Preserving Business Assets for Family

Without the appropriate business succession strategies, your spouse/partner and children may not inherit your share of a business. Business partners may not be able to buy out the deceased’s share. The surviving spouse or children may 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.

Challenges Without Proper Succession Planning

Hard work and dedication have meant that you have built up a sound business to benefit you and your family, and naturally, you would want to ensure that your loved ones are 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?

Ensuring Continuity for Your Loved Ones

Who would actually be entitled to this share of the business? Without a valid Will, the deceased’s share would be subject to the Laws of Intestacy, and the person who inherits may not be the person you intended.

Importance of a Valid Will

Would you or your business partner be content to run your business with their 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.

Implications of Business Partnerships

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 even have had the presence of mind to set up a Company Will and a Cross Option Agreement.

Preparation with Life Cover and Legal Agreements

This would ensure that the surviving business partner/s have the right to buy out the deceased’s share of the business. The proceeds of the Family 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 their right to sell this share of the business to the remaining business partner/s in exchange for either the market value or an agreed amount covered by a Family Life Assurance Policy.

Impact of Life Assurance and Cross Option Agreements

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 to be part of their estate. While this share is held and the business continues trading, then the assets could be exempt from Inheritance Tax if they qualify for Business Relief (BR). Once the Cross Option has been effected, then BR 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. Depending on the size of the business, this could be a significant loss.

Considerations with Cross Option Agreements

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 the surviving business partner? With a standard Cross Option Agreement, the surviving partner now owns 100% of the company. This is fine while the business is still trading and while BR is still applicable.

Implications for Surviving Business Partner

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, creditors/bankruptcy, divorce settlements, and long-term care costs.

Future Implications for the Surviving Partner

Would they even want to be involved with the running of the business? 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.

Considerations for Spouse Involvement

Would you have sufficient funds to purchase the deceased director’s share from his family? Or would the business have to be sold? If the business is sold by the deceased’s beneficiaries, how 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? Both parties’ estates could be impacted by Inheritance Tax in the future, having now lost any Business Relief previously available while the company was still trading. With the sale of the business, you risk losing 40% of the cash proceeds to the Tax man.

Financial Considerations

So how do Wills and Cross Option Agreements differ? Tailored Business Estate Solutions can provide significant protection to the business and reduce the possible impact of Inheritance Tax dramatically. Furthermore, the business and proceeds from a future sale of the business are protected for the bloodline from IHT, remarriage, creditor claims, and nursing care fees.

Benefits of The Solution

This solution 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 estates.

Protection Through Family Trusts

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(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).

Benefits for the Surviving 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(s), any dividends paid into the Trust(s) could be distributed to beneficiaries of the trusts who may well have nil or low rate Income Tax.

Tax Planning with Shareholder Trusts

Should the surviving Director(s) decide to sell the business, only their original share of the business 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 or be at risk from attack by long-term care costs, divorce, and creditors/bankruptcy.

Maintaining Asset Protection

In essence, by structuring the estate in this manner, you can ensure that the business remains intact and protected for the benefit of your family. This approach not only safeguards against potential tax implications but also shields the assets from various risks such as remarriage claims, creditor actions, and long-term care costs.

Final Thoughts

Remember, the decisions you make today can have a profound impact on the legacy you leave behind. Therefore, it’s essential to seek professional advice and carefully consider your options to ensure the continued success and prosperity of your business for generations to come.