Directors
/ Shareholders Insurance - Partnership Planning (Business)  |
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 Directors
/ Shareholders Insurance - Partnership Planning (Business) SUMMARY
OF GUIDANCE Introduction The purpose of the report is to give guidance about the protection needs of Partners in business; Partnership agreement The importance of establishing a partnership agreement which will be fair to all partners. Family provision The provision of funds for each partner's family on suffering death or on suffering a critical illness. Cover against loss of goodwill The arrangement of insurance for the partnership if a partner dies or falls seriously ill, to provide cover against loss of goodwill and disruption of the business. Buy-out of a deceased partner The arrangement of enough funds for the surviving or continuing partners to buy the partnership assets of a deceased partner. Guidance The guidance in this report is restricted to the area of financial protection through life and health insurance. It is not intended to provide you with a tailored comprehensive planning review. We may be able to answer queries by contacting us at enquiries@goforcustomer.co.uk .If you are in any doubt about your individual or company requirements then you should seek professional advice. GENERAL Death of a partner It is important to plan for the possibility of a partner's death or severe disability. If a partner were to die: Provision for family It would be important for their family to have adequate financial provision. If the amount of money available is inadequate, their standard of living could be drastically reduced. Moreover, the deceased partner's dependants could become a serious long term financial drain on the surviving partners. Surviving partners buy-out ability It may also be important for the surviving[partners to be able to buy out the interest of the deceased partner in any partnership assets including goodwill, if that is not to be written out of the partnership agreement. Disability of a partner The same considerations arise if a partner were to become severely disabled. MAKING FUNDS AVAILABLE ON DEATH OF A PARTNER - PERMANENT POLICIES Need for cover If a partner dies before reaching retirement age, the surviving partners will need cash to buy out their share in the partnership assets. It is clearly important to make the cash available at the time it is needed. Loss of goodwill In the event of a partner's death, there may also be a considerable loss of goodwill and also organisational disruption to the firm. Level of cover Each partner should consider starting an insurance plan for a sum assured which reflects their current:
At www.GoForCustomer.co.uk we make available the key financially secure and competitive Life Assurance Providers in an easy to use on-line quotation tool. Quotations are listed in competitive order and all documents are provided to apply for the cover required. Read quotation and key features carefully You should read the quotation and key features carefully; they contain important information about your rights and benefits under the policy. Affordability The premiums are readily affordable by the individual partners, based on your own assessment. Commitment to maintain protection contract It is important to remember that you will be making a long term commitment to maintaining the cover under this plan. CRITICAL
ILLNESS COVER Need for the cover If a partner were to fall ill because he or she had contracted a critical illness, both the partner's family and the partnership would suffer. Benefits of critical illness cover Cover, often referred to as critical illness insurance, can be used to provide this lump sum. Critical illness cover should be taken out by all the partners for the benefit of their families and the partnership.
Critical illness insurance would pay out a capital sum if a partner suffered any of the key critical illnesses or events defined in the terms of the plan. These normally include diagnosis of heart attack, stroke, kidney failure, almost all serious forms of cancer, multiple sclerosis or a coronary artery bypass surgical operation or transplant of a major organ. The pay-out under the policy could also be made if the partner is permanently totally disabled or dies. The plan pays out on the earliest of one of these events, so that it is possible to claim only once under the policy. Thus if a claim is paid out for having a heart attack and the partner subsequently dies, there will not be a further payment of the cover under the plan. Quotation At www.GoForCustomer.co.uk we make available the key financially secure and competitive Life Assurance Providers in an easy to use on-line quotation tool. Quotations are listed in competitive order and all documents are provided to apply for the cover required. Read quotation and key features carefully You should read the quotation and key features carefully; they contain important information about your rights and benefits under the policy. Affordability The premiums should be readily affordable by the individual partners, based on your own assessment. Commitment to maintain protection contract It is important to remember that you will be making a long term commitment to maintaining the cover under this plan. HOW THE POLICIES SHOULD BE WRITTEN Need to be written in trust It is important to ensure that the policy proceeds are received tax-free by the remaining partners when the purchase is to take place. Each partner should therefore take out a policy on their own life, written subject to a trust, for the benefit of the other partners. The trust should be written so that if the partner dies or becomes critically ill the proceeds of the policy would be paid to the other partners free of inheritance tax. Critical illness policy trust The flexible power of appointment trust could allow the critically ill partner to benefit from the policy if this was appropriate, eg, because it was agreed they would return to work with reduced responsibilities and income. Flexible trust A flexible power of appointment trust is particularly useful in this context, so that the funds can be made available to the right person. This kind of trust allows the trustees to pay the benefits to anyone among a widely defined class of beneficiaries. All the other partners in the firm could be included, even those who become partners at a later date, so provision can be made for future changes in the partnership. Adjustments for different premiums If each partner takes out a policy on their own life, the difference in cost, caused by varying ages and sums assured, may be considered unfair. In these circumstances it is suggested that any difference in premiums could be equalised, either by a suitable adjustment to the division of profits or by arranging for the payment of a salary as a first charge on the profits. This salary should equal the higher premiums that may be payable by some of the partners after making allowances for income tax. Alternative: part life of another Each partner could take out a policy on their own life for the same amount of premium. Any balance of cover required should be taken out by the other partners as grantees. A statement is enclosed showing how the policies should be written and the division of the premium costs. IHT on premiums The premium paid by each partner on their own life could be a transfer of value for inheritance tax purposes but should be within each partner's annual £3,000 and normal expenditure exemptions (see appendix www.goforcustomer.co.uk). Any excess would be a potentially exempt transfer. However, if the arrangement was fully commercial no transfer of value would be involved. Alternative: IHT position on life of another policies Any premiums paid by the grantee under the policies on the lives of the other partners would not give rise to any liability to inheritance tax, because the policy would be the absolute property of the grantee. AUTOMATIC ACCRUAL OF GOODWILL AND CAPITAL IN PARTNERSHIP DEED Automatic accrual If the partnership deed provides that if a partner dies or retires, their share in the capital and the goodwill of the firm will automatically accrue to the remaining partners without any payment. No capital from firm on death Unlike many business people, therefore, you will not have built up a substantial capital base in the form of a saleable business. The partnership has effectively left it to you to make your own arrangements for death and retirement. INCOME PROTECTION (PERMANENT HEALTH INSURANCE) PHI If a partner were unable to continue working because of ill health, their family and the partnership would both suffer. Reasons for PHI Income protection (permanent health insurance) should be taken out by the partners: - To provide continuing income up to retirement age for the disabled partner. Quotation The quotation facility provides a quotation with the full terms and conditions from the various insurance companies along with the key features and key facts documents showing the provider's charges and the commission's payable. Read quotation and key features carefully You should read the quotation and key features and key facts carefully; they contain important information about your rights and benefits under the policy. Affordability The premium should be readily affordable now and in the future, based on your own analysis of your income and expenditure. Commitment to maintain protection contract It is important to remember that you will be making a long term commitment to maintaining the Permanent Health Insurance cover under this plan. If you cease paying premiums after a short period of days the cover will lapse. To re-establish cover will require the full quotation and application process to be completed and be subject to the then current terms and conditions. If health has deteriorated for example, cover may no longer be available or special terms may be imposed. ASSUMPTIONS ABOUT TAX POSITION Tax position The assumptions about the tax position of the plans and recommendations made in this guidance are based on current law and HMRC practice which may be subject to alteration in the future. In particular, what assets, gains or income are taxed and the levels of taxation on them are all subject to change. Tax reliefs may also change and their value to you will depend on your individual circumstances. SUMMARY OF RECOMMENDATIONS Partnership agreement The partnership should ensure the Partnership agreement is in keeping with their requirements. Family life cover Life cover including critical illness cover should be taken out on the life of each partner to provide cover for both the family and the remaining partners. Purchase of deceased partner's assets Sufficient life cover and critical illness cover should be provided, so that the surviving partners can buy the partnership assets of a deceased partner. |