The Perfect Partnership – A Match made in Heaven!

Ever considered what would happen should a business partner of yours die or suffer from a serious illness? The consequences for the partnership or even its pure survival can be devastating. Would you or any other surviving partners have the necessary funds in place to buy out the deceased partner’s share? Valuations would generally be capital invested in the business, loans provided, share of undrawn profits and value of any goodwill built up.

Under the Partnership Act 1890, a deceased partner’s share of the business automatically becomes the property of their estate, and the partnership dissolved unless there’s a formal agreement in place as to their desired outcome. Even then, would you have the funds available to do this or would it be more likely you’d have to apply for bank finance? How easy would it be for a business to raise this finance? Where funds are borrowed to buy a deceased partners share, the remaining partner/s may be unable to sustain the repayments in the long term.

A fact which may surprise you is that within 5 years of the death of the founder of the business, 72% of businesses cease trading (BDO Simpson Xavier).

Thankfully, there’s a simple and viable solution in the form of Partnership Insurance. This puts the finance in place so that in the event of a partner’s death, the continuity of the partnership is secured. The key benefits are the surviving partner/s keep full control of the business as they are now in a position to buy back the deceased partner’s share. Equally important, the next of kin receives the full value of the deceased’s share by way of a capital lump sum. As a consequence, good relationships built up between other family members over the years are also maintained.

There are many ways that Partnership Insurance can be structured, but this is to a large degree dependent on the type and size of the partnership. Critical also is having the appropriate legal agreement in place. This is simply a Double Option Agreement which basically includes a “Call” and a “Put Option”. These options ensure that either the surviving partner/s or the deceased’s next of kin can trigger the option. In this way, both parties are financially and legally protected. A fair deal all round.

Typically, the premium cost to set up this Partnership Insurance is borne by the partners themselves. As competition is strong for this business however, rates are very keen at the moment. Significantly, the proceeds are not liable to Inheritance Tax in the hands of the surviving partner/s provided they are used to buy out the deceased partner’s share, as intended. In the same context, the proceeds inherited by the deceased’s spouse or civil partner are also exempt from Inheritance Tax.

Similar to other forms of business protection, it’s becoming increasing popular to incorporate serious illness cover also. Such an illness could prevent one from continuing as an active participator in the firm. In such circumstances, we can structure the arrangement that the appropriate funds are also in place to affect the buyout.

A Certified Financial Planner is ideally placed to advise you if you have concerns about how your business would cope in the event of a death or serious illness to another partner. Partnership insurance is vitally important where there are two or more partners in any business such as solicitors, dentists, accountants, pharmacists and many other SME’s.

In summary. When set up correctly, the key benefits of partnership insurance to you are;
• Surviving partners have funds in place to buy the deceased’s share in the firm without having to resort to borrowing or selling assets.
• The surviving partners keep full control of the business without incurring any inheritance tax liability.
• The spouse or dependents of a deceased partner are financially compensated to the value of that deceased partner’s share

Please share this blogpost if you think it has been informative or might help someone else you know. Get in touch if you have a query on this or any other financial issue or would like to arrange your free Discovery Meeting consultation.

Paul is the Managing Director of Lifestyle Financial Planners Ltd and been in the Financial Planning business since 1985. Lifestyle Financial Planners offer specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.

Tel: 096-75951 Mob: 086-8053755,
The information contained in this article is for general information only. It cannot be relied upon as the basis for any form of agreement or advice. We advise readers seek professional tax and legal advice where necessary. The information given is a guideline only and does not take into account your own particular circumstances.

Posted 19th June 2017

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