Trusts and Cross-Option Agreements

Why Trusts Matter in Business Protection

A trust is a legal arrangement that allows the policyholder to specify who will receive the proceeds of a life assurance policy and under what circumstances. In the context of business protection, placing a life assurance policy in trust offers significant advantages. Most notably, it ensures that the lump sum paid out on the death of a partner or director is not counted as part of their estate for inheritance tax purposes. This means the funds can be accessed quickly and in full by the intended recipients, usually the surviving business owners, without being delayed by probate or diminished by tax liabilities.

The process also becomes clear and controlled by the use of a trust. Business owners can ensure that the money is used where it is most needed by stating the beneficiaries in the trust document; this could be to buy out the shares of a deceased partner or to support his family financially. This avoids the risk of disputes or unintended recipients, which can arise if the proceeds are simply paid into the estate and distributed according to a will or worse, in the absence of a will, according to intestacy laws.

The Role of Cross-Option Agreements

While a trust ensures that the policy proceeds are paid out efficiently, a cross-option agreement dictates how the business shares are transferred following an owner’s death.

A cross-option agreement is a legal agreement among business owners that gives the surviving business owners and the estate of the deceased business owner the right, but not the obligation, to buy or sell the shares of the deceased business owner at a pre-determined value.
This arrangement is crucial for several reasons. Firstly, it provides certainty and flexibility. The surviving owners are not forced to buy the shares, nor is the estate compelled to sell them, but either party can trigger the transaction if they wish.
This mutual option avoids the risk of a forced sale or an unwanted third party acquiring a stake in the business. Secondly, when combined with a life assurance policy held in trust, it ensures that the funds to complete the transaction are readily available, so the process can be completed swiftly and smoothly.

The Combined Benefits for Business Owners

When trusts and cross option agreements are used together, they create a robust framework for business succession. The life assurance policy provides the necessary funds, the trust ensures those funds are paid out tax efficiently and without delay, and the cross option agreement guarantees that the shares are transferred according to the wishes of all parties. This combination protects the business from disruption, ensures that ownership remains with the intended people, and provides fair compensation to the family of the deceased.

Regrettably, a number of enterprises do not consider these steps, as they are either not aware of the existing options or they see no point in the legal arrangements, as they are too complicated or not necessary at all. Yet, as the experience shows, in the absence of such safeguards even the most desirable life assurance policy may fall short of bringing the anticipated benefits. Delays, tax liability and disputes all can occur, endangering the future of the business when stability is the most essential.

Summary

Trusts and cross option agreements are not mere legal formalities but form an important part of a well laid business protection strategy. These agreements give business owners peace of mind and future security by making sure that life assurance benefits are efficiently paid out and that shares are transferred without any problems. For any business serious about succession planning and long-term stability, putting these arrangements in place is not just advisable, but essential.

Secure Your Business Future with Trusts and Cross Option Agreements

Trusts and cross option agreements are far more than just legal formalities, they’re vital components of a comprehensive business protection strategy. These arrangements ensure life assurance benefits are paid out smoothly and shares are transferred without complications, giving business owners peace of mind and long-term security.

If your business is serious about succession planning and stability, putting these agreements in place isn’t just advisable, it’s essential. Call us on 0345 688 4939, complete our Smart Enquiry Form today to get expert guidance tailored to your business needs.

Disclaimer: This article contains information from sources believed to be reliable but no guarantee, warranty, or representation, express or implied, is given as to its accuracy or completeness. Howard Wright Ltd does not undertake any obligation to update or revise any future statements. Past performance is not a reliable indicator of future results. Investments can go down as well as up and actual results could differ materially from those anticipated. This article is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any person as such, the information contained in this article is not intended to constitute, and should not be construed as, investment or financial advice. Appropriate personalised advice should be taken before entering into any transactions. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. Howard Wright Ltd is Authorised and regulated by the Financial Conduct Authority.