Hybrid Business Succession Strategy

Many lawyers who question or oppose the use of Business Insurance Trusts either don't understand them or are simply trying to justify their own historical preference for Self-Ownership.

On the other hand, there are also lawyers who recognise the functionality of an Insurance Trust and try to mimic it under the guise of Self-Ownership or a "Hybrid Business Succession Strategy".

Using Trusts to Aggregate

In other areas of practice, lawyers embrace trusts as "aggregators".

In the investment context, trusts are a perfect vehicle to aggregate investors, investors' funds and investment opportunities.

Many opponents of Trust Ownership use trusts in this context.

Many of them advocate Testamentary Trusts as well.

But when it comes to Insurance Trusts, they sing a different song.

Many opponents don't understand Trusts.

On the other hand, many advocate Self-Ownership so strongly that they cannot now back down and embrace Insurance Trusts.

This stand-off causes much of the misunderstanding of the Business Insurance Trust Structure that frustrates Advisers and Clients.

Using Self-Ownership to Aggregate Insurance Cover

The Business Insurance Trust Structure has been designed to aggregate different Cover onto One Policy.

Many advocates of Self-Ownership oppose the need for aggregation and prefer to hold the Buy/Sell Cover on a dedicated Buy/Sell Policy owned by the Life Insured.

However, in some cases, opponents of the Trust Structure are now using Self-Ownership as a legal vehicle to aggregate cover onto One Policy.

One example is the "Hybrid Business Succession Strategy".

The impetus behind a "Hybrid Business Succession Strategy" is two-fold:

it recognises that aggregation of cover onto One Policy makes sense to clients; and
Self-Ownership means that an Adviser only has to get the Life Insured to sign the Insurance Proposal (whereas Trust Ownership means that the Trustee or Business has to sign the Proposal as the Policy Owner).

The Hybrid Business Succession Strategy is a response to the intuitive marketing appeal of the "One Page, One Policy Succession Plan" made possible by the Business Insurance Trust Structure.

However, by abandoning the Trust Structure, it loses other advantages and results in other disadvantages.

Security Concerns

Trust Ownership means that someone other than the Life Insured must own the Policy.

Usually, the Trustee will be the Business itself.

On the other hand, Self-Ownership means that the Life Insured must own the Policy.

It's interesting that a key goal of the Hybrid Strategy is to avoid Trust Ownership and embrace Self-Ownership.

However, ironically, the Hybrid Strategy not only mimics the functionality of Trust Ownership, it will ultimately constitute a trust in its own right.

The problem for the Hybrid Strategy is that it is less secure than Trust Ownership.

The trust (and therefore the Insurance Proceeds) is controlled by the Life Insured (or someone on their behalf).

The practical concern is that, if you control the trust, you control the Insurance Proceeds.

You only have to look at what would happen in the case of a Death or TPD to understand how a trust of the Insurance Proceeds is created and the adverse practical implications of a Hybrid Strategy.

Death

In the case of a Death Benefit, the Policy and the Insurance Proceeds will form part of the assets of the Life Insured's Estate.

The person who controls the assets of the Estate will be the Life Insured's Executor.

The Executor is a Trustee appointed by the Life Insured to administer their Estate in accordance with their Will.

The Executor owes its principal duty of care to the Life Insured and members of the Life Insured's Family or the Beneficiaries of the Estate.

The Executor is not a Trustee appointed by all of the members of the Business Family.

It is a Trustee appointed by just one member of the Business Family to administer their own Estate in the interests of their own Family and Beneficiaries.

So, despite the desire to avoid the concept of a Trust, the Hybrid Strategy actually involves a Trustee in the case of Death Benefits.

Unlike the Business Insurance Trust Structure, this Trust does not exist and the Executor does not become a Trustee, until the Death of the Life Insured.

However, even when the Life Insured has died, there is scope for uncertainty and doubt.

Before the Executor or Trustee is in a position to take any action, a number of steps have to be taken first:

the Will has to be found;
the Executor has to be identified; and
the Executor has to consent to act as Executor.

Only when all of these steps have been taken can the Trustee make a claim and ultimately distribute the Insurance Proceeds.

All this assumes that there is no dispute with respect to the administration of the Estate.

TPD

The situation could be similar in the case of a TPD.

If the Life Insured is seriously disabled, they might not have the physical or mental capacity to make a claim or distribute the Insurance Proceeds.

If they have granted an Enduring Power of Attorney, then the Attorney might perform these functions.

However, the Attorney does so as Trustee for the Life Insured.

If the Life Insured does not have a valid Power of Attorney, it might be necessary to apply to the Court to appoint a Trustee of the Life Insured's affairs.

Once again, a Trustee appointed by the Life Insured (or in the interests of the Life Insured) is in control of the Insurance Proceeds, not a Trustee appointed by all of the members of the Business Family.

Selective Imitation

Imitation is the sincerest form of flattery.

However, it's ironic that the Hybrid Strategy is selective - it only mimics the aggregation function of Insurance Trusts.

It consciously avoids the ability of Trust Ownership to offer all members of the Business Family security and certainty.

It places temptation in the hands of the deceased or disabled Life Insured and jeopardises the interests of the surviving Lives Insured.

In other words, it plays favourites. It sides with one Proprietor over the others.

Ironically, it will always be the "others" who own the Business after the Insured Event.

The ones who are jeopardised by the choice of Trustee (or Policy Owner) are the Proprietors who the Adviser hopes will remain clients in the future.

They are unlikely to remain clients if the real reason Self-Ownership or the Hybrid Strategy was used is that the Adviser thought it was administratively inconvenient to get the Trustee to sign the Proposals.

Ultimately, we all have to work together to "get the right money to the right people at the right time".

Insurance Trusts are designed to do justice to this adage.

Nothing more, nothing less.

Tax Issues

Click here to read about some of the tax concerns with respect to Self-Ownership and the Hybrid Business Succession Strategy.

Unfortunately, where the Life Insured (or the Executor of their Estate) is required to pay the Insurance Proceeds to a Third Party, the discharge or performance of this obligation itself would create a CGT liability.

Hybrid Business Insurance Trust Agreement

Please note that the Hybrid Business Succession Strategy is different to the Clover Law Hybrid Business Insurance Trust Agreement discussed here.

Adviser Tip

The One Page Strategy is designed to help you simplify Succession Planning.

It helps you understand your needs, it helps you quantify them, it helps you cost them, and it helps you prioritise them.

See more Adviser Tips

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