Shareholder Protection

Shareholder (or partnership, including LLP) Protection

Is a term assurance policy providing a capital sum to enable shareholding directors or business partners to purchase shares from a critically ill shareholder or a deceased shareholder’s estate? This allows them to retain control of the business and guarantee continuity.

If a shareholder or owner dies, the recipient of their share of the business would normally be determined by either the terms of their will or the laws of intestacy. This can cause issues if the beneficiary of the shares has no interest in the business or wants to sell the share to a third party.

Who does it protect?

To allow for such an outcome, shareholder protection cover is taken out. Each shareholder holds a policy on their own life written in trust for the benefit of the remaining shareholders. The business then needs to adopt appropriate legal agreements setting out what happens to each shareholders’ shares on their death or critical Illness. A cross option agreement can be used to give each party the option to buy and sell shares as required.  

The benefits of Shareholder Protection:

By implementing shareholder protection, surviving shareholders or owners can retain control of the business and the deceased owner’s dependants have a willing buyer and a capital sum rather than a share of the business.

Shareholder protection is usually set up under trust. The trust works together with the legally binding documents to assist with the required outcome of the protection.

A trust has the following main benefits:

  • It identifies who the beneficiaries should be 
  • The chosen beneficiaries will receive the benefit quickly without the need for probate or prior payment of inheritance tax 
  • The amounts paid to beneficiaries are generally free from inheritance tax

Whilst shareholder protection will be put in place for an appropriate length of time specific to the business’s circumstances, regular reviews of the cover, business value, shareholdings and legal documentation are required to make sure the cover remains suitable.

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