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Original Beneficial Ownership

 

Additional Service Fees:

Additional Fact-Finding Fees

Variations of Draft Agreement

 

Initial Agreements:

Initial Agreements

Content of all Agreements

Current Legal Fees

Inadequate Insurance Proceeds

Trauma Buy/Sell Strategy

 

Alternative Initial Agreements:

Complete (BITA)

Complete (Hybrid BITA)

Simple (Self-Owned BSA)

 

Proprietors Agreements:

Proprietors Agreement

 

Debt Reduction Agreements:

Debt Reduction Agreement

 

Other Services:

Variation Agreements

Meetings and Advice

 

Cost Savings:

Cost Savings

 

 

 

 

 

Debt Reduction Agreement

 

Debt Reduction (or Key Person) Agreement

This is a stripped-down version of the standard Business Insurance Trust Agreement that deals solely with Debt Reduction issues.

It omits the standard Buy/Sell Provisions that form part of the Business Insurance Trust Agreement.

 

CGT Exemptions

The Agreement retains the standard Provisions of the IGS Business Insurance Trust Agreement that ensure that the CGT implications with respect to the Debt Reduction Policy are adequately addressed by a legal agreement.

Underneath the "roof" of a standard IGS Agreement, the Life Insured is the "Beneficial Owner" of the Policy.

As a result, the Agreement obtains a CGT exemption with respect to both Death and Non-Death Benefits.

Please click here to read about the CGT implications of Trust Ownership of Debt Reduction Cover.

 

Third Party Recipients

The Business Insurance Trust Agreement can distribute the Insurance Proceeds directly to Third Parties both securely and tax-effectively.

In the case of the Debt Reduction Agreement, this allows the Agreement to pay the Insurance Proceeds to:

  • the Creditor/Lender;

  • the Debtor/Borrower; or

  • the Continuing Proprietors (so that they can lend the Insurance proceeds to the Debtor/Borrower).

The ATO Ruling with respect to the IGS Business Insurance Trust Agreement states that:

"the payment of an amount by the trustee to a nominated recipient in accordance with a nominated beneficiary's direction, will not be the discharge or satisfaction of an asset under CGT event C2."

 

Directions to Trustee

Because the Life Insured is the Beneficial Owner of the Policy, it is entitled to direct the Trustee (or Legal Owner) how to distribute the Insurance Proceeds on behalf of the Life Insured.

For example, the Life Insured may direct the Trustee to pay any Debt Reduction Cover to the appropriate Creditor.

This process is similar to the situation where a customer of a Bank signs a cheque that directs the Bank to pay funds to the payee or presenter of the cheque.

In a commercial sense, the money belongs to the customer, but the customer directs the Bank what to do with it.

A Trust Ownership Agreement effectively constitutes a "list of cheques" that must be distributed by the Trustee upon the occurrence of an Insured Event.

 

Commercial Debt Forgiveness Provisions

The Trustee physically pays the Creditor directly.

However, the journal entries show a payment to the Business or the Continuing Proprietors.

Whether the Insurance Proceeds are paid to the Business or the Continuing Proprietors, they are paid to them absolutely and not by way of a loan.

As a result, the payment does not create any Right of Contribution or Loan Account as between the Life Insured (or their Estate) (on the one hand) and the Business or the Continuing Proprietors (on the other hand).

In the absence of a Loan owing to the Life Insured (or their Estate), there is no question of any Commercial Debt Forgiveness.

Click here to read more about Trust Ownership and the Commercial Debt Forgiveness Provisions.

 

Secure Repayment of Creditor

While Self-Ownership means that the Life Insured (or their Executor) will be responsible for distributing the funds of the Business to the Creditor, a Business Insurance Trust Agreement means that a Trustee will control distribution of the Insurance Proceeds to the Creditor in accordance with the terms of the Trust Agreement.

This means that physical control of the Insurance Proceeds (and therefore the implementation of the "Business Will") is in the hands of a custodian that has a contractual and fiduciary obligation to comply with the directions of the Beneficial Owner in the Trust Agreement.

The Trust is therefore a more secure vehicle for protecting the interests of all of the members of the "Business Family".

 

Substitute Loan Accounts

The journal entries required by the standard Agreement show a payment of the Insurance Proceeds to the Continuing Proprietors (who now own 100% of the Business between them).

One of the unique features of a Business Insurance Trust Agreement is that it establishes Loan Accounts pursuant to which the Continuing Proprietors lend the Debt Reduction Insurance Proceeds to the Business, which in turn repays the Creditor.

In effect, the Agreement creates new Loan Accounts with the Continuing Proprietors in substitution for the external Debt.

The Continuing Proprietors are referred to as "Substitute Lenders".

Under the IGS Trust Structure, the initial payment of the Insurance Proceeds to the Substitute Lenders does not create any Loan Account or other obligation owing by them to the Life Insured or their Estate.

The new Loan Accounts are not intended or required to be "forgiven" .

Instead, the existence of the new Loan Accounts in favour of the Substitute Lenders allows future cash flow of the Company to be paid to the Substitute Lenders as tax-free repayments of principal (rather than as assessable dividends).

 

Avoidance of Franking Credit Problem

This structure avoids one of the adverse tax implications of Company ownership of Debt Reduction Cover.

While the receipt of Death Benefits by a Company would be CGT-free, there is an adverse income tax implication: because no tax has been paid, there would be no franking credits attributable to the Insurance Proceeds.

Therefore, any subsequent dividends attributable to the Insurance Proceeds would be taxable at the full marginal rate of the shareholders.

Under the Loan Account structure created by the Business Insurance Trust Agreement, the Debt Reduction Proceeds are lent to the Company.

This enables the Loan Accounts to be repaid tax-free in the future (i.e., the payments are repayments of principal owing with respect to the Loan Accounts, not payments of dividends).

Example

In the above example, the Agreement would save:

  • a Premium of $257 per annum;

  • CGT of $85,720 on a Non-Death Claim of $285,720; and

  • Income Tax of $132,860 subsequent to a Death Claim.

Obviously, this level of saving more than funds the cost of setting up and updating the Agreement.

 

Legal Fee (Up to Four Individuals)

Up to four Individuals: $2,200

 

Legal Fee (More than Four Individuals)

The above Fees apply up to the first four individuals.

There is an additional Fee of $275 per individual for each individual exceeding four individuals.

 

Compliance with Fee Policy

All Fees are subject to strict compliance with the Legal Fee Policy.

 

Initial Client Meeting and Advice Fee

No provision has been made in the Legal Fee for a Meeting or Teleconference.

If a Meeting or Teleconference is required, the standard Meeting and Advice Fee is additional to the cost of a Debt Reduction Agreement.

 

Additional Fact-Finding Fees

It is not always possible to complete all of the details of the Business Structure and Liabilities of the Business in the Client Meeting or Teleconference.

If the information is not supplied in the Questionnaire, there will be an additional Legal Fee of $440 to collect the information from the Business or its Advisers, review it and incorporate it into the Succession Plan and Documentation.

Click here to read more about the Additional Fact-Finding Fees.

 

Any Variation of Incomplete Draft Agreement

After six months from first draft: $440

After 12 months from first draft: the standard Fee for an Initial Agreement

Failure to finalise any Agreement promptly can have serious adverse commercial, legal and taxation implications for the Business and the other parties to the Agreement.

 

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

The average premium cost of the Trustee’s Fee is less than one annual Policy Fee.

See more Adviser Tips

 

 

 


Current Marketing Schedule

Current Marketing Schedule

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.