Four directors of an IT company (Andrea aged 38, Henry aged 42, Margaret aged 55 and Tim aged 50) own one quarter of the shares each.
At a regular board meeting the issue of contingency planning was discussed and in particular what would happen to the remaining shares if one of them died. There was a general concern that their surviving partners should be looked after, however, none of the shareholders wanted them to get involved in the business.
The company had been valued at £3,200,000 and we arranged for each shareholder to be covered by a life assurance policy for £800,000. The premiums for the policies are paid for by the individuals.
Each policy is written under an appropriate trust with the other directors as trustees and beneficiaries, and is supported by a cross option agreement.
Two years after setting up their shareholder protection Tim dies and his shares in the business pass to his spouse. She had no relevant experience or expertise in the business, did not wish to be involved, but had an expectation of income to support her and the children.
The cross option agreement gives the remaining shareholders, Andrea, Henry and Margaret the option to purchase the shares from Tim’s widow. It also gives Tim’s widow the option to a cash sum in exchange for the shares. Either party may exercise their option without the consent of the other.
The life assurance policy provides the funds for Andrea, Henry and Margaret to complete the transaction.
The result – Andrea, Henry and Margaret have control of their company and Tim’s widow has received a fair return for his shareholding. As the correct documentation was used the process should be efficient for inheritance tax purposes.
Although the above considers shareholders in a limited company similar principles and issues apply to partners in a partnership.