Left behind

Vanessa Alberts, Financial Adviser at PSG Wealth Pretoria East.

Surviving the death of your business partner.

Have you ever wondered what would happen to your business if one of your business partners were to die? If you’re a small business this can be a very difficult time – not just emotionally, but from a complex administrative perspective as well. “Recently this affected a new client of mine, who co-owned commercial buildings with his business partner. When his business partner died unexpectedly, he faced needing money to buy out his deceased partner’s interests along with sorting out all the technicalities, and it became a very costly and stressful affair,” says Vanessa Alberts, Financial Adviser at PSG Wealth Pretoria East.

“From the start, it would have been useful if he had put preventative measures in place. While it may have been too late for him to do so, there are many business owners who can benefit from being as prepared as possible.”

Business insurance and a sale and purchase agreement are must haves. “At business plan level, you should already make provision for unforeseen events, but just like some of us delay updating our personal wills, this part of planning in business can fall by the wayside,” she says. “But you need more than just your shareholder agreement to ensure a successful long-term business.”

There are different types of business insurance on the market, including continuity insurance, shareholder (or buy and sell) insurance, and key person cover. Each of these is taken out for a specific purpose and an agreement should be drawn up to make these intentions clear.

“A shareholder insurance policy is specifically intended to provide for sufficient capital to be available should one of the partners die,” says Alberts. “This capital is used for the remaining shareholder/s to buy out the deceased’s shareholding and allows for business to continue uninterrupted.”

How much cover should I have though?

A valuation of your business will need to be done. This, together with the existing shareholding structure, can then be used to determine adequate cover.

Where a shareholding is in the name of a trust, the trust nominates a representative and it is that person whose life is insured and who stands in as shareholder in the name of the trust.

The insured value may also include any outstanding loan accounts. Tax law makes provision for the proceeds from a shareholder insurance policy to be exempt from estate duty, provided that certain conditions are met. These conditions include:

• There must, in case of death and/or disability, be an intention to use the capital to buy the deceased's shareholding in the business.
• The shareholder benefiting from the policy must also be one of the lives insured.
• No premiums may be paid by the life or lives insured in terms of such a policy. The cost of the premiums payable must be borne proportionately by the other shareholders.

Alberts says this means that where the shareholding is in the name of a company or a trust, additional provision must be made for estate duty as there will be no exemption.

A purchase and sale agreement that clearly states the insurance conditions is essential, and must always be read in conjunction with the existing shareholders’ agreements, so no contradictions exist.

It is possible to take out insurance for both death and/or disability, though it is not recommended that critical illness cover be included. The reason for this is that such cover pays out to the owner of the policy in the event of a dread disease being diagnosed, but he or she may be able to continue working and won’t need to sell the shareholding. Disability cover would assist should critical illness cause disability, and this type of cover must be taken out by each partner personally.

“Regular review of the purchase and sale agreement and associated insurance is essential as shareholders may change, as may the value of the business,” Alberts concludes.