Question of Finance: Insurance is best solution to this age-old risk
Q: MY BUSINESS partner at 62, is 20 years older than me and I'm concerned that in the unfortunate event of his death I'll have to buy out his spouse. Is there a form of cover that we should have?
A IF YOU do not have a partnership agreement in place then the deceased partner's share of the partnership automatically becomes the property of their estate as per the Partnership Act 1890; this effectively becomes a debt due that can be immediately called in.
The surviving partner must raise sufficient capital to pay the deceased partner's share of retained profit and capital.
Partnership insurance is the solution to this risk.
On the death of a partner, the proceeds from the life policy allows for the purchase of the deceased partner's share in the business from their estate.
This is commonly arranged under a double option agreement whereby either the surviving partner (call option) or the legal representatives of the deceased partner's estate (put option) can compel the other party to sell or buy the share respectively.
Advice should be taken from a qualified accountant to properly assess the value of the firm.
This should be insured under a convertible and indexed plan to protect against inflation.
There are two ways to the double option agreement for partners, 'own life in trust' and 'life of another'.
With such a difference in age, the cost under the own life in trust arrangement would be unfair for the older partner who would be paying a much higher premium. It would be more equitable to arrange the latter, that way the older partner would be paying a lower premium for the unlikely event that the younger partner died first.
I would advise that expert advice be taken before taking out any insurance policy.
- Mathew Kennedy, Mathew Kennedy Financial Services