Shareholder Protection
The sudden death of a shareholder in a private limited company can cause problems for both the surviving shareholders and the family of the deceased shareholder.
For example, the surviving shareholders could lose control of the business as they may find themselves working with the deceased’s family. And as for the deceased’s family, they may be left with a share in a business, an illiquid asset but with little or no income.
Life assurance can provide a solution to these problems by providing liquid capital on the death of a shareholder to enable.
- the surviving shareholders to retain control of the business as the deceased’s shares are bought back by the company, and
- the family of the deceased shareholder to realise their shares for cash, shortly after death.
The solution outlined above can be achieved in one of two ways
PERSONAL SHAREHOLDER PROTECTION
- The shareholders enter into a personal legal agreement with each other to “buy out” a deceased shareholder’s shares in the event of his death.
- To provide the funds to fulfil their personal obligation under the legal agreement each shareholder personally effects life assurance cover which is payable to the surviving shareholders on his death.
- The surviving shareholders can then use the proceeds of the life assurance plan to “buy out” the deceased’s next of kin in line with the legal agreement.
- The “Personal” arrangement is relatively simple to arrange and the legal and taxation issues are straightforward.
- The main drawback of this solution is that the cost of the arrangement is borne personally by the individual shareholders out of “after tax” income. If the company funds a “Personal” arrangement the cost is treated as a “benefit in kind” for each shareholder.
CORPORATE SHAREHOLDER PROTECTION
- The company enters into a put / call legal agreement with each of its shareholders to buy back shares from their personal representatives in the event of death.
- The company takes out a life assurance plan on each shareholder, to provide funds to enable the company to fulfil its obligation under the legal agreement.
- In the event of death, the proceeds of the life assurance plan are payable to the company to be used to buy back shares from the deceased’s next of kin in line with the legal agreement.
- The major advantage of the “Corporate” arrangement is that the cost is borne totally by the company because the plan proceeds are for the benefit of the company – with no “benefit in kind” implications for the individual shareholders.
- However, this option is complex to set up due to the fact that certain company law provisions must be satisfied and formal approvals are required.
- In addition there are a number of conditions that must be satisfied to ensure the buy back of shares from the family of a deceased shareholder can be achieved in a tax efficient manner, thus making it unsuitable in certain circumstances.
The following table is a quick comparison of both arrangements which may assist you.
