How to Preserve my Business Assets for my Family?
How to Preserve my Business Assets for my Family?

Hard work and dedication has meant that you have built up a sound business to benefit you and your family, and naturally, you would want your family to be provided for in the event of your death.  So what if the worst should happen and either you, or a business partner were to die?

Without the appropriate business succession strategies:

  • Your spouse/partner and children may not inherit your shares of your business.
  • Business partners may not be able to buy out the deceased's shares.
  • The surviving spouse or children may not be obliged to take over the running of the business.
  • The value of the business could depreciate owing to the inexperience of any beneficiary.
  • The business may have to be sold and the proceeds become liable to inheritance tax.

Without a valid Will, the deceased's shares would be subject to the laws of intestacy, and the person who inherits the shares may not be the person you intended.  Would you or your business partner be content to run the business with the surviving spouse or their beneficiaries?  This could have a major impact on the running of the business, or the value of the business may now go down following the death of such a key person.

Many spouses would probably not want to be burdened with the running of a business they may know very little about.  For instance, if there are young children to care for and provide for then the surviving spouse might prefer to be bought out.  Would there be sufficient funds in the business to purchase the deceased director's shares? or would the business need to be sold?

You may feel that you have prepared for the worst and taken out sufficient life cover to protect all parties' shares of the business.  You may even have set up a company Will and cross option agreement.   This would ensure that the surviving business partners have the right to buy out the deceased shares of the business.  The life insurance could be used to pay the surviving spouse or beneficiaries in exchange for their inherited shares.  

But what about the impact that, a standard cross option agreement has on someone's estate??

If you or a business partner dies their share will pass to their spouse or beneficiaries through their Will.  This is now deemed as part of their estate.  Whilst this share is held and the business continues trading then the asset could be exempt from inheritance tax if they qualify for Business Relief (BR).  Once the cross option agreement has been effected the BR is no longer available on the proceeds i.e. from the Life Assurance.  The spouse's assets assessable for inheritance tax have now increased by the funds received from the life assurance policy risking 40% tax of the proceedings to inheritance tax.  Depending on the size of the business this could be a significant loss.

These assets are now at risk from attack from any future Remarriage Claims, Creditors, or Bankruptcy and Long term care costs.

What about the consequences a standard cross option agreement has for the surviving business partner??

With a standard Cross Option Agreement, the surviving business partner now owns 100%  of the company.  This is fine whilst the business is still trading and whilst BR is still applicable.  However, what would happen when they decide to sell the business?

Now their personal estate will be increased to include the proceeds from the sale.  This leaves the spouse wide open to attack from inheritance tax, creditor claims divorce settlements, and long term care costs. 

So how do our Wills & Cross Option Agreements differ?

Our planning provides significant protection to the business and reduces the possible impact of inheritance tax dramatically. Furthermore, the business and proceeds from the future sale of the business are protected for the bloodline from IHT, Remarriage, Creditor Claims, and long-term care fees.  Our planning leaves each partner or director's share of their business to individual family trusts through appropriate clauses written into their wills.  Furthermore, the appropriate Life Cover will also be assigned to Shareholder Trusts so that these proceeds do not impact on the surviving individual estate.

So how does this benefit the remaining business partner?

The surviving business partner still retains their original share of the business but the deceased's partner's share is passed directly into a shareholder trust from where the life assurance proceeds were originally paid.  The surviving director still has the fullest of control over the business as he is a trustee of the shareholder trust that holds the shares from the deceased partner.

The shareholder trust(s) can also be utilised as a further efficient income tax planning tool.  Now that a proportion of the business is in the shareholder trust any dividends paid into the trust could be distributed to beneficiaries of the trust who may well have nil or low rate income tax bands.

Should the surviving director(s) decide to sell the business, only their original share of the business will enter their estate.  The remaining shares will belong to the shareholder trust for which he and his family are beneficiaries.  This share is also protected and cannot be assessed for inheritance tax purposes or be at risk from attack by long term care costs, divorce,  or creditor claims/bankruptcy.

For more information on how Strategic Wills can help your business please contact us directly on 01249 704863 or visit the website for lots more information 

Information provided by Countrywide Tax & Trust Corporation.

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