Shareholder Protection Shareholder Protection is effectively an agreement between shareholders which is backed up by a series of Life Assurance policies and trusts. In this agreement, the conditions are set out regarding what should happen to the shares in the event of death. For example, will they go the deceased’s family, will they be evenly split with the remaining shareholders or will they be sold on the Open Market. The Life Assurance Policies would provide the finance in this instance. As we saw in ‘Example 2’, a Cross Option can be embedded into this agreement, which means that the surviving shareholders have an option to also buy the shares from the deceased party’s family. In terms of ensuring that your business will continue to thrive in the event of your death, this is, in our opinion, the best Protection product to look into. Shareholder Protection Insurance guarantees that in the event of the death of a shareholder, the surviving owners will be given sufficient funds in order to buy the deceased’s stake in the business. By doing this, the surviving shareholders will remain in control of the company and the beneficiaries of the deceased’s estate (i.e. your family) will receive any interest accumulated from the shares, or indeed the profit of the sale of them. Shareholder Protection Insurance will enable your business to continue to be operational and your family to receive a financial gain.
Colin and Ravi are equal directors and shareholders of a catering company, which they set up 4 years ago. Both of them are involved in the day to day operations of the business, even though they employ over 40 members of staff. The two men both have wives and children, but none of the family members have the skills to run a business and the children have no urge to follow in their father’s footsteps. Colin and Ravi decide to set up two Keyman Insurance policies in order to protect each other’s lives if the worst were to happen. This would mean that in the event of sickness, incapacity or death, the two families would be looked after and the business could still continue to operate. In this instance, Shareholder Protection policies are set up under a business trust with a cross option agreement. This means that if one of them should die, the payment received goes straight into the company and the shares that the deceased owned go to the respective family. Of course, the family have no interest in the business so do not want the shares, they want the money. Conversely, the surviving business owner wants the shares, not the cash. This is where the Cross-Option Agreement comes in to play.
This agreement means that if one party is dissatisfied with the outcome and wishes to contest it, the other party must oblige. In this case, both parties are eager to do this, so that the family get the cash and the remaining business owner receives the shares. The family are financially comfortable and the surviving business owner has full control of the company. Everyone is happy. There are two perspectives to consider when looking at the benefits of Shareholder Protection Insurance. Firstly, if you have a business partner, or rather fellow shareholder, you will benefit if this type of insurance is in place. Imagine that your co-owner falls ill or even dies. By having Shareholder Protection Insurance in place, you will be given a lump sum which you can use to buy their shares and keep control of the business. By having complete ownership of the company you make the decisions. You can decide what is best for the company, for example you may want to replace the deceased or incapacitated Shareholder and bring someone new onboard. The terms of the Shareholder Protection Insurance state that the deceased Shareholder’s family will not be involved in the running of your company (they will sell the shares to you, so they benefit financially and you gain control of the business). This is reassuring, as you can be safe in the knowledge that someone who is not familiar with your business will not be in control. You should also take comfort in the fact that you have been able to purchase the shares in company without having to borrow money. This means that you have put the company in a financially strong position, i.e. no debts to repay or loans from the bank that are hanging over your head. In the second perspective, imagine that you are the Shareholder who is ill, or has sadly passed away.
Shareholder Protection Insurance will make sure that your family will receive a fair value for your interest in the business. This type of insurance will give you peace of mind, as the sale of your shares will realise the true value of your stake in the company. By having Shareholder Protection in place, you are also preventing any added pressure on your family in the event of your death. They will not have to try to find a buyer for your shares in the business, as they will automatically be obliged to sell them to the fellow shareholders. All of the hard work that you have put into your business will be paid back to your family. There are also benefits that can be attributed directly to you from Shareholder Protection Insurance. Say for example you fall ill. The last thing you need is the added worry of financial matters, which could hinder your recovery. This type of Protection will eradicate this, meaning that you can get well without any stress. You can also be safe in the knowledge that you are preventing the company ending up in financial jeopardy, caused by them having to borrow funds to buy your shares. Finally, Shareholder Protection will enable to you to retire with no money worries-as long as you are a shareholder, your family will always benefit. As you can see, Shareholder Protection does not only benefit your family, but it also benefits your company- whether you pass away or if a fellow Shareholder dies or is taken ill. This type of Protection is something that we would recommend to all business owners.
Partnership Protection comes in three main forms; ‘Buy to Sell’, ‘Cross Option’ and ‘Automatic Accrual’. In essence, this type of Keyman Insurance is the same as Shareholder Protection, however this deals with the actual ownership of the business, rather than just shares.
As the owner of a Company, Keyman Protection should be something that is a strong consideration for you. At the end of the day, the implementation of such a scheme could save you hundreds, thousands and in some cases millions of pounds. Keyman Protection is a safety net that could also ensure that your business is protected for the future. This type of insurance can be incredibly complicated, so we highly recommend seeking professional advice from an independent financial planner. At Efficient Portfolio, we have years of experience dealing with corporate clients, so we are here to help you with your Keyman Insurance.
We wanted to look at a type of Trust which will safe-guard your loved ones inheritance from divorce.
As a married couple, if your total estate including your pensions exceeds the nil-rate band (currently set at £650,000 for a couple), your next generation are likely to be faced with a 40% Inheritance Tax bill on the excess. It is also worth considering that the UK has the highest divorce rate in the EU. With this in mind, it seems a shame to work hard to save into your pension, only to have some or all of it taken away from your family by the state or from a divorce in the family. A special type of trust for your pension can help to safeguard this valuable asset against these issues.
Trusts are a very cost effective way to protect your family’s assets and to reduce your Inheritance Tax (IHT) bill. However, many people are oblivious to the issues that can arise without them. Trusts provide probably the best protection when it comes to making sure that everything you have worked hard for stays in the family. The Spousal Bypass Trust is a specific way of using a traditional trust arrangement to protect your pension fund; often the second largest asset someone has. So how does it work? The best way to answer this is to look at an example of what usually happens without one.
Mr and Mrs Smith have a joint estate worth £1 million, plus Mr Smith has a pension policy worth £500,000 and has nominated Mrs Smith as the beneficiary of any death benefits.
On Mr Smith’s death before retirement, Mrs Smith inherits the whole estate, including the pension as a tax free lump sum. No Inheritance tax here, so all seems fine at this stage.
The problem arises when Mrs Smith dies. At that point, the pension value is now added to the estate, so her total estate is now £1.5m. As a result, Mrs Smith’s Inheritance Tax liability after the joint nil rate band (£650,000) would be £340,000.
That is a significant reduction to the family’s wealth, but this could have been worse. What if Mrs Smith had remarried Juan, and then divorced him later in life? That might have cost the family £750,000. Or worse still, what if Mrs Smith had remarried Juan and then died; that could cost the family the full £1.5m if Juan gets his hands on it! Finally, if Mrs Smith went into long term care at a typical cost of £48,000 per annum, the estate will rapidly be eroded.
So how would a Spousal Bypass Trust help?
Nothing changes during Mr Smith’s lifetime other than the need to assign the death benefits of the pension to the Spousal Bypass Trust that has been created. On Mr Smith’s death, the death benefits pass to the trust. Family or friends, including Mrs Smith, are trustees to keep the running costs to a minimum, and they make an interest free loan of the full £500,000 to Mrs Smith.
Mrs Smith can use the funds as she needs during her lifetime, but on her death the funds can return to the trust to be reallocated to the children. This would save Inheritance Tax on the £500,000 that had come from the pension, an immediate tax saving of £200,000.
Furthermore, if Mrs Smith had got remarried to Juan and then divorced, the £500,000 is not her asset but a loan, so the Trust should ensure that is excluded from the divorce settlement. Equally, if she remarried and then died, whilst the rest of the estate may go to Juan, the £500,000 will return to the trust and pass down to the children. The same protection would apply against care costs too.
If your company makes profit through sales, how are those sales generated? If you operate a manufacturing firm, how are your goods produced? If you offer a service, where does that knowledge come from? The answer in all of these examples is through your team of people. Your company relies on its workforce, whether they have experience and knowledge, a powerful influence or a skill set which makes them a valuable commodity. Employing the right people is a struggle in itself, but once you have them, your company can become exceptional and outstanding in its field. Once you have these, you need to keep them. You can do this through the benefits which you provide for them, for example a pension scheme (which has been proven to be the 2nd highest ranked financial benefit of working, next to a salary. But this is not the focus of this chapter; We are going to assume that you already know how to retain your steam. So, the question is, what else could go wrong? What would happen if one of your key team members was taken ill for an extended period? What if someone has an accident which prevents them from working? And what about the worst possible scenario, one of your most valuable members of staff dies? What will happen to your business if one, or more, of your key personnel needs time out of the business?
To put this idea into context, think about this; you insure the building that your business is located in because damages to it would be costly, both to rebuild and repair the physical building, but also so that you do not have to take money out of your company to cover these costs. Likewise, you insure any machinery, company cars, mobile phones, computers…the list goes on. You insure these because you need them in order to operate and because you place a high importance upon them. So why would you not insure the core ingredient that not only makes your business a success, but the aspect of your company that you really cannot do without- your key employees?
One of the biggest risks to your company is the incapacitation of one of your key individuals. The influential, knowledgeable and experienced personnel within your company make your business what it is. If something happens to them, your business will suffer. Illness and death is something that is out of all of our control. However, there is help out there, which will safeguard you and your company;
Keyperson (or person) Protection is fundamentally a type of Insurance for your business. When a company wishes to compensate for financial loss that would arise from a serious illness or death of a key individual, this type of insurance can be taken out. The policy intends to cover the business for any losses incurred and enables the business to continue as before. The policy does not cover actual losses, but instead compensates the company with an income or lump sum that has been predetermined.
In order to show you the importance of Keyperson Protection, we would like to share a case study with you. This case study looks at Phillip Carter who was the Executive Director for Chelsea:
In April 2007, Philip Carter was a non exec director of Chelsea FC. Like his chairman, Mathew Harding, he sadly died with his son died in a helicopter crash coming back from a Chelsea match. His day job was running Carter &Carter– a highly successful business valued at £500 million the day before his death. At the time the share price was £12.75.
Following his death, shareholders and the bank became concerned about the viability of the company going forward and, because of this, the company was thrown into a cash flow crisis, and this quickly snowballed. The shares dropped in value by about 20% on the news of his death, but within six months the shares had fallen to just 85p and were suspended on the stock exchange. In April of 2008, the administrators were called in and the business folded. His widow had been left with a business that was now worth nothing.
Had the company had Key Person Protection, on his death or even serious illness, the company would have received a lump sum of money. This would have given the company time, and the bank confidence, to get the house in order, thus avoiding the company experiencing these problems.
Had the company had Shareholder Protection in place, the company would have had further capital to be able to buy the shares from the widow, leaving the management or other directors to run the company, and giving the widow the capital she needed for her and her family.
Carter’s tale is certainly a deeply upsetting one. The man that had it all financially was set to provide his family with a lifetime of security and comfort. Then tragedy hit and they were left with next to nothing from his extraordinary business. This is a harsh reality for business owners- one day you can have it all and the next it is taken away from you. Unfortunately in life there are some things that you cannot stop from happening, but there are steps that you can take which will ease, if not eradicate, the financial blow and ensure that an unexpected event does not bring your financial plan crashing down.
Keyperson Protection is essential future planning for your business. The smaller you are, the more vulnerable you become to loss due to sickness and death of a key member. Even larger companies with say three managers or directors would be severely impacted if there was a loss of just one person. A sole trader will cease to exist. Keyperson Protection will protect your business and reduce the risk that losses could mean. It could also act as the difference between your family benefiting from your businesses profits or being left with nothing. So let us look at this type of protection in more depth.
To begin with, we will discuss the types of cost that you could be faced with if a key individual was absent from work for a protracted period. If a key person cannot work, you may require temporary staff to cover their role. This would mean that you have the cost of recruitment, additional wages and training. Taking money out of the business to do this may affect your cash flow, which in turn could lead to you not being able to fulfil all of your customer’s orders or needs. You may then be in a position where it becomes a necessity to borrow funds from the bank. Not only could this be a lengthy process, but you are not guaranteed the loan. After all, if the banks are not confident that you can repay the sum, they will not lend it to you. Even worse, the bank may lose confidence in your company and call in the overdraft. This leaves you in a financial conundrum where cash flow has decreased and profits have significantly dropped. This may sound extreme, but it could easily happen. During this time of difficulty, you also need to consider how many customer you may lose, especially how many of them will be pilfered by your prowling competitors.
In order to put this into a real situation, we would like to share an example with you. The aim here is to show you how Keyperson Insurance can help to prevent a catastrophe.
Thankfully, Gill is one of the individuals who are named on the firm’s Keyperson Insurance policy. This means that temporary staff have been recruited to cover Gill’s role and ensure that the customers still receive their orders on time, staff rotas are completed, and the Managing Director still has someone reliable in place to take charge in her absence. Keyperson Insurance pays out the sum assured to cover the costs of recruitment and additional wages
As you can see in the previous example, Keyperson Insurance is a valuable protection to put into place, both for you, your business and your family. The people that can be covered by Keyperson Protection can effectively be anyone who has a significant impact upon your business. For example, they could be the CEO or Executive, departmental manager, a sales person or a head of a department. As a starting point, Keyperson Insurance covers 3 categories of loss:
In the financial services sector there are three main types of advisers.
There are advisers that are tied to one company, and these are known as Tied advisers. These are sales people for that company, and an example of such an adviser is someone who works at a high street bank. They can only advise you on that companys products.
There are also advisers that are tied to limited ranges of products, and these are known as Multi-tied advisers. Some of these would give the impression that they can choose from the whole market, but in fact they can only sell the products of the companies that they are tied to. In some instances this may only be one company in the area of financial planning you need help in. An example of a company like this would be St James Place.
Independent Financial Advisers (IFAs)
Finally, there are Independent Financial Advisers (IFAs), otherwise known as whole of market advisers. These advisers offer advice on the whole market and therefore have the most options available when it comes to meeting your financial planning needs. An example of an Independent Financial Advisory firm is Efficient Portfolio Wealth Management. Our Financial Advisers, based in Rutland and London, are all independent.
Tied advisers and multi-tied advisers will generally work on a commission basis where possible, and on a fee basis for investment work. This means you are still paying for the cost of their advice, but you are paying through that charges of a contract they recommend. Independent Financial Advisers offer the choice of fees or commission to their clients. Fee based advisers tend to be able to give advice on areas not paying commission and therefore often forgotten. This includes giving advice on savings products, Trusts and Wills. They can still use the commission to offset the clients fee, if that is what the client wants, but there is generally more honesty and transparency in fee based Independent advice, as the fees remain the same regardless of the provider or solution recommended.
There is a myth that Independent financial advice is the most expensive of the options. In actual fact the Independent adviser still has the same commissions and fee options available to the client that a tied or multi-tied adviser has, but he also has other options to meet the clients specific needs. It is for this reason that Accountants and Solicitors are prohibited from referring their clients to anything other than an Independent Financial Adviser by their regulators. Sometimes going to the bank for a financial product can seem best, but if you can seek independent financial advice first, it might save you just being sold the banks latest product of the month.
Writing this just after the October half-term break, it seems appropriate to talk about holidays. I love this time of year, and I’m sure many of you share my passion for spending quality time with your loved ones and enjoying some much-needed relaxation, fun and indulgence.
But imagine that you went to the travel agents, told them that you wanted to go away and they said that you could, but they could only send you away to Finland. There is nothing wrong with Finland, but it might not be the ideal holiday for you and your family. It certainly wouldn’t be classed as winter sun, and October is no time to be visiting Santa in Lapland!
That would be unacceptable, wouldn’t it? It would actually be ridiculous! If every travel agent only recommended one country, you’d end up having to most of your holiday legwork research, which somewhat defeats their purpose. You wouldn’t book a holiday through a company who offered such narrow options, so why is that so many people are accepting these conditions when it comes to their money?
If you are looking to plan for your future, grow your wealth or simply take the first step in your financial planning journey, it’s crucial to implement the best plan possible. So, as a customer, what should you be looking for in your planning?
First and foremost, look for independent help. Independence will give you far more choice and enable you to find the best solution for your specific needs. Independence means that you are employing someone to sit on your side of the table, as opposed to selling you something from the other side. Independent Financial Advisers have the ability to recommend solutions from across the market and are able to tell you how your existing planning stacks up against comparable strategies from other companies.
And therein lies an important point. If you go to see a travel agent that only sells holidays to Finland, guess what? They are going to try and sell you a Finland holiday! When I want travel advice, I want someone who knows the best places to travel to in each season. I don’t want to have to do that research myself, because I don’t have the time, resources or expertise.
When it comes to your pensions and investments, and the tools with which you are going to create your own financial freedom, it is vital you receive the best growth possible for a level of risk you are comfortable with. An extra 1% gained in performance here or an extra 1% lost in charges there may not seem like a big deal, but overtime it makes a massive difference. It could be the difference between cruise ships and battleships in your later life.
Knowing whether your money is growing as fast as it could be elsewhere in the market is difficult research to do without the right expertise and tools. That is one of the benefits of using an Independent Financial Adviser, because they have both.
To kick start 2020, we want to help people accurately assess their current pensions and investments, so they can clearly see if what they have really is the best solution available. To achieve this, we will be offering a FREE Portfolio Review for any new client throughout January. We will clearly show you how your investments are performing compared to the other options out there, so you can make an informed decision. If you would like to take us up on this incredible offer, simply email firstname.lastname@example.org or call 01572 898060 and we’d be delighted to shed some light on your financial situation.
We are living in an aging population. There are more people over the age of 60 than there are children under the age of 18. In many ways it is a great thing that we are living for longer- it means that we are healthier and modern medical advances are working. It also means that we have more time to enjoy life! However, there are of course some downsides. We will let your imagination think up all the ailments of old age, as for the purpose of this paper we are mainly concerned with one problem; long-term care.
The longer we live, the more care we may require. The current UK state funding aid is limited, and there are no signs of this improving. For many, local council care will be sufficient, but if you would prefer to live your final days receiving the higher level of care and comfort that you would like (and deserve), you must preserve some of your estate to pay for this. Trusts are an option for saving funds to do this. More on long-term care fees later.
If you would like guidance on how you can use Trusts to protect your family’s wealth, we work closely with a number of leading solicitors in this area, and are happy to meet for a free initial consultation to discuss the opportunities available.
Throughout our working lives, most of us strive to earn a good income to provide for our families and enjoy our time. Whether we want our ‘forever home’, the ability to privately educate our children, or even be able to enjoy exciting annual holidays, earning a good income helps us to enjoy our time and lead comfortable lives. But what would happen if that income suddenly stopped? Would you be able to pay the mortgage? Could you afford school fees? Would you even be able to put food on the table?
Whilst none of us can accurately predict the future, that doesn’t mean that we shouldn’t consider life’s unexpected moments and protect ourselves from the unknown.
Imagine you contracted a serious illness or had an accident and couldn’t work. How would you and your family cope? You might have savings set aside for such eventualities, but would they be sufficient? And what if you needed specialist care? Would you want to compromise the security of your family’s wealth so that you could get better?
A quick question: Do you insure your car? I would hope that if you drive you do! I bet you insure your home, pets, holidays, and even your mobile telephones. We insure these things to protect them from the worst. Insurance means that if our kitchen caught fire, we’d have money to repair it; if our faithful four-legged friend broke their tail, we could afford to pay the vet to restore them to full health; if our holiday was cancelled, we wouldn’t be out of pocket.
So why is it that so many of us neglect to insure the most important aspects of our lives? We protect material objects and possessions but forget about our health and our ability to generate an income.
If you take a moment to consider how much you are worth over your lifetime, you are most likely to be the most expensive asset that you own. For example, if you started earning £30,000 at age 20 and this rose with inflation each year (approx. 2.5%), by the time you retire, say at 65, you would have earned £2.5m! If you owned something worth £2.5m would you get it insured? You are darn right you would!
Income Protection is considered to be the most important piece of financial planning by the FCA, as it underpins all of the rest of your strategy. It ensures that if you are unable to work, as a result of illness or accident, you receive an income until either you return to work, or you retire. Unlike policies sold by the banks, like PPI, it is underwritten at the point of application, not the point of claim, which means it is much more likely to pay out when you need it.
If you would like to discuss your options, or reassess any existing plans, we would be delighted to help. At Efficient Portfolio, we believe that protection is one of the most important, yet neglected, areas of financial planning and it’s something we are passionate about improving.
The first step in achieving your goals is to discuss your current concerns with one of our qualified Financial Planners.
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