Can I protect my business for my family?
The right estate planning can protect a business and the business-owner’s family from a variety of threats.
You and your business partner may have laboured for years to build your company to be the success it is today. All that hard work and dedication should mean that you and your families can now reap the benefits but what would happen if you or your business partner were to die?
Without a will, the deceased’s share of the business would be subject to the Laws of Intestacy and the person who inherits may not be the person you intended. What if the deceased’s spouse or another beneficiary inherits? Would you wish to run the company with someone who might know very little about it?
The best option might be to buy the beneficiary out but would you have the funds? You may have had the foresight to put life assurance in place to provide the necessary cash; you may even have set up a Company Will and a Cross Option Agreement to ensure the surviving business partner has the right to buy the deceased’s share. But what impact does a standard cross option agreement have on someone’s estate?
Once the cross option has been effected, the surviving spouse’s estate has been increased by the value of the life assurance, risking exposure to inheritance tax and, depending on the size of the business, this could be a significant amount. It’s also at risk from subsequent divorce, creditors and long term care costs. Meanwhile, the surviving business partner now owns 100% of the company and is similarly exposed.
Appropriate business estate planning can provide significant protection to both the business owner and the owner’s family, dramatically reducing the possible impact of inheritance tax and helping to protect the future family’s estate against remarriage, creditors, care fees and generational inheritance tax.
Utilising trusts, the proceeds from any life assurance policy can be kept out of the beneficiary’s estate, although they have full access to the assets. And the surviving business partner also benefits. The deceased partner’s share of the company is passed to a Shareholder Trust, allowing the surviving director full control of the business as Trustee. Dividends can also be paid to trust beneficiaries (perhaps other family members) with low tax rates.
Should the surviving director decide to sell, only their share of the business will enter their estate and the remaining share will stay with the Shareholder Trust, of which they and their family are beneficiaries and where it cannot be assessed for inheritance tax, care costs, divorce or bankruptcy.