What a partner's death means for the practice
When a partner dies, their share of the business becomes part of their estate. Depending on your partnership agreement, the estate may be entitled to be paid out, or the partnership itself might have to be wound up and reformed. Surviving partners can find themselves owing a large sum just as they lose a colleague and their client relationships.
Firms of accountants, solicitors, surveyors, vets and dentists are often run as partnerships or LLPs, and many hold their value in goodwill. Partnership protection means the money to settle with the family is ready when it is needed, without draining the firm's working capital or forcing a loan.
Common ways to set it up
The usual method is own life in trust. Each partner takes out a policy on their own life for the value of their share and places it in a business trust, with the other partners as beneficiaries. If a partner dies, the trustees pay the money to the surviving partners, who use it to buy the share from the estate.
Some partnerships use an accruer arrangement in their partnership deed, where a deceased partner's share passes automatically to the others and the insurance pays the family directly. That route has its own tax considerations. Your solicitor can explain which structure suits your deed.
- Own life in trust with a cross-option agreement
- Life of another, where partners insure each other
- An accruer clause in the partnership deed
The role of a cross-option agreement
A cross-option agreement gives the surviving partners an option to buy the deceased partner's share and gives the estate an option to sell. Once one side exercises its option, the other must complete the sale. Because neither side is bound until then, the agreement is not normally treated as a binding contract for sale, which can matter for business relief on inheritance tax.
Some firms write the options into the partnership deed itself. Others keep a separate agreement that sits alongside the deed and the trusts. Tax treatment depends on circumstances, so ask your solicitor and accountant to review the arrangement and confirm how it fits your partnership.
Keeping the cover in step with the firm
Partnerships change. Partners join, retire or change their profit shares, and the value of goodwill moves with the firm's results. A policy set up when the practice was smaller may fall short years later, leaving the surviving partners to find the difference themselves.
Agree a valuation method with your accountant and review the cover when a partner joins or leaves. New partners will need their own policies and should sign the agreement. When a partner retires, their policy can usually be cancelled or kept for personal use, depending on how it was written.
Planning for serious illness as well as death
A partner who becomes seriously ill may want to step back and realise the value of their share, while the others need to bring in someone new. Adding critical illness cover to each policy gives the firm the money to buy that share if a partner is diagnosed with a condition the insurer lists.
For this to work, the agreement needs options that apply on a serious illness as well as on death, and the trust has to let the money reach the right people. Some firms prefer to cover illness through income protection instead, so a partner keeps their stake and receives an income while they recover. We can explain how each approach would play out for your firm.
How Hi Tomorrow helps partners plan their succession
We look at your partnership deed, the number of partners and how the value of the firm is shared. From there we suggest a structure, the cover each partner needs and whether to add critical illness cover, then compare policies from the insurers on our panel.
Each partner talks to us privately about their health. We set up the business trust at the start of each policy, and we work with your solicitor so the policies and the agreement line up. We can also help you review the cover when the partnership changes.