They were advised to do a share protection scheme using life insurance and cross-option agreement but the advisor did not correctly implement the advice.
When Matt died, the life insurance paid out and Phillip purchased Matt’s shares for £900,000. This caused Matt’s wife’s estate to increase by this amount and created a potential £360,000 Inheritance Tax (IHT) bill (£900,000 x 40%) for her children.
Phillip subsequently sold the business for £1,800,000 which is now part of his estate and creates a potential IHT bill for his children of £720,000 (£1.8m x 40%).
This meant the tax man received a combined IHT payment of £1,080,000 on the business valued at £1.8m which represents a tax rate of 60%.
With the correct Wills and use of trusts the potential IHT bill could have been reduced to zero.
* (a cross option agreement is where each shareholder agrees that upon his death his fellow shareholders have the option to buy his shares at market value and that his spouse or personal representatives (on death) have the option to sell his shares. Life insurance is often bought where there are insufficient funds to buy out).
Our Planning leaves each partner or director’s share of their business to individual Family Trusts through appropriate Clauses written into their Wills. Furthermore the appropriate Life Cover will also be assigned to ‘Shareholder Trusts’ so that these proceeds do not impact on the surviving individual estates. Once the Cross Option has been executed, the proceeds from any Life Assurance policy replace the share held in the deceased’s Family Trust(s) and so do not form part of the beneficiary’s estate. These funds are now protected against any of the risks named above and the surviving spouse and beneficiaries still have full access to the Trust assets.
The surviving business partner still retains their original share of the business but the deceased’s partner’s share is passed directly into a Shareholder Trust(s) from where the Life assurance proceeds were originally paid. The surviving Director still has the fullest of control on the business as he is a Trustee of the Shareholder Trust(s).
The Shareholder Trust(s) can also be utilised as a further efficient income tax planning tool. Now that a proportion of the business is in the Shareholder trust(s) any dividends paid into the Trust(s) could be distributed to beneficiaries of the trusts who may well have nil or low rate income tax.
Should the surviving Director(s) decide to sell the business, only their original share of the business will enter their estate. The remaining share will belong to the Shareholder Trust(s) for which he and his family are beneficiaries. This share is also protected and cannot be assessed for IHT purposes or be at risk from attack by Long Term Care Costs, divorce, and bankruptcy.