In the interests of financial security, business stability and continuity, it is essential for partnerships to provide a safety net following the death of a partner. There should also be a partnership agreement in place that specifies that the partnership should continue on the death of a partner. If this is not in place then in England and Wales, on the death of a partner, the partnership is automatically dissolved. (Partnership Act 1890).
Partnership Protection is usually put in place to ensure that, on the death of a partner, their share of the partnership is available for the other partners to buy and there is sufficient cash available to buy the share.
The risk of not setting up some Partnership Protection is as follows:
- Their share may go to the deceased’s family, which has no interest in the business and may prefer a cash lump sum
- The Partnership or other partners may not have the resources to buy the deceased’s share of the Partnership
- The share may be taken over by someone who does not share the Partnership’s objectives, and they may even be a competitor.
Partnership Protection is normaly put in place by:
- Taking out a life insurance policy for each partner to the value of their share of the partnership.
- Placing these life insurance policies in trust so that any payout is available to the remaining partners without any tax implication
- Setting-up a Cross Option Agreement between the partners so that if the options are exercised, the holder of the share must sell them and the other partners must buy them
- I can provide FREE expert Independent advise on the best arrangement for your Partnership, and also put the necessary policies and trusts in place. I can also provide ‘draft’ cross option agreements, again free of charge.