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Business Assurance | Reid RaetzerReid Raetzer

Business Assurance

The death of a key employee or shareholder can have an enormous financial impact on a company. That’s why adequate business assurance is of such great importance. We provide qualified advice as to how these situations can be avoided tax effectively. We also offer solutions concerning how to protect companies and individuals from liabilities arising from collateral cessions.

A Buy and Sell Agreement and the underlying life assurance can be a little tricky to understand, so please click here for a case study that explains it all.

Every business entity, which has two or more shareholders or partners, needs to ensure that should one of the partners die, arrangements have been made for the continuation of the business. If not, a situation may result where the deceased partner’s estate will claim the value of his/her interest in the business and insist that this be paid out. If the surviving partner doesn’t have enough capital to do so, the business may have to be sold to a third party or liquidated.

Another scenario could be that the deceased partner’s wife / beneficiary become a shareholder in the business. This could result in ill feelings and/ or a drain on cash flow.

In order to avoid this, the parties should enter into a Buy and Sell Agreement: a legal document which dictates that at death, the surviving partner will buy the deceased’s interest from the estate in full and final settlement. The most effective way in which this agreement is funded is via life assurance where each member takes cover equivalent to their respective interests on each other’s lives.

The deceased’s policy would pay the surviving partner directly as he/she would be the legal owner of the policy. The surviving partner is then bound in terms of the Buy and Sell Agreement to pay the proceeds to the deceased partner’s estate and thereby obtain the deceased’s shares. The end result is that the surviving partner now owns the deceased’s interest and the deceased’s estate receives full payment for his/her interest.

The proceeds of the policies are exempt from estate duty as long as they comply with the Estate Duty Act.

Many companies rely on the services of a few key people whose death would have a negative impact on the business – everything from severe financial problems to having to spend a lot of money to recruit and train a replacement.

We recommend taking out a policy on the key individual’s life on whose premature death the company would receive the proceeds.

The premiums on a key person policy can be tax deductable, but the maturity value will be included in the employer’s gross income. If the premiums were not deducted for income tax purposes, the proceeds will be tax-free.

Preferred Compensation plans are a way of ensuring the continued services of highly valued employees. The employer undertakes to pay the employee a cash amount at retirement or at a certain set date and funds this via an investment policy.

The employer pays the premiums towards the investment which, after a stipulated period, and per a legally binding agreement assigned to the employee. The employee may then cash in the policy or leave it invested with the assurance company.

The premiums may be tax-deductable in the hands of the employer as a ‘salary increase’ plus proceeds are tax free.

Contingent Liability Cover is a life assurance policy that is used to cover liabilities for which a member/shareholder has had to sign personal surety. Should the guarantor prematurely die or become disabled, the life assurance policy will clear the liability.

The business pays the premium and an underlying agreement is made under which the business undertakes to pay the proceeds of the policy to repay the loan. The premiums can be tax-deductable, however, if the deduction is taken, the proceeds are subject to income tax.

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