MANY business owners are not only worried about surviving the current economic shut-down, but ensuring financial security for their families in the event of their illness or death.
Never before has the need for structured business succession been so urgent, yet many remain unprepared.
There are no barriers when it comes to Covid-19, which continues to claim its stake regardless of age, gender or social background.”
One issue right now is the problem of a beneficiary who may have no interest in the business left to them but may be extremely interested in realising its value.
At a time of economic inactivity, when cash flow is key, finding the funds to buy out a non-participating beneficiary may not be an option.
To avoid such problems, business owners should (if not already) consider the viability of taking out a life assurance policy and then entering into a suitably drafted ‘cross option’ agreement.
Should an owner have such an arrangement in place, upon their death, fellow owners can exercise an option to buy the deceased’s interest from their estate. If they do not choose to do this, the deceased’s personal representatives have the option to sell such an interest to the surviving owners.
The funding of this cross option is dealt with by the life assurance policy which, once paid out, is held in trust for the remaining owners to pay for the deceased’s interest.
This not only allows the deceased’s beneficiaries to receive value in a panic-free manner, but it can also allow the share transfer to be eligible for business property relief and the proceeds of the policy to be exempt from inheritance tax.
If a cross option is being drafted we would also urge the owner to consider the price to be paid across for the business share.
Most well drafted agreements will allow that the ‘option shares’ (which could already be held by family members of the deceased) are transferred for "fair value". To do so, the amount of the sum insured in the policy would be reviewed annually.
It should be remembered that a life assurance policy will expire usually after five or ten years and the ‘cross option’ agreement should provide what would occur in that scenario.
The final consideration for all business owners is the issue of their will. It is imperative business owners ensure their wills are kept up to date and in line with what the cross options envisage.
We would recommend they consult their solicitor who can ensure that amendments made during lockdown will be valid. The company’s existing constitutional documents, should also, if necessary, be amended.
While reviewing such documents is not often top of the priority list, now more than ever, such a task could prove essential to ensure the future for many of our successful family-owned businesses.”
:: James Morrison (james.morrison@dwf.law) is partner (commercial) at law firm DWF Belfast
