Why business protection makes sense

According to a recent survey from an Irish Insurance Company the majority of business directors and partnerships leave their business vulnerable to the financial consequences of the death of a key person in the business, by not having provisions in place to deal with this situation. The Business Protection experts say that one of the most critical risks to a small business namely, the death of a key member of staff, is being overlooked by many – until it’s too late.

The survey of directors indicated that almost 50% of business leaders haven’t considered putting business protection in place because they are simply unaware of its existence, while 40% of those that don’t have it in place, considered it unnecessary.

Few business directors or partners may consider or are aware that the family of the deceased would probably inherit the deceased’s share in the business. As such, they will expect to be bought-out or participate and profit from the business on an immediate and on-going basis. With the current restricted access to credit, a buy-out of their share would seem an unlikely outcome – while the alternative could be that the deceased spouse would become engaged in the day to day running of the business – which is often very challenging or indeed, sometimes actually unworkable.

We at Cathedral Financial Consultants Ltd feel that business advisors such as solicitors and accountants are well placed to promote this integral insurance to their clients.

Why Business Protection makes sense?

• On death the shares of a deceased director/partner form part of their estate.
• Those who inherit the shares may not want to get involved in the business or conversely the surviving directors/partners may not want the next of kin to come into the business.
• The most feasible option is to sell shares back to the surviving directors/partners’.
• This would require the directors/partner to produce a substantial lump sum.
• The solution is business protection – an arrangement can be put in place whereby on the death of a director/partner, funds become available to buy shares back from the next of kin.

It won’t happen to our company

The odds of one shareholder dying or becoming seriously ill before retirement are probably higher than you think.

Source: mortality tables (AM92) published by the Institute of Actuaries (UK)

How It Works

• With Business Protection, the company/partners enters into a legal agreement with each of its directors/partners to buy back shares from their personal representatives in the event of death.
• The directors/partners takes out a life assurance policy on each shareholder, to provide funds to enable the directors/partners to fulfill its obligation under the agreement.
• In the event of death, the proceeds of the life assurance policy are payable to the directors/partners to be used to buy back shares from the deceased’s next of kin.

Case Study

• Shane and Mary have 2 children.
• Shane part-owns a business with Tom valued at €500,000.
• Shane met with Cathedral Financial Consultants Ltd and identified the exposure to both his surviving business partner Tom and his next of kin Mary, in the event of his untimely death.

The Solution

• Cathedral Financial Consultants Ltd helped Shane and Tom formalise what would happen if either of them died. They agreed that on death, the survivor will buy the deceased partner’s share of the business from his family.
• Shane and Tom took out a Business Protection plan that pays €250,000 to the surviving business partner – If Shane dies, Tom receives €250,000 and vice versa.

The Result

If Shane dies:

• Tom receives €250,000 and uses it to buy Mary out of the business. He retains control of the business.
• Mary receives €250,000 from Tom.

If Tom dies:

• Shane receives €250,000 and uses it to buy Tom’s share of the business from his next of kin. As a result, Shane retains control of the business.

There are two categories of Business Protection

1. Company Insurance – for limited companies.
2. Partnership Insurance – suitable for businesses such as solicitors’ practices or any other partnerships where the partners are assessable for income tax under Schedule D Case 1 or 2.

Supporting Documentation

Depending on which category is chosen, there are legal and tax requirements to be fulfilled. This is to ensure, amongst others, that the policy proceeds receive favourable tax treatment.

Legal Agreements

Share Buy Back Agreements – this needs to be put in place to ensure that surviving directors/partners ‘buy back’ the shareholding from the next of kin and that the next of kin agree to ‘sell back’ the deceased shareholding to the surviving directors/partners.

Declaration of Trust

In most business protection arrangements, each policy is arranged under trust so that on death, the proceeds are payable directly to the trustees for the benefit of the surviving directors/partners.

All premiums quoted are the most competitive quotes from all life companies operating in the Irish Market.

Ask Yourself

• How would your business survive if one of the business owners became seriously ill or died?
• If your business partner died what would happen to their share of the business?
• How would you feel about a shareholder’s family joining your business if he/she died suddenly?
• If you died what would happen to your share of the business?
• Are your spouse or children in a position to take your place in the business?
• How will your family survive financially?