Business Protection
Safeguarding your clients’ futures
Mark Reilly – Aviva Life & Pensions
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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
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
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
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
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
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 NOTtax 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
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
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
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
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?
10,000 shares
Next of kin / estate
devolve to
Policy
€1m cover
Paid into trust
Co-Director’s Assurance
Cover in Place…what happens when Mr. Smith dies?
10,000 shares
Next of kin / estate
Remaining Shareholders
€1m cash
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
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
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
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
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
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?
10,000 shares
Next of kin / estate
Policy
€1m cover
ABC Ltd
Contin
gent Pur
c
hase
Agreeme
n
t
Company Share Buy-Back Insurance
Cover in Place…what happens when Mr. Smith dies?
10,000 shares
Next of kin / estate
€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
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
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…
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…
Keyperson
Assurance
Partnership
Assurance
Co-Director’s
Assurance
Company Share
Buy-Back
Insurance
Different Assurances for different scenarios / clients but each has a role
to play in advising your clients on how to protect their businesses
© Aviva plc 2009 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.
