If you're in business or senior management you may never have considered the need for a company Will and you might need an explanation of why it's necessary. It's not something you'll be able to buy off-the-shelf, and if you try googling the concept you will see it’s a very vague offering.
Deb Hale, a Business Development Manager at Zurich, a specialist protection provider, referred to this in a recent intermediary blog post, and she makes some great points that we thought we would share with you.
"Firstly," writes Deb, "it is important to consider what the Will would look like and try to visualise it. You may ask why it is necessary when you already have a personal Will, and how a company Will would differ. Often the business can be so intertwined with your personal matters that one should not be set aside from the other.
As part of the whole mitigating risk exercise, there is an opportunity to piece together various elements to create a “safe will environment”. Shareholder cover, or succession planning as I prefer to call it, fits well within that environment.
A great place to start is obtaining a copy of the articles of association, memorandums, additional shareholder agreements – any documents that set out the constitution of the business as this will be something to build on and already part way to establishing the Will.
Then there are components that can be pieced together to create a solid shareholder arrangement.
Funding issues
This starts with having the funds available to enable a share purchase to happen. If the business owners don’t have the means available to facilitate the purchase of shares, then an insurance policy is the fundamental foundation to provide those means. The policy can be used to cover the death or serious illness of a shareholder.
Next comes the option agreement which is the legal arrangement of how the share sale should be enforced. A double option, otherwise known as a cross option, agreement is needed for life cover. In addition, a single option agreement is needed to cover off critical illness cover. There are also different agreements that apply to the different methods of setting up the share purchase arrangement.
Depending on which method is used, there could be a trust to add in. The trust sets out the management and distribution of the policy proceeds.
Planning for Tax
You should also consider the tax aspects relative to the arrangement. Perhaps another component would be the premium equalisation piece. It is best to work with an accountant and a solicitor to ensure it is fully watertight, takes a holistic view and is legally binding. So, all of these building blocks together form the company Will.
There are other concepts that could be added into the mix which will minimise the risk further, such as a spousal bypass trust which would be beneficial to the surviving spouse where there is a potential Inheritance Tax (IHT) liability. The surviving spouse’s estate would be bypassed, and a supplementary trust would be used for the spouse to borrow from therefore creating a debt to their estate.
You could also consider using a whole of life policy or even a convertible term policy that could be used to cover the insurance needs of the business. If the shareholder plans to sell their share at some point, then they could use the same policy to cover their personal liabilities beyond the sale of the business.
So, going back to my starting point – a business succession plan ideally should not be separated from the plans of the individual shareholders as there are many overlaps."
Great Advice
This is great advice from Deb, and it's something that all businesses should consider. In the same way that you might ask, "Have I put adequate arrangements in place to safeguard my family's financial future in the event that I died or became disabled prematurely?", you should be asking yourself what are your arrangements for ensuring that your business continues to function in the same circumstances?
In our experience, this is not an issue that most business owners have properly addressed. That's partly because of the complexities involved, and making sure that any arrangements are robust, tax-efficient, and flexible can be hard to achieve without specialist advice. As Deb mentions above, that advice is likely to involve your financial planner, accountant, and solicitor working together to create a plan that covers all of the angles.
Should the worst happen, though, having made sure that your company Will is in place could prove to be the most important thing you ever did. Many businesses never recover from the death or incapacity of a key individual, and sadly leave their surviving family with large borrowings and liabilities and no means of repaying them.
At Chesterton House, we are uniquely placed to provide the comprehensive advice that you need in this area. Speak to your usual contact to get things underway, or drop us a line here.
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