By David Robinson
What would happen to your business on your death or incapacity? What would happen to your and your family's interests in the business?
None of us like to think of a time when we may no longer be here - when we take up our seat in the Board Room in the sky! But planning for the inevitable is a crucial part of business and wealth protection - for the sake of both family and business.
We may be familiar with the need to make a Will or even a Lasting Power of Attorney (possibly from assisting elderly relatives or in the event of incapacity). But we are likely to be far less familiar with other ways to address succession and wealth protection issues in relation to a business.
One way is by means of Cross-Option Agreements. This arrangement is relevant to all types and sizes of family businesses, from those with two shareholders to those with multiple shareholders/partners.
The objective of the arrangement is to ensure that on the death of a shareholder or partner;
- The succession of the business is secure; and
- The deceased's family is provided for by receiving payment for the deceased's interest in the business.
Under the arrangement, the deceased's interest in the business goes to the surviving business partner, and the deceased partner's family receives payment for that interest. This means that the surviving business partner can continue the business while the deceased's family is left with a cash sum. This is achieved by each of the business partners taking out life assurance on their respective lives. The life cover is then put in trust by each of them in favour of the other.
On the death of a shareholder/partner, the life policy proceeds pass to the survivor creating a cash fund to pay to the deceased's family in consideration of the transfer of the deceased's interest in the business to the surviving shareholder/partner. Often, these arrangements are put in place and forgotten about. The death of one of the business owners is not an easy subject to discuss (and that's the Elephant!), but as the value of the business grows, it is important to review the level of the life cover - perhaps every two or three years - to ensure that the cash sum generated on death will be sufficient to fund the purchase of the deceased's interest in the business.
Another factor to consider here is to ensure that any corporate documents put in place to confirm what happens on the death of a shareholder are mirrored in a Will. Similarly, company documents should address what happens in the event of incapacity, which again is mirrored in a (business) Lasting Power of Attorney. Failure to put these documents in place could lead to a costly and expensive alternative, during which time assets will likely be frozen.
Fletcher Day takes a holistic approach to all of these issues. Our experienced corporate and private client lawyers can carefully explain the issues and guide you through the complexities straightforwardly and practically. Please contact David Robinson (Corporate) or Elena Tzialli (Private Client) for an informal, friendly chat for more information.
The important message is - for the sake of both business and family, don't ignore the elephant in the room!