This area is often overlooked when protecting businesses when a partner/business owner/director passes on. Most advisers or clients only attend to the Buy-and-Sell agreement, funded by policies. But Contingent Liability, can have a catastrophic effect on the cash flow of a business if a partner/director/business owner passes on. When policies are recommended for this type of scenario, the following should be considered:
These types of policies must not be made conforming, because the proceeds on the policy will then be taxable, and a company paying off the capital on debt, is not tax deductible. There must be a contingent liability agreement in place to ensure that the policy proceeds are in fact used to settle the debt. It is important to remember that the Life assured, will be dead and no longer able to ensure how the company money is used.
Other key areas to consider when assessing the possible risks for companies/businesses in the event of a death of one of the partners/business owners/directors, is Key Person Insurance & the Buy-and-Sell agreement as previously mentioned.
Finally, business owners: never start a business to have it just dissipate away, into thin air, because of the death of a owner/partner. Talking to an accredited financial adviser, can be advantages for the smooth transition & continuation of a business, upon the passing on of an important member of the business, be it a key person or a share holder in the business.
Till next time.
Article written by Claude Louw, Vision Risk & Investment Financial Adviser