put the policies in trust to avoid tax implications when you receive the lump sum payout.
- Set up a Cross Option Agreement, which will facilitate purchase of the deceased person’s share of the business by the remaining partners.
Advantages of Partnership Protection
- If the deceased’s family do not wish to become involved in the business they can receive a lump sum instead for payment of their share of the business.
- It will provide sufficient funds to enable the surviving partners to purchase the deceased’s share of the business.
- It can prevent the purchase of the deceased’s persons share by somebody who does not act in the best interests of the business.
Shareholder Protection
With a Shareholder Protection Plan (or an Ownership Protection Plan) you can ensure that if a major shareholder of your company dies, the remaining shareholders will receive a lump sum payout to enable them to purchase his share of the business.
Share Protection Insurance is normally accompanied by a Cross Option Agreement that will stipulate that if a major shareholder dies, the other shareholders will be able to purchase his shares in the business. This will enable them to keep the company running smoothly.
The procedure is as follows:
- Set up life insurance for each director with a sum insured equal to their shareholding.
- Put the policies in trust to avoid tax implications when the remaining shareholders receive the lump sum payout.
- Set up a Cross Option Agreement which will facilitate purchase of the deceased person’s shareholding by the remaining company directors.
Advantages of Shareholder Protection
- If the deceased’s family do not wish to become involved in the business they can receive a lump sum instead for payment of their shareholding.
- It will provide sufficient funds to enable the remaining directors or shareholders to purchase the deceased’s share of the business.
- It can prevent the purchase of the deceased’s persons share by somebody who does not act in the best interests of the business.
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