Would you have sufficient funds to purchase the share of deceased Director from his family?
Or would the business have to be sold?
If the business is sold by the deceased's beneficiaries, how much would this impact on their estate as their assets increase? How would it also affect the surviving business partner's assets as these too increase? Inheritance Tax could be waiting to take a big bite out of both parties' estates in the future, as a result of any Business Property Relief previously available to the company (whilst trading) now being lost.
With the sale of the business you risk losing 40% of the cash proceeds to the tax man!
Perhaps you have made some provision for this eventuality
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 have had the presence of mind to set up a Company Will and a Cross Option Agreement.
This means that the surviving business partner(s) has the right to buy out the deceased's share of the business and the proceeds of the life assurance policy could be paid to the surviving spouse or beneficiaries, in exchange for their inherited share of the business. Equally, the surviving spouse or beneficiaries would be able to exercise the right to sell this share, to remaining business partner(s) in exchange for either market value or an agreed amount covered by a life assurance policy.
But what about the impact 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 to be part of their estate. Whilst this share is held and the business continues trading then the assets could be exempt from Inheritance Tax if they qualify for Business Property Relief (BPR).
Once the Cross Option has been affected then BPR is no longer available on the proceeds; i.e. from any life assurance. The spouse's assets assessable for Inheritance Tax (IHT) have now increased by the funds received from the life assurance policy risking 40% of the proceeds to IHT, dependant upon the business size this could be a sizeable loss.
These assets are also 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 surviving business partners?
The surviving partner now owns 100% of the company - or does so if the business is still trading and BPR continues to be applied. However, if the business is sold their personal estate will be increased to include the proceeds from the sale. As for the spouse - they are now left wide open to attack from Inheritance Tax, creditors, bankrupty, divorce settlements and long term care costs.
How do Custodis Company Wills and Cross Option Agreements avoid these pitfalls?
Our experts take the Standard Planning Options available on the high street to a whole new level - creating business estate planning tailored to fit you and your business and estate needs.
We plan to provide the potential significant protection to your business and reduce the possible impact of Inheritance Tax dramatically. Furthermore, the business and proceeds from a future sale is protected by us for the bloodline from IHT, remarriage, creditor claims and nursing care/long term care needs.
We deliver the appropriate Life Cover assigned to 'Shareholder Trusts' so that these proceeds do not impact on the surviving individual estates.
Once the Cross Option has been executed, proceeds from any Life Assurance policy replace the share held in the deceased's Family Trust(s) and so do not form part of the beneficiary's estate. These funds are now protected against any of the risks named above and the surviving spouse and beneficiaries still have full access to the Trust assets.
So how does this benefit the remaining business partner?
He or she will still retain their original business share, but the deceased's partner's share is passed directly into a Shareholder Trust(s) from where the Life Assurance proceeds were originally paid. The surviving Director still has the fullest of control on the business as he is a Trustee of the Shareholder Trust(s).
Also an efficient Income Tax planning tool, the Shareholder Trust be used to distribute any dividends paid into it to beneficiaries of the trust, who may well have a low or nil Income Tax rate.
Should the surviving Director(s) decide to sell the business, only their original share will enter their estate. The remaining share will belong to the Shareholder Trust(s) for which he and his family are beneficiaries. This share is also protected and cannot be assessed for IHT purposes and provides protection from attack by long term care costs, divorce and bankruptcy.
