NONE of us like to think of a time when we may no longer be here – when we have finally shuffled off to the great Board Room in the Sky!
But planning for the inevitable is a crucial part of business and wealth protection – for the sake of both business and family.
What will happen to your business on your death? What will happen to your interests in that business?
We may be familiar with the need to make a will or even an Enduring Power of Attorney (possibly through assisting elderly relatives), but we may be less familiar with other ways to address succession and wealth protection issues in relation to business.
One way is by means of a Cross Option Arrangement. Typically this arrangement is relevant to an SME with 50:50 shareholders/partners. But it is not confined to this situation and is equally relevant to businesses/entities with multiple shareholders or partners.
The objective of the arrangement is to ensure that on the death of one partner;
1. The succession of the business is secure.
2. The deceased's family is provided for by receiving payment for the deceased's interest in the business.
Under the arrangement, the deceased's interest in the business goes to the surviving business partner and the deceased's partner's family receives payment for that interest.
All this means that the surviving business partner can continue the business, while the deceased's family is left with a cash sum.
This is achieved by each of the business partners taking life assurance on their respective lives. The life cover is put in trust by each of them in favour of the other.
On death of one partner, the life proceeds pass to the surviving partner, creating a cash fund to give to the deceased's family in payment for the deceased's interests in the business.
Often, these arrangements are put in place and forgotten about (it's that elephant again). But as a business' value grows, it is important to review the level of life cover – at least bi-annually – to ensure that the cash sum generated on death will be sufficient to fund the purchase of the deceased's interest in the business.
The important message is – for the sake of both business and family, don't let the elephant in the room!
