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Call us for further information on:
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0116 240 4402
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or alternatively email us at:
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ifa@greyfriars.co.uk
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Sole traders, partners and owner-directors will be concerned about the succession and continuity of their business in the event of the death of a co-owner. Similarly, they will be equally concerned about the financial security of their own family in the event of their own premature death.
Let us look at this in the context of an example. James and Phil are owner directors of their own trading company, each owing 50%. The company is worth approximately £1,000,000 on the open market and both James and Phil are concerned about what would happen in the event of one of them dying before disposing of his shares.
Both James and Phil leave their shareholdings under the terms of their Will to their respective spouses. Neither, however, would welcome the idea of their business partner’s wife joining them in the business in the event of one of them dying prematurely.
Indeed, both James and Phil would prefer that their spouses receive the market value of their shareholding at the time of their deaths giving them the financial freedom to continue their lives and bring up the family.
The problem is twofold; firstly, neither James or Phil has £500,000 available to purchase the shares and, secondly, there is no structure in place that would ensure a smooth transition of the shares from the deceased’s estate to the surviving director. In the absence of both of these elements, the preferred wishes of James and Phil cannot take place.
To ensure that their wishes can be met, the first element of the exercise is to ensure the appropriate funds are available. This generally means taking out a life assurance policy on the life of each director for the value of his shareholding. Clearly, this needs to be reviewed regularly as, at the point of death, any sale of the shares must take place at the appropriate market value at that time.
This policy should then be written under an appropriate trust wording to ensure that the proceeds are paid to the surviving director rather than to the estate of the deceased. In combination, this effectively ensures that the appropriate sum is paid to the correct person at the right time.
The two directors then need to enter into a Cross Option Agreement which is a legal document which ensures that, on the death of either party, the surviving director can enforce a sale of the shares from the deceased’s estate to him and the executors can force the purchase by the surviving director.
This is an option rather than a binding agreement to buy and sell, but either party can enforce this at the appropriate time.
In this way, the executors and the surviving director have the ability to enforce the sale and the funds that are available to enable this to happen.
We, at Greyfriars Asset Management LLP, have considerable experience in advising on the most appropriate life assurance contract, the correct trust wording and cross option agreements in these circumstances. We are also able to advise on the correct tax treatment on the payment of premiums to ensure full IHT efficiency.
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