I’ve been running a small business with my brother for the last 30 years.  It’s a limited company and we’re the sole shareholders at the moment.  My son isn’t interested in being involved but my two nephews are managers in the business and the plan is for them to take it over when my brother and I retire.  However, I do feel that I want some kind of recompense for handing my share of the company over to my nephews so that I have money both for my retirement and to leave my own son.  I’m also concerned about how we handle my share if I die before I retire.  What do you suggest?

Carl Lamb of Smith & Pinching Responds

There are two aspects of succession planning to look at here.  Firstly, you need to manage the transfer of ownership of the company to your nephews when you retire and to work out how you are going to get paid for your share.  Whatever you decide, it needs to be something that you and your brother can formally agree upon.  A shareholder agreement can provide you both with the security of knowing that whatever you’ve agreed will happen when the time comes.

A shareholder agreement sets out a structure for the business, details how it should be managed and determines what happens in the event of disputes between shareholders.  It also has the important role of setting out what happens to a shareholder’s holding if he or she either dies or wishes to dispose of their shares.  This prevents shares being purchased by an unapproved third party, whilst ensuring that the deceased or departing shareholder can receive the value of his or her shareholding.

The other issue you raise is how to ensure your heirs get the value of your share of the business if you die before you retire.  Shareholder protection is an insurance policy that can play an important role in securing the business for the future of all remaining shareholders on the premature death of a shareholder.  It also provides security for the family of the deceased shareholder.

There are a number of options available depending on the circumstances of the company and some are more complex than others.  In a typical arrangement, the insurance policies are taken out by the existing shareholders of the company and the shareholders pay the necessary premiums.   The policies are set up, via trust arrangements, usually with an additional agreement called a Cross-Option agreement, to cover the lives of all the shareholders which will deliver a lump sum upon the death of one of the shareholders, to allow the remaining shareholders to buy the deceased shareholder’s shares.  The lump sum payment via the Trust and agreements in place would eventually go to your heirs and they would have no further connection with the business.

Any opinions expressed in this article do not constitute advice.

Carl is a Director and Chartered Financial Planner with Smith & Pinching