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Business Succession Planning: Need for Asset or Buy/Sell Strategy Need for Liability or Key Person Strategy
Simple Succession Plan:
Complete Succession Plan:
One Page Strategy: Simplifying the Valuation Issue
Multiple Policy Approach:
One Page, Two Policy Strategy:
Other Issues:
Sole Proprietors and Families: Third Party Buy/Sell Strategies Estate Equalisation Strategies
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The Traditional “Multiple Policy Approach”
Traditionally, Advisers have written one Policy for each separate Need of the Business or its Proprietors (the "Multiple Policy Approach"). This often results in three, four or five different Policies for each Life Insured, usually in the name of different Policy Owners. These arrangements are often difficult to understand, manage and review. They usually require Policy changes, medical tests and valuations each time one of the Life Insured’s needs changes. One day, the Life Insured might not be able to obtain all of the Cover they need.
Policy Ownership Calculator Click here to see a Policy Ownership Calculator that illustrates the number and ownership of Policies that would be needed to address the needs of a typical Business Insurance scenario.
Changing Needs The needs of the Business and its Proprietors are likely to change over time, no matter how the Insurance Cover is owned. Example Click here to see a typical change in the needs of a Proprietor. Bank Debt and Personal Needs might decrease over time, but the net value of the Business might increase. Thus, you might need to increase your Buy/Sell Cover. If the cover was written on separate Policies:
These steps involve the administrative burden of dealings with the Insurance Company. In addition, the increase might require new medical tests and underwriting, which can take up valuable management time. If the Life Insured cannot satisfy the Insurer’s requirements, an increase might not even be possible.
Tax Implications of Multiple Policies Equally importantly, the ownership of the Policies determines the Income Tax and Capital Gains Tax liability of the Insurance Proceeds. Often what seems like a sensible commercial method of ownership will result in a tax liability for a Death or Non-Death Benefit. See here for a more detailed analysis of the tax implications of Policy Ownership.
"One Page, One Policy Succession Plan" The One Page, One Policy Strategy is designed to deal with these issues more simply, tax-effectively and cost-effectively. It makes it easier to deal with your needs as they change over time. However, there might still be situations where the Business and its Advisers would prefer a Multiple Policy Approach.
Complete Succession One Policy Worksheet Click here to see a Risk Analysis Worksheet completed for a Complete Succession Plan held on One Policy pursuant to the terms of a Business Insurance Trust Agreement.
"One Page, Two Policy Succession Plan" In some cases, the Business might wish to obtain the benefit of a "One Page Succession Plan". However, it might not wish to use the One Policy Strategy. Super Fund Ownership of Buy/Sell and/or Personal CoverCover The Lives Insured might require some of the Buy/Sell or Personal Cover to be owned by a Public Offer Super Fund or Self-Managed Super Fund, where considered appropriate by the Adviser and Business. The purpose of the Superannuation strategy would be to obtain a tax deduction with respect to some of the Premium. It is not appropriate to hold Key Person or Debt Reduction Cover in the Superannuation environment, because it would breach the "sole purpose test". Self-Ownership of Buy/Sell and Personal Cover Alternatively, they might require:
Two Policies Therefore, these strategies effectively require at least two Policies:
In these cases, it is possible to design a “One Page, Two Policy Strategy”. Click here to read more about the One Page, Two Policy Strategy. Possible Third Policy for TPD and Trauma Cover Where Super Fund Ownership is required, it might also be necessary to obtain a third Policy, if Own Occupation TPD and/or Trauma Cover is required for any Buy/Sell or Personal Needs. Super Fund Ownership Click here to read about the implications of Super Fund Ownership. Click here to read about Super Fund Ownership of Buy/Sell Cover.
Hybrid Agreement The One Page, Two Policy Strategy requires a Hybrid or Multiple Policy-Owner Agreement. In these cases, the Agreement will enable the cover for each Life Insured to be split between two or more separate Policies owned by different parties:
This version of the Agreement would reduce some of the security concerns about the use of a Non-Arm's Length Trustee, because in most cases the intended Recipient of the benefit of the Insurance Proceeds will be the Policy Owner. Click here to read more about a Hybrid or Multiple Policy-Owner Agreement.
Complete Succession Two or Three Policy Worksheet Click here to see a Risk Analysis Worksheet completed for a Complete Succession Plan held on Two or Three Policies pursuant to the terms of a Hybrid Business Insurance Trust Agreement.
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Traditionally, Advisers have arranged a separate Policy for each separate need, often owned by different Policy Owners. After a few years, nobody knows what Cover they have, what it's for, whether it's for the right amount or whether the Insurance Proceeds will be paid to the right Recipient.
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. |
