Protecting Your Business Against Shareholder Death

The Problem
A shareholder’s business interest forms part of their estate and passes to their beneficiaries on their death, which could mean that running the business is also left to them.

The issues here are:

  • Beneficiaries may not want to try to run the business or may not know how to. However they will be entitled to the profits and capital.
  • Surviving shareholders may seek approval or consult from the beneficiaries regarding the decisions in business.
  • Beneficiaries may require that business profits are distributed as dividends which may not benefit the business.
  • Surviving shareholders may want to buy out the beneficiaries but may not have the resources.
  • Valuations of the business interest can make things difficult for the beneficiaries to sell the business interest if there isn’t a market for it, lumbering the beneficiaries with shares in a business they do not want nor can sell.

The Solution: Cross-Option Agreements

A cross-option agreement is the grant of put and each shareholder agrees that upon his death his fellow shareholder have the option, but not obligated to buying his shares and his personal representatives have the option, but are not obliged  of selling his shares to the surviving shareholders.

The method for valuing the business interest is outlined in the cross-option agreement and is usually based on market value.

 

Each shareholder takes out a life policy written in trust for the surviving shareholders to fund the deceased business interest under the cross- option agreement. The structuring matters like this means that its possible to ensure that the shareholder’s business interest qualifies for up to 100% business property relief from inheritance tax.

A properly-drafted cross-option agreement coupled with associated life policies ensures that a business can continue without having the uncertainty that a shareholders death can bring. It will also provide a tax efficient mechanism that the beneficiaries can extract value from a business.

For more information or to discuss your needs, please call John Ireland now

on 0208 547 2583 or email, john@legacy-wills.co.uk

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