29th July 2019

We were contacted by the Group MD of a £100M+ t/o company which imports, distributes and manufacturers a raw material. Following an MBO, the directors wanted to retain control of the company on death, terminal illness or critical illness of a co-shareholder and have funds in place to buy his shares.

How did we help?

We identified the most appropriate solution – Director Share Protection insurance.

We arranged for each shareholding director to take out a life insurance policy that included critical illness cover, on their own lives, written in trust for the benefit of the remaining shareholders in proportion to the shares held.

We put forward the trust templates that were suited to the clients’ needs and a draft cross-option agreement.  We then liaised with the clients’ and their solicitors to implement final versions.  The Articles of Association were also amended to reflect the agreement.

In summary, the cross-option agreement ensures that a purchase (or sale) can take place and the life policy in trust provides the funds quickly and without the need for probate.

What type of life insurance?

We discussed the different types of cover available and researched the market for best terms, subject to medical and financial underwriting.  On this occasion we recommended a term assurance plan including critical illness for a 10-year term as the directors were all in their early 50’s and expected to have sold their shares and or retired during that period.  It was the cheapest form of insurance available to meet their needs.

We submitted applications to two providers due to the high sums assured and arranged for one of them to take the lead and coordinate medical information in order to improve efficiency and avoid duplicity for the clients.  The reason for applying to multiple provider is because the sums assured were much higher than average and final terms after underwriting can differ materially from the original quotation which assumes ordinary terms being offered; in reality special terms are often applied after underwriting and the best quote may not turn out to be the best final terms.

What type of trust?

We recommended a business trust in order to be inheritance tax (IHT) efficient.  To do this each trust had to be arranged on commercial terms for the benefit of the remaining directors.  That meant that there had to be no element of bounty and the shareholding directors needed to deal with each other at arm’s length.

What type of Agreement

A cross-option agreement was entered into by all participating shareholders of the company, under which each shareholder granted to the other shareholders an option to buy his shares and it also provided an option for his estate (family) to sell on his death.  In the case of terminal illness or critical illness it would enable the sick shareholder to compel the remaining directors to buy his shares, allowing him to step back from the business and be properly compensated for doing so.

How did each shareholding director benefit from our advice?

The director shareholder insurance solution we put in place will:

  • provide peace of mind knowing that if he becomes seriously ill or dies, he or his family will have a willing cash buyer rather than a share in a business which they may neither need nor want
  • have maximum potential IHT mitigation
  • prevent disruption to the business of the company in the event of a death or serious illness
  • enable remaining directors to retain control of the business

Note:  This form of solution is equally valid for LLP members and for partnerships

Trusts and Tax Planning are not regulated by the Financial Conduct Authority.

The case study is purely for information purposes and does not constitute advice. For advice based on your individual needs and circumstances please contact us.