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 eventually 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.
This would ensure 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 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 life assurance policy.
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.
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, which dependent on the size of the business could be a significant 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 the surviving business partner? With a standard Cross Option Agreement the surviving partner now owns 100% of the company.
This is fine whilst the business is still trading and whilst BPR is still applicable.
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, as for the spouse this leaves them wide open to attack from Inheritance tax, creditors / bankruptcy, divorce settlements and long Term care costs.
Many companies like ourselves offer business estate planning tailor made to suit you and your business.
It takes the Standard planning options available on the High Street a significant step further.
Wills planning provides the potential significant protection to the business and reduces the possible impact of Inheritance Tax dramatically.
Furthermore the business and proceeds from a future sale of the business is protected for the bloodline from IHT, remarriage, creditor claims, Nursing Care Fees.
Our Planning leaves each partner or director's share of their business to individual Family Trusts through appropriate Clauses written in to 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.
Once the Cross Option has been executed, the 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? 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).
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.
Should the surviving Director(s) decide to sell the business only their original share of the business will enter their estate.