Business Succession Planning
If you co-own a business, whether as a shareholder in a private limited company or as a partner in a non-incorporated business, it is essential to have arrangements in hand to ensure that your share in it passes upon your death to an appropriate successor. It is surprising just how few business owners, or indeed their professional advisors, give adequate consideration to this important issue.
Having an up to date Will is of course an essential part of these arrangements, as is having a Power of Attorney so that your appointed attorney can deal with your affairs and assets if you should become incapable of acting during your lifetime.
However it is likely that you will want the value of the business that you have built up over the years to pass to your family, but for the business assets themselves to pass to your surviving business partners who have the expertise and interest to take it forward. If you leave your business assets to your family under your Will they can offer to sell those assets to your business partners, but will they have sufficient liquid cash to finance the purchase?
The usual solution to this problem is for each business partner to take out a life assurance policy to the value of their interest in the company or partnership. The policy is held in a simple trust for the benefit of all of their surviving business partners, in proportion to the stake that they own in the business.
This ensures that when a business partner dies the life policy proceeds are paid out not to their own estate but to the surviving business partners, who can then use the cash to purchase the business assets from the beneficiaries under the Will of the deceased partner. The business partners also sign a cross-option agreement, authorising this arrangment.
The result is that the family of the deceased partner receive the value of that partner’s share in the business, but the control and ownership of the company or partnership pass to the surviving partners. The advantage is that the business is not crippled by the withdrawal of a substantial cash sum required by the estate of the deceased partner.
It is important that the option in favour of the surviving business partners to purchase the share of a deceased partner is legally structured in the correct way (ie a ‘put and call’ option), so that there is no pre-existing contract to sell the share, as otherwise Business Property Relief for Inheritance Tax purposes may be lost.
If you have any queries regarding the issues referred to in this article please contact our Private Client Department.
