What happens to shares when an owner dies
When a shareholder dies, their shares pass under their will or the intestacy rules. That could leave a spouse or adult child owning part of your company. They may have no interest in the business, or they may want a say in how it is run. Either way, the surviving owners and the family both face a hard conversation at a hard time.
Most families would rather have money than a minority stake in a private company. Most surviving owners would like to keep control. Shareholder protection gives both sides what they want, provided the cash and the paperwork are in place before anything happens.
How the cover is set up
The most common approach is own life in trust. Each shareholder takes out a policy on their own life, for the value of their shares, and places it in a business trust for the other shareholders. If one owner dies, the trustees receive the money and the surviving owners use it to buy the shares from the estate.
Other routes exist. Shareholders can insure each other directly, which suits companies with two owners. Alternatively, the company can insure each shareholder and buy back the shares itself, which brings in company law rules that your solicitor needs to check. We can explain the differences so you can choose with your advisers.
- Own life in trust: each owner insures themselves for the others
- Life of another: owners insure each other directly
- Company share purchase: the company buys back the shares
Why a cross-option agreement matters
Insurance provides the money, and a cross-option agreement provides the deal. Under this agreement, the surviving shareholders have the option to buy the shares, and the deceased owner's estate has the option to sell them. If either side chooses to use its option, the other has to go along with it.
Because neither side has to sell or buy until someone exercises an option, the agreement is not normally treated as a binding contract for sale. That distinction can matter for business relief on inheritance tax. Tax treatment depends on circumstances, so your solicitor and accountant should review the agreement and the trust wording alongside the policy.
Choosing the amount and type of cover
Each policy should match the value of that owner's shares. Valuing a private company is never exact, so most businesses agree a method with their accountant and review it every year or two. If the company grows, the cover should grow with it.
You can choose life cover alone, or add critical illness cover so the shares can change hands if an owner becomes too unwell to work. Adding illness cover usually needs its own option in the agreement. Premiums are normally paid by each shareholder personally, and the company can help by increasing salary or dividends to cover the cost.
Points to agree before anyone applies
Shareholder protection works best when the owners have talked through a few questions first. Settling them early saves time with the solicitor and makes sure each policy is set up to match what you have agreed between you. Your accountant and solicitor can help you answer the harder ones, such as valuation.
It also helps to involve every shareholder from the start, including those with small holdings. Each person needs to sign the agreement and, in most structures, take out their own policy. An owner who opts out can leave a gap the others cannot fill later.
- How the company will be valued, and how often you will update it
- Whether serious illness as well as death should trigger a sale
- Who the trustees of each business trust will be
- What happens to a policy if an owner sells up or retires
How Hi Tomorrow helps your shareholders plan ahead
We look at your share structure, the value of each holding and the health and age of each owner. From that we recommend an approach and compare policies from the insurers on our panel. Each shareholder deals with us in confidence about their own medical details.
We arrange the business trust at the start of each policy, so the money goes to the right people. We do not draft legal agreements, but we work alongside your solicitor and accountant so the cover and the cross-option agreement line up. We can also remind you to review the amounts as the company changes.