Shareholding Directors – Protect Shares & Pass The Value To A SpouseWritten on February 16, 2017 by Kirk Rice LLP
The Question:
I am one of 3 Shareholding Directors in a business which has grown and our shares are now worth something. My wife has no interest in the business and if I were to die she would want (as indeed would I) to receive the value of my shares; not the actual shares. How do I go about achieving this?
Kirk Rice LLP answers:
When you are busy growing the business it is easy to overlook the problems the business and family face if one of the Shareholding Directors were to die. If the right arrangements are not in place your wife could end up being a Shareholder in the business; this is clearly something that she would not want to happen, and I suspect it would not be too popular with your fellow Shareholding Directors. They could buy the shares from your wife, but at present there would appear to be nothing in place that means they have to – they are not obligated. More importantly, how would they pay for them? Despite her current feelings she may decide in the future that she would like to be a Shareholder and does not want to sell. Once again, there is nothing in place obliging her to sell. Either way the current situation is not ideal for anyone.
The solution would be to put in place a Life Assurance Policy for each Shareholding Director. This can then be put into Trust with the other Shareholding Directors as Beneficiaries. Should a Director die, the proceeds of their policy can be paid to the remaining Shareholding Directors. This gives them the money to buy the shares from the deceased Directors Beneficiaries. If the shares in the business have a value of £750,000 and each Director owns a third i.e. £250,000, they could set up a Life Assurance Policy for £250,000 in Trust for the other two Shareholding Directors.
If a Director dies, the insurance policy pays out £250,000 (£125,000 to each Director) providing the money needed to buy the shares. You also put in place a Cross-Option Agreement, which deals with the sale and purchase of the shares. This document states that, IF, the remaining Shareholding Directors decide to buy the Shares from the Beneficiaries of a deceased Director the beneficiaries have to sell. The reverse is also true; IF, Beneficiaries decide they want the remaining Shareholding Directors to buy the shares, they must do so. The proceeds from the Life Assurance policy upon death should be Tax Free due to the policy being in Trust. The Cross-Option Agreement should also help avoid Inheritance Tax. You should also consider what would happen if a Director is seriously ill. In this instance a Critical Illness policy may be a solution.
Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email info@kirkrice.co.uk
If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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