Think of share protection as key safety net

In challenging economic times it can be very opportune for business owners to take stock and check that they have addressed what might happen in the event of their death or serious illness. Admittedly we can all probably think of better topics for our “stare out of the window” moments of contemplation, but this is a necessary one.

Everyone should, of course, have a will but where two or more people own a business (either in partnership or as shareholders in a limited company) it is very important for both of them to think what might happen if one of them dies or becomes seriously ill.

I often talk to business owners who perhaps understandably foresee their family holding on to their share in the business in order to provide income and security after their death. However, there is no guarantee that it will do that and equally not everyone will wish to carry on in business with the family of a partner or shareholder who has died. The dynamics can be very different.

A common route to address this is what financial advisers call share protection arrangements.

It works by using life insurance (perhaps also coupled with critical illness insurance) in order to produce a capital fund to enable a surviving partner or shareholder to buy out the deceased’s interest in the business, thereby securing funds for the survivor to enable him or her to buy, and a capital sum for the deceased’s family representing the value of the share of the business which can be used to provide future income/security for the family (perhaps in addition to other life assurance or financial planning which may have been made for that purpose).

It usually works by each partner or shareholder taking out life assurance and then placing that insurance in trust for their business partners such that it is available to them to fund a purchase as described above. These arrangements need to be coupled with an option agreement to enable both the survivor to buy and the deceased’s executors to require the survivor(s) to buy, thus giving all parties the level of certainty which the arrangements are intended to create.

The life assurance and trust arrangements are usually generated by the insurance company or financial adviser but the option agreement is a vital document which will deal with key elements (including valuation of the share in the business) which a legal adviser is best placed to prepare. Putting share protection arrangements in place is therefore something on which financial advisers and solicitors work closely together and is certainly something worthy of consideration by most if not all business owners.

For further information or advice please contact Roger Sands Business specialist at Wolferstans on 01752 292316 or email rsands@wolferstans.com.