Should I invest in Shareholder Protection?
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I run a small business with three other directors – we are also the only shareholders. We had a bit of a scare recently when one of the directors had a heart attack and very nearly died. He has now recovered, thank goodness, but it has made us think about how we would fund paying our heirs for their share of the business so that we keep control. What would you advise?
Douglas Bridges of Smith & Pinching responds:
It is certainly a good idea to plan for this scenario. There is a specific type of insurance that may be suitable for you, known as Shareholder Protection. This can be put in place alongside a Shareholder Agreement that sets out what will happen to a shareholder’s holding in the event of their death.
The existing shareholders of the company take out the shareholder protection policy and pay the necessary premiums. Trust arrangements are set up within the policy alongside an additional agreement known as a Cross-Option agreement which covers the lives of all the shareholders.
Shareholder Protection will provide a lump sum on the death of one of the shareholders, which can be used to buy the deceased shareholder’s share in line with the terms of the Shareholder Agreement, such as dividing the deceased shareholder’s holding between the remaining shareholders or passing it to a named new shareholder.
The lump sum can then be used, through the Trust and in line with the Shareholder Agreement, to recompense the deceased shareholder’s estate to pass on to his or her heirs. This type of policy gives protection to both the fellow shareholders and the deceased shareholder’s heirs in that it allows the capital value of the shareholding to benefit the deceased shareholder’s estate and provides the remaining shareholders the funding necessary to buy his or her share.
Both Shareholder Protection Insurance and Shareholder Agreements can be complex so I strongly recommend that you get legal and financial advice when setting them up.
As directors of your business, you might also want to think about the business impact of one of you suddenly not being able to work because of illness or death. Key Person Insurance is designed to support a business while it recovers from the loss of someone who is critical to its profitability.
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I think it would be really useful for you to have a business protection review with an independent financial adviser to ensure that your business has measures in place to enable you to cope with anything that life may throw at you.
This is a marketing communication. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk