Protecting Business People & Their Families. Presented By: Marie Murphy BBS, AITI, QFA FLIA

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1 Protecting Business People & Their Families Presented By: Marie Murphy BBS, AITI, QFA FLIA

2 Protection is a simple concept where significant money can be made available in the event of death or critical illness. Protection provides solutions to problems caused to: A business owner s family on the death of the business owner. The owner s business when someone else in the business dies.

3 Protecting the family on a business owner s death.

4 Protecting the family What does this mean? Leaving the family debt free. Covering household bills into the future. Providing for children s future education. In short, maintaining the lifestyle.

5 What s different about business owners? Business owners are different in 2 ways: 1. Providing for their family is entirely up to them (Typically no employer benefits on death). 2. They have a business that will make some provision (but often overestimated).

6 Where is the money to come from? Personal Assets Shares Investment Properties Cash Life Assurance The Business Can continue as a going concern. Or Might be sold.

7 The financial impact if you died today If you died today would your family stay in the business or would they sell your share? If your family stay in the business: If your family sell the business: What financial effect would your death have on the business? Do you know what they would get? Would loans need to be repaid? Would your key skills need to be replaced (at a high cost?) Are there key relationships which depend on you? Your business partners might buy them out; has anything been agreed? Would your business partners have the money to buy your share?

8 Case Study The Need John and Mary have 2 children. John part-owns a business with Aidan which is valued at 500,000. Mary would need 700,000 on John s death to ensure that the family s future was secure. The Solution Aidan and John formalised what would happen on either of their deaths. They agreed that on death of either party the survivor could buy the deceased party s share from his family. Life Assurance plans were put in place to pay 250,000 to the surviving partner on the death of either of them (e.g. if John died, Aidan would receive 250,000 and vice versa). 450,000 personal life assurance set up on John s life payable to Mary on his death.

9 Case Study The Result If John dies: Aidan would receive his 250,000 and use this to buy Mary out. He would retain control of the business. Mary would receive the 250,000 from Aidan and the 450,000 from the Life Cover giving her the 700,000 she would need to provide for her family.

10 Protecting the business on someone else s death.

11 Impact if someone else in client s business died If your business partner died today If a key person died today Control issues if a co-owner dies Financial impact if a key person dies What will happen to his or her share of the business? Will his or her family become involved in the business? Would you like to be able to buy them out? Will the business suffer a financial loss? Will the business lose goodwill & important contacts? Will the business need to hire a replacement? Is anything agreed? Will loans need to be repaid? Would you have the money? Will profits be lost in the short term?

12 Case Study The Need Siobhan & Alan are equal partners in an IT business worth 300,000. Alan has key skills which would cost 100,000 to replace. Siobhan is worried about the dependence on Alan and what would happen in the event of his death. The Solution Siobhan and Alan formalised what would happen on either of their deaths. They agreed that on the death of either party the survivor could buy the deceased party s share from his or her family. Life Assurance plans put in place to pay 150,000 to the surviving partner on the death of either of them (e.g. if Siobhan died, Alan would receive 150,000 and vice versa). Keyman Assurance which would provide 100,000 to the company on Alan s death..

13 Case Study The Result In the event of Alan s death Siobhan would receive 150,000 which would allow her to pay Alan s family for his share of the business. In addition, the Keyman cover would pay 100,000 allowing the company to secure the skills needed to keep the company going.

14 Business Protection Keyperson Share Purchase Protection

15 Keyperson Compensating company for anticipated loss in the event of the death or critical illness of a keyperson.

16 Need for Keyperson Insurance Loan Related Loss of Profits

17 Keyperson Insurance loan related Amount of cover = loan Director/bank loan Serious illness on accelerated basis no double cover

18 Keyperson Insurance loss of profits Work on vital project could stop. Company contacts could be lost. Specialist or technical business skills and knowledge could be lost. Loss of future contracts, sales or new business.

19 Quantifying Cover Loss of Profits Loss of profits. Replacement Costs. Costs of adapting the business. Normally multiple of salary or profits

20 Who is a key person? Key employee Director Partner Consultant

21 How does it work? Business takes out cover on keyperson and pays the premium On death of keyperson, the proceeds are paid to the business Proceeds used to repay loans/replace lost profits

22 Keyperson Insurance - Taxation Conditions for Tax Deduction on premiums: Employer & employee relationship. Employee has < 15% of shares. Covering loss of profits only. Short term term assurance.

23 Keyperson Insurance Taxation of Proceeds What is the intention? If to replace loss of profits then proceeds taxable. If repayment of loans only, no tax relief on premium and no tax on proceeds. Separate policies for: - Loss of profits. - Loan protection.

24 Keyperson Insurance Company owns the proceeds. Proposer = Company Use the proceeds to replace profits/cover loan. No personal interest.

25 Keyperson Insurance Useful Questions Loss of profits. Is there an individual with specialist skills/knowledge/experience that business relies on? If this individual died/suffered critical illness would the business need to train other employee/employ a replacement? Is there anyone else with similar skills/knowledge/experience? How long would it take to replace the individual (if a replacement can be found)?

26 Keyperson Insurance Useful Questions Loss of profits Could the business survive without replacing the individual for how long? How much would it cost to replace the individual? Where would the business source the funding financial impact? Would it make sense to plan for an injection of funds to replace lost profits/recruit?

27 Keyperson Insurance Useful Questions Loan related Has the key person loaned to the business? Does this loan become repayable on death? Is the loan protected, if not how will it be repaid? Will this have a financial impact on the business?

28 Keyperson Insurance Useful Questions Loan related ctd Has the key person given a personal guarantee on a business loan? Does this loan become repayable on death? Is the loan protected, if not how will it be repaid? Will this have a financial impact on the business? Will the debt pass to the deceased s estate? How will the deceased s next of kin repay the loan?

29 Keyperson Insurance - Documentation Proposal Form Board Resolution stating purpose and nominating individual to sign for company Keyperson cover questionnaire Copy of Loan offer (loan related) Additional underwriting requirements depending on level of cover

30 Share Purchase Protection Personal Arrangement Co Directors Insurance Partnership Corporate Route Corporate Co-Directors

31 Share Purchase Protection Personal Arrangement Co Directors Insurance Partnership

32 Share Purchase Protection Protecting business owner s and their families when a shareholder/partner dies. Provides funds to enable survivors to complete the purchase Provides legal agreements to trigger the buy back

33 Share Purchase Protection without it? Joe Bloggs dies His shares go to his next of kin They are not obliged to sell them back to the other shareholders/partners If they are willing to sell their shares, where do the surviving business owners get funds to buy back the shares

34 No Share Purchase Protection Joe Bloggs dies Shares Estate 600,000

35 Share Purchase Protection Joe Bloggs dies Shares Estate 600,000 Life Policy 600,000 Business Survivors Agreement

36 Share Purchase Protection - Joe Bloggs dies Estate Shares Cash Business Survivors

37 Share Purchase Protection with it? Joe Bloggs dies His shares go to his next of kin There is a legal agreement in place to trigger the sale of shares back to the surviving shareholders/partners The payout on death has been paid to the other shareholders/partners so they now have funds to buy back the shares

38 How to Set Up Personal Arrangement Own Life in Trust or Life of Another

39 Shareholders Agreement A Double Option Agreement

40 Taxation Aspects- Personal Arrangement No tax deduction on the premium Proceeds from policy not taxable (share purchase) Potential liability on increase in value from date of death to date of sale Taxable benefit in estate (spouse exempt)

41 Share Purchase Protection How is the business run? (Limited Company or Partnership?)

42 Share Purchase Protection - Valuation Partnership is an interest in an asset passing? what payments fall to be made on death? Company (separate entity) devolution of shareholdings(mv) share in personally owned assets passing

43 Share Purchase Protection VALUE of the Shareholding/payments to be made/value of property interest SEPARATE Plans for shares and property? Is there already a BUYBACK in place? Has OTHER PROVISION (e.g. wills) been made?

44 Share Purchase Protection Is the Business FAMILY RUN? Is it intended that Spouse or Children should come into the Business? HOW many Directors/Partners to participate?

45 Benefits Regulates the position on death Business Survival Plan Business Survivors own the business Family get cash Tax efficient no liability to inheritance tax for business survivors

46 Share Purchase Protection Useful Questions for Shareholders Does the business have a Shareholders agreement? What would happen the shares on death? Would the deceased shareholder s next of kin join the business? Would they have the knowledge/skills/interest? Would this be acceptable to the the remaining shareholders?

47 Share Purchase Protection Useful Questions for Shareholders - ctd If they want to sell the shareholding, do the remaining shareholders want to buy them? If yes, how do you value the shares? Are they allowed to buy the shares? Where do they source the funding financial impact? Could the shareholding be sold to a third party impact? Are there inheritance tax implications for the estate?

48 Share Purchase Protection Useful Questions for Partners Does the business have a Partnership agreement? What would happen the deceased s share of the business on death? Would the deceased partner s next of kin join the business? Would they have the knowledge/skills/interest? Would this be acceptable to the the remaining partners?

49 Share Purchase Protection Useful Questions for Partners - ctd If they want to sell the share of the partnership, do the remaining partners want to buy them? If yes, how do you value the share of partnership? Where do they source the funding financial impact? Could the deceased partners share of partnership be sold to a third party impact? Are there inheritance tax implications for the estate?

50 Personal Arrangement - Documentation Proposal Forms Double Options Agreement Business Protection Cover Questionnaire Trust forms (if own life in Trust) Additional underwriting requirements depending on level of cover

51 Corporate Co-Directors Insurance Alternative Method Company =Proposer Company agreement to Buy Back Shares Provision of funds to enable company to complete purchase

52 Corporate Co-Directors Insurance Shares bought back are cancelled Surviving shareholders own company

53 Taxation Premiums not tax deductible Policy proceeds not taxable No Capital Gains Tax (CGT) if sold back soon after death Capital Acquisition Tax

54 Corporate Co-Directors Insurance 2 Sets of Rules.. Is Company allowed buy back it s own shares? Does the tax treatment of this transaction make it worthwhile?

55 Power of Company to buy back its own shares Articles must allow it Only under contract approved by a Special Resolution Can not buy back all of its own shares Only full paid up shares may be bought Must pay in full Only from profits available for distribution

56 Tax Treatment of Purchase Price Changed by Finance Act 1991 Up to 1/7/1991 distribution Income Tax Treatment AFTER 1/7/1991 Disposal for CGT subject to certain conditions

57 CGT Treatment on sale of shares to company Unquoted trading company Seller must be resident and ordinarily resident in the State Buy back must be for the benefit of the trade Seller must have owned share for at least 5 years (3 yrs if death)

58 CGT Treatment on sale of shares to company Seller s interest must be significantly reduced (at least 25%) Seller no longer connected with company after the sale ( not own or control > 30%) Not part of a scheme to participate in profits without taking a dividend.

59 Corporate Co-Directors Insurance Documentation Proposal Forms Board Resolution Contingent Purchase Agreement Business Protection Cover Questionnaire Additional underwriting requirements depending on level of cover

60 The Opportunity The death/serious illness of a partner/shareholder can have serious repercussions for the future of a company 70% of Irish business have not arranged any form of partnership/codirector protection Failure of family businesses in most cases can be attributed to poor succession planning 72% of family owned business ceased trading within 5 years of the death of the founder of the business 33% of family business survive to 2nd generation 15% make it to the 3rd 4.5% to the 4th

61 Target Clients Business clients Protect family, Protect business Executive pension clients Group pension clients Group risk clients Corporate investment clients

62 Ideal clients Established business generating a profit At least two owners Age Husband and wife - Keyperson

63 The Market Type of Business Keyperson Shareholder Protection Personal Protection* Ltd Co. 2 + shareholders Yes Yes Yes Partnership Possibly Fixed Assets Yes One Man Co. Possibly No Yes Self Employed Sole Trader No No Yes * including estate planning

64 Questions

65

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