This month, I wanted to touch on a rather gloomy topic focussed at business owners who have dedicated their lives to building their businesses. Owners who have a significant portion of their wealth tied up within their businesses carry the risk that should they pass away before retirement, their beneficiaries may not benefit from the full value of their labour. While extracting profits and wealth out of the business in a sensible and measured approach will allow you to build up personal wealth outside of your business interest, having the correct business assurance in place could add that extra layer of protection should you pass away before sufficient private wealth has been built up or should your beneficiaries have no desire to continue on with your legacy. Below is some further reading on how a well-structured business assurance policy could benefit your estate planning.
If you have a large portion of your accumulated wealth invested in your business, a correctly structured business assurance policy can be used as a very effective estate planning tool. If you own a share of a business together with other shareholders, your share of the business would form part of your estate should you die. However, for a number of reasons, this is not always ideal. Firstly, your heirs may have no interest in being involved in the business, nor have any expertise to take over your position. Secondly, your business partners may wish to purchase your share of the business and may not want your beneficiaries involving themselves in their business dealings. Also, your beneficiaries may prefer to receive the value for your business interests so that they can invest the proceeds to generate an income.
Business assurance is, therefore, an effective way of ensuring the succession of your business and that your heirs receive full value for your business interests, while not unnecessarily increasing estate duty. While the proceeds of domestic life policies are considered deemed property in a deceased estate, the proceeds of correctly structured business assurance policies are excluded.
Business assurance involves taking life and/or disability cover on the life of the shareholders to the value of their respective shares. In the event that one shareholder dies, the policy will pay the proceeds to the surviving shareholders which will allow them to purchase the deceased shareholder’s shares. The result is that the family of the deceased shareholder will receive the full value of the deceased’s business interests, while the surviving business owners can continue running the business without interference from the deceased’s heirs.
In order to have a properly structured business assurance policy, there are a number of criteria that must be met including the signing of a buy and sell agreement. The agreement must set out the details of what will happen with a shareholder’s business interests in the event of death (or disability, if relevant), as well as details of the funding mechanism to be used to purchase such interests. For the policy not to be included for estate duty purposes, it is important that the policy is taken out by a person who is a co-owner of a business, and that the policy is specifically to be used to purchase the deceased shareholder’s business interests. Also, the policy must not be paid for by the insured shareholder.
Should you require further information around business assurance, please do not hesitate to get in contact with me or your RWM Wealth Manager.