Appropriate mainly to partnerships, the Partnership Agreement can be worded in such a way that the deceased’s partner’s share of the business automatically passes to the surviving partner(s), with no payment being made to the deceased’s estate.
This method is particularly appropriate where the main asset of the partnership is goodwill. However a great deal of care and attention must be given to the wording of the Agreement.
If the partner’s decide on an automatic accrual, it would be wise for each partner to make other arrangements to compensate for the transfer of his/her interest in the business. Thefore under the terms of the agreement each should effect a suitable life insurance on his or her own life. The policy chosen will be typically be a whole of life or temporary assurance.
The policy can be used in any way that the individual chooses. For example it could be written under trust for the benefit of his or her family since no value will pass to the from the business.
If an automatic accrual arrangement is not an acceptable arrangement to the members of the partnership, the may opt for a cash purchase scheme. Such schemes are also appropriate to directors although there are special considerations. The principal schemes use the Buy and Sell Agreement and the Double Option Agreement and operate both retirement and death.
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In simple terms this is a written agreement to effect that the deceased’s share of the business must be sold to the surviving partners or directors, who must buy that share.
Frequently, the sale price will be determined by using a method of valuation previously agreed by the partners of directors. This avoids disputes arising at the point of actual sale.
Perhaps the main advantage of this type of arrangement is that every party knows precisely what will happened the event of a death occurring. However there is one major disadvantage, namely the loss of Business Relief for inheritance tax. The significance of this lost relief will depend on the individual’s circumstances.
Also know as a ‘Cross Option Agreement’ or ‘a put and call agreement’, this style of agreement includes options. Should either of the deceased’s personal representatives or beneficiaries wish to sell or the surviving directors wish to buy the other party is obliged to comply.
The prime advantage of this type of arrangement is that Business Relief is not lost, as this is seen by the Inland Revenue as not being a contract for sale.
Where the double option agreement is being considered by a company, it is essential that it does not conflict with it’s Articles of Association, which may have to be modified.
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