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From this document you will learn the answers to the following questions:
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1 Business Protection Safeguarding your clients futures Mark Reilly Aviva Life & Pensions Fill this white space with an image. Introduction Presenting the case for Keyperson, Co-Director s and Partnership Assurance is one of the most important services you can offer your clients to: Safeguard their personal future Safeguard their family s future Safeguard their firm s future
2 Consider the following Statistics show that 72% of businesses ceased trading within 5 years of the death of the founder of the business Source: BDO Simpson Xavier 75% of business owners don t have any Keyperson Assurance in place and 49% didn t even know it was available Source: OCS Consulting, September 2008 Only 10% of business owners would have sufficient liquid capital in place to fund a purchase of a deceased partner s shares Source: OCS Consulting, September 2008 Reasons for you to know about Business Protection It s firmly within the domain of the professional financial adviser Part of an overall Corporate Package You are the Life Assurance Expert A relatively untapped market But it is a must have for the SME market You will often be dealing with higher levels of benefit so larger premiums are common Advice driven But significant earning potential for the financial adviser There is always a market for protection Now more than ever it will be imperative for businesses to survive Remove this worry from your clients they have plenty of other worries on their plate!
3 Business Protection Typical Categories Keyperson Protecting the value of the business whenever a Keyperson dies or becomes critically ill Keyperson Assurance can help replace lost profits resulting from their absence (through illness or death) and pay the costs of recruiting their successor Share Purchase Protection Protecting business owners and their families when a shareholder dies Partnership Assurance can help the remaining partners raise the funds and provide the ill partner or his estate with a ready market for their share(s) Co-Director s Assurance is designed to help the remaining directors raise the funds needed to buy a colleague s shareholding in the event of diagnosis of a specified illness or death Keyperson Assurance A Keyperson is a person of significant value to the company
4 Keyperson Assurance The Benefits Availability of a pre-determined lump sum payment on the death or diagnosis of a specified illness of the individual insured under the policy Pay off outstanding bank loans Repay any loans made by the individual to the company Recruit a suitable successor Invest the funds in the business Keyperson Assurance How to Arrange Cover The Necessary Steps Who should be insured? How much cover is required? Passing a Board Resolution Proposing for the Policy Issue of the policy and payment of the first premium
5 Keyperson Assurance Who should be insured and how much cover will be required? The company can insure any director or employee on whom the business depends for its continued success, and whose death or diagnosis of a specified illness could result in the business suffering a financial loss Loans personally guaranteed by the individual and/or any loans made by that individual to the company Estimated loss of profits resulting from the death or specified illness of the individual, including the costs of recruiting a replacement 5 10 times earnings, or 2 x gross profit or 5 x net profit attributable to the Keyperson Remember it is not meant to generate a windfall for the business! Keyperson Assurance Company Law Requirements & Passing a Board Resolution The company s Memorandum of Association should be checked and amended if necessary to ensure that the company has the necessary authority to effect the policy Directors of company should pass a Board Resolution recording their intention to effect the Keyperson Assurance cover with Aviva Life & Pensions It is resolved that XYZ Ltd shall effect a Keyperson Assurance policy with Aviva Life & Pensions Limited to protect against the financial consequences resulting from the death or specified illness of Mr Jones, while in the service of XYZ Ltd. Mr Smith is hereby authorised to complete all the necessary documentation on behalf of XYZ Ltd and it is hereby declared that the proceeds of the policy beneficially belong at all times to XYZ Ltd.
6 Keyperson Assurance Proposing for the policy and issuing the policy Life of Another policy Life assured is the individual who is to be insured under the policy, and The company is the policy owner or grantee Individual to be the insured must complete the application form & sign it as the life assured Authorised officer of the company should sign the application form for and on behalf of the company as the grantee. Company s stamp should be affixed to the proposal form over the signature of the Authorised Officer Individual to be insured and the Authorised officer should be different people Individual to be insured may be required to attend a medical examination and the company may be asked to complete a Financial Underwriting Questionnaire Keyperson Assurance Taxation of the policy Premiums are generally NOT tax deductible for Corporation Tax purposes Revenue have outlined the circumstances in which such premiums may qualify as admissible deductions: Employer and employee relationship, and Employee has < 15% of the ordinary share capital, and Policy is intended to cover loss of profits only, and Policy is a short term term assurance In practice all 4 conditions must be met very rarely happens!
7 Keyperson Assurance Are Benefits Taxable? Loss of Profit Related Keyperson Policies Benefits paid from the policy are taxable Liable to Corporation Tax at 12.5% Loan Related Keyperson Policies Benefits paid from the policy are not taxable Share Purchase Protection Protecting business owners and their next of kin when a shareholder dies
8 Share Purchase Protection Individual / Personal Route Co-Director s Assurance Partnership Assurance Corporate Route Company Share Buy-Back Assurance Co-Director s Assurance Ensure that surviving directors receive the necessary funds to purchase the deceased director s shareholding
9 Co-Director s Assurance Co-Director s Assurance The main objective of Co-Director s Assurance is to ensure that the surviving directors receive the necessary funds to purchase the deceased director s shareholding It provides a mechanism to trigger the Buy-Back of shares Agreement or Option to Buy and Sell shares Benefits Surviving directors may not wish to work with deceased director s family Surviving directors will wish to retain control and avoid shares passing into the hands of an outsider The deceased s estate will be adequately recompensed for selling their inherited stake in the business Co-Director s Assurance The Buy / Sell Agreement The Buy / Sell Agreement As the name implies a Buy / Sell Agreement is a legal agreement between the directors which provides that on the death of one of them The surviving directors are obliged to buy the deceased director s shares at a fair open market value, and The next of kin s personal representatives are obliged to sell the shares to the surviving directors
10 Co-Director s Assurance No Cover in Place what happens when Mr. Smith dies? Mr Smith owns 10,000 shares in ABC Ltd Value = 1m On death the value of Mr Smith s shares pass to his next of kin / estate Co-Director s Assurance Cover in Place what happens when Mr. Smith dies? devolve to 10,000 shares Next of kin / estate Policy 1m cover Paid into trust Remaining Shareholders
11 Co-Director s Assurance Cover in Place what happens when Mr. Smith dies? Next of kin / estate 10,000 shares 1m cash Remaining Shareholders Co-Director s Assurance Setting up the Policies Own Life in Trust Each director takes out a life policy on his/her own life under trust for a sum assured = value of his/her share of the business In the event of one of the director s deaths, the trust ensures that the proceeds are payable to the surviving directors who then use the proceeds to buy the deceased s share of the business The trust also allows for members to leave the business, with the policy reverting to personal cover under the terms of the trust Any new director who joins the business can be included as a beneficiary under the terms of the existing trusts as long as they take out the appropriate life cover in trust for the other directors and become a party to the Buy/Sell or Double Option agreement
12 Co-Director s Assurance Setting up the Policies Life of Another Each director takes out a life policy on the life of each of the other directors for a specified sum assured The Life of Another method is very attractive where there are only two or three directors, but has a number of disadvantages when there are a large number of directors involved in the business It is not a flexible arrangement for situations where new directors join the business or existing directors leave Co-Director s Assurance Tax implications Premiums can be paid By the individual out of after-tax income, or By the company on behalf of the individual and declared as a BIK by the individual Capital Acquisitions Tax (CAT) None, provided Revenue conditions are met Deceased s estate may have an inheritance tax liability on the value of the shares of the business inherited if the value > tax free CAT threshold Capital Gains Tax (CGT) Any proceeds becoming payable under the terms of the policy are not liable to CGT Deceased s estate sell their shares to surviving directors a liability to CGT would only arise in respect of an increase in value of shares since date of death to date of disposal
13 Co-Director s Assurance Valuing Shares in a Private Company Not an exact science Different methods Rights attaching to shares Multiple of turnover They are not freely marketable The prevailing economic circumstances at the time The company auditor should be consulted Co-Director s Assurance Specified Illness Cover Possible to take out Specified Illness Cover under a Co-Director s Assurance arrangement However, the ill director may not want to sell A Capital Gains Tax (CGT) charge may arise on the sale A Gift Tax charge for other shareholders may arise if no buy-back of shares takes place Make sure you take your client through the likely eventualities Single Option Agreement is normally used to cover this type of scenario
14 Partnership Assurance Ensure that surviving partners receive the necessary funds to purchase the deceased partner s shareholding Partnership Assurance Partnership Assurance The main objective of Partnership Assurance is to ensure that the surviving partner s receive the necessary funds to purchase the deceased partner s shareholding It provides a mechanism to trigger the buy-back of the share of the partnership Agreement or Option to Buy and Sell share of partnership Reference to the Partnership Agreement (if any exists) is important Benefits Surviving partners may not wish to work with deceased partner s family Surviving partners will wish to retain control and avoid the deceased s share of the partnership passing into the hands of an outsider The deceased s estate will be adequately recompensed for selling their inherited stake in the partnership
15 Company Share Buy-Back Insurance A means of solving the financial problems that can arise following the death of one of the shareholding directors of a company Company Share Buy-Back Insurance The COMPANY enters agreement to buy back shares from deceased s next of kin (Contingent Purchase Agreement) at a fair open market value The COMPANY effects Life Cover on each shareholding director and it pays the premiums (no personal outlay for the shareholding directors) The COMPANY purchases shares from the deceased s next of kin using the proceeds of the policy
16 Company Share Buy-Back Insurance No Cover in Place what happens when Mr. Smith dies? Mr Smith owns 10,000 shares in ABC Ltd Value = 1m On death the value of Mr Smith s shares pass to his next of kin / estate Company Share Buy-Back Insurance Cover in Place what happens when Mr. Smith dies? Contingent Purchase Agreement 10,000 shares Next of kin / estate Policy 1m cover ABC Ltd
17 Company Share Buy-Back Insurance Cover in Place what happens when Mr. Smith dies? Next of kin / estate 10,000 shares 1m cash ABC Ltd Company Share Buy-Back Insurance Company Share Buy Back Insurance is complex and may not be appropriate in every case 2 main areas that may restrict the use of Company Share Buy-Back Insurance are as follows: 1. The legal power of the company to purchase its own shares, and 2. The taxation treatment of the buy-back of the company s own shares Shareholding directors should seek professional advice from their own legal & taxation advisers to ascertain whether Company Share Buy-Back Insurance is suitable for them
18 Company Share Buy-Back Insurance Power of Company to Buy-Back it s Shares Company s Articles of Association must allow it Purchase contract must be approved by special resolution Company cannot buy-back all of its own shares Only fully paid up shares may be bought Must pay in full at the time of purchase Purchase from profits available for distribution Company Share Buy-Back Insurance Taxation care needed in this area Premiums are not tax deductible for Corporation Tax purposes s.130 Taxes Consolidation Act, 1997 Company redemption of shares is treated as a distribution Dividend Withholding Tax (DWT) and Income Tax come into the equation s.176 Taxes Consolidation Act, 1997 The purchase by a company of its own shares is NOT a distribution if a number of conditions are satisfied
19 Company Share Buy-Back Insurance CGT Treatment on Sale of Shares to Company 1. Unquoted Trading Company; 2. The Benefit of the Trade test; 3. It must not be a scheme to avoid paying a Dividend; 4. The seller must be resident and ordinarily resident in the State; 5. Seller must have owned shares for at least 5 years (3 years if after death); 6. Shareholding of Vendor and his associates must be reduced by at least 25%; 7. Vendor and associates must own < 30% of the equity in the company after sale Wrap-Up & Conclusions Turning the theory into practice
20 Identifying Clients Limited Companies Executive Pension Clients Group Pension Employer Employer Facilitated PRSA Arrangements Partnerships Personal Pension Clients PRSA Clients Look at the full picture and have all the facts Know the individuals involved Understand their situation Put in place a strategy and plan together No 2 situations will ever be the same! To summarise Co-Director s Assurance Partnership Assurance Company Share Buy-Back Insurance Keyperson Assurance Different Assurances for different scenarios / clients but each has a role to play in advising your clients on how to protect their businesses
21 The information contained in this presentation is based on Aviva Life & Pensions understanding of current legislation and Revenue practice as at March 2010 While great care has been taken in its preparartion, this presentation is of a general nature and should not be relied on in relation to a specific issue without taking financial, insurance, legal or taxation advice. For Financial Adviser Use Only Aviva plc 2009
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