Partnership / Director Share Protection: Willis Insurance Belfast

Financial Services - Business

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 dependants 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.

Partnership Protection

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

Case Study

Richard Black is a company director of a haulage company and has a 25% shareholding worth £500,000. The company is valued at £2,000,000 and has three other directors who also have a shareholding of 25% each. Richard has a heart attack and dies. We look at what happens with and without business ownership protection.

With Ownership Protection

Richard and the other three directors of the company took out a Shareholder Protection Arrangement. They were each insured for an amount of £500,000 to cover death, and the insurance policies were put in trust for each other’s benefit. They also arranged for their Articles of Association to be amended to state that the shareholding of the deceased director could be purchased from his estate.

Upon Richard’s death his insurance company paid out a sum of £500,000 to the trust. This amount was passed to the surviving directors by the trustees allowing them to purchase Richard’s shares from his family. This meant that the directors were able to keep control of the company and each now had a 33% shareholding. Richard’s family had not wanted to become involved in the business, and the share payment helped ease their financial loss at a difficult time.

Without Ownership Protection

Upon Richard’s death the three remaining directors would have had to raise the funds to purchase Richards’s £500,000 share in the company. They may have to take out a loan to finance this, which the company may not have been able to afford, resulting in financial difficulties for the business. Failing this, Richard’s family would retain his 25% share, whereas they may have preferred to receive a lump sum rather than become involved in the running of the company.

At Willis and Company (Financial Services) we can help you assess the financial provisions you need to put in place to support prudent business protection. We can also help to explain what can often seem a complicated situation in a clear and easy to understand way.

If you would like further information on protecting your business assets, please contact the Willis Financial Services team on 028 9032 9042 or complete our enquiry form.

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