It will never happen to me - will it?
Looking at the evidence, you could be forgiven for assuming that business owners never fall seriously ill or die.
Most companies make sure they have public liability insurance and cover for contents, fire and theft. And one would expect anyone running a small to medium sized company to recognise that the serious illness or death of a key person would have a potentially devastating effect on the business, not least to its value and profitability.
Yet when it comes to key people, many adopt a high risk strategy by doing absolutely nothing about cover at all.
Without question, the consequences of such inaction are potentially dire. What would happen, for example, if the business owner or major shareholder became seriously ill or died?
Let’s take the case of two shareholders, A and B. They spend all their time in the business and then suddenly, A dies. Who would acquire the shares previously owned by A? Has A made a Will? Would the shares go to A’s spouse, children – or someone else?
Shareholder B could now be in a very difficult position. Will B be able to carry on running the company as he or she wants? Who will exercise the voting rights of the shares previously held by A? Even if the person inheriting the shares wants to sell them, could B afford to buy?
It could be more bad news for A’s family as well. What if B cannot afford to buy the shares – or doesn’t want to? Where does that leave A’s family? They could be ‘locked in’ to a company with no real prospect of any income or other financial support at a time when they need it most.
Given that serious illness, such as cancer or a heart attack, affects one in four women and one in five men before retirement age*, potential scenarios like these are not uncommon. Yet the problems facing A and B could all have been perfectly ironed out if the right safeguards had already been put in place.
Share purchase and partnership protection ensures business succession as well as the safeguarding of commercial interests and family legacy. This protection provides funds to allow remaining business owners to buy the shares of the business from the outgoing or deceased owner. By putting this simple arrangement in place, capital is available to help purchase this person’s interest.
So in the cases of shareholders A and B, with these measures in place, solutions would have been found for both parties by utilising life cover, a business trust**, a legal document called a cross option agreement, and structuring Wills** correctly.
On A’s death, the shares could pass into a Will Trust, set up for the benefit of the spouse and other family members. At the same time, the monies payable on A’s death from the life policy could pass into a Business Trust for the benefit of B and family.
The cross option agreement then allows the shares to pass into the Business Trust and the money moves across into the Will Trust which can then be used to benefit A’s family.
For A, the Will Trust structure will provide Inheritance Tax savings to be made on the spouse’s death later on, and long term planning opportunities for A’s children. It also provides a useful ‘asset protection mechanism’ for the family in the future.
Meanwhile, as almost every privately owned business ends up being sold or transferred one day, B can take advantage of some useful long term tax planning opportunities for the future by holding shares previously owned by A in a Life Policy Trust.
Having all the correct protection in place and ensuring this is regularly reviewed and updated to reflect business changes is a particularly onerous and daunting task for time-hungry entrepreneurs. It is one which is best left to a wealth management specialist to help protect the business from a wide range of risks and ensure business owners meet their aims while concentrating on managing their company.
At the same time, a wealth expert can help owners with all those other neglected financial affairs such as formulating a carefully planned exit strategy,*** retirement planning, investment planning, mortgages, healthcare and other insurance.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Charlotte Poole-Graham represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group's wealth management products and services, more details of which are set out on the Group's website www.sjp.co.uk/products.
*This Is Money (20/9/11)
** Wills and Trusts are not regulated by the Financial Conduct Authority. Wills and the writing of Wills involves the referral to a service which is separate and distinct to those offered by St. James's Place.
*** Exit strategies may include the referral to a service which is separate and distinct to those offered by
St. James's Place.
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