In a partnership, partners rely on each other for support and are key assets to the business. If one partner dies unexpectedly, the business may face serious challenges, particularly
concerning their share of the business.
Without an agreement, the death of a partner dissolves the partnership. Under the Partnership Act 1890, the deceased partner’s share, including retained profits and capital, becomes a debt due to his/her estate at the date of death.
Surviving partners may need to raise a significant lump sum to buy out the deceased’s share, potentially requiring them to borrow funds if no prior provision is made.
For limited companies, director succession planning through Co-Directors Insurance provides similar continuity solutions as Partnership Protection does for partnerships.
The deceased partner’s estate will expect immediate payment for their share of the partnership, often the estate’s largest financial asset, requiring a substantial payout from the remaining partners.
The main goal of Partnership Assurance is to provide the surviving partners with funds to buy the deceased partner’s share at market value from their estate.
To protect the business against financial disruption caused by the loss of essential personnel, consider additional cover for key employees or directors through Key Person Insurance.
A Partnership Assurance plan is arranged by partners, agreeing that if one dies, the others will buy their share. Life insurance provides funds for the buyout, preventing financial strain or the need for large loans.
While Partnership Assurance protects the business, it’s equally important for partners to maintain personal life cover for their family’s financial well-being.
Policy proceeds from Partnership Protection can also be used to support strategic business savings and investments for long-term growth.
Business partners enter a Buy/Sell Agreement, ensuring that if one dies, the survivors can purchase the deceased partner’s share at fair market value.
1. The deceased’s estate or representatives to sell, and
2. The surviving owners to buy the holding at a price calculated according to the agreement terms.
A Double Option Agreement is similar but offers flexibility; if both the estate and surviving partners agree, they can choose not to exercise their options immediately.
As a result, the deceased’s share in the partnership can pass to their estate, which may be beneficial if all parties agree to a family member joining the business. For example, a family member already working in the business could take over the deceased’s share.
The purchase price should reflect the market value to ensure fairness and avoid potential tax issues. Independent legal and tax/financial advice is recommended to tailor the agreement to the partnership’s specific circumstances.
In incorporated entities, corporate share buy-back solutions ensure the company—not the individual shareholders—handles ownership transitions efficiently.
The most common arrangements involve partners taking out life assurance policies on an “Own Life in Trust” or “Life of Another” basis. Before proceeding, all parties should understand the legal and tax implications of Partnership Assurance and seek advice from our financial advisors before proceeding.
In this arrangement, each partner takes out a life policy on their own life, under trust, for an amount equal to their share of the business. Upon a partner’s death, the trust ensures the proceeds go to the surviving partners, who use them to purchase the deceased’s share.
The trust also allows for members to leave the business. New partners can be added as beneficiaries but must join the existing Buy/Sell or Double Option Agreement and obtain their own policy under trust for the other partners to maintain equity, with the policy reverting to personal cover as per the trust terms.
A, B, and C are in business together, with the business valued at €9 million and each holding a 1/3 share. If they take out Partnership Assurance on an Own Life in Trust basis, the process would be:
If A dies, the proceeds from A’s policy go to B & C, who use the funds to pay A’s estate for their share. B & C would then each hold 50% of the business and should review their business protection arrangements to reflect their new ownership structure.
Premiums can be paid in two ways:
Under current legislation, proceeds from the policy are not subject to Capital Gains Tax. Shares are deemed acquired by the deceased’s estate at their market value on the date of death, incurring no Capital Gains Tax liability at that time. If the estate sells the shares to the surviving partners, Capital Gains Tax only applies to any increase in share value from the date of death to the date of sale.
The proceeds from the policies are exempt from Capital Acquisitions Tax (CAT) if the partnership arrangement complies with Revenue guidelines.
In this arrangement, each partner takes out a life insurance policy on the life of the other partners for a specified sum assured to cover the cost of buying the deceased’s share. This method works well for two or three owners but becomes impractical with more partners.
It also lacks flexibility when new partners join or existing ones leave, requiring policy adjustments. The agreed price must reflect the fair value of the business to avoid tax issues and ensure the estate receives a fair price for the sold share.
A, B, and C are business partners, each owning 1/3 of a €9 million business. Under a Life of Another Partnership Assurance:
If A dies, the €3 million in proceeds goes to B & C, who use it to buy A’s share from the estate. B & C would then each hold 50% of the business and should review their business protection arrangements accordingly.
Premiums can be paid:
Proceeds from the policy are not subject to Capital Gains Tax under current law. Shares are considered acquired by the deceased’s estate at market value on the date of death, with no Capital Gains Tax liability. If the estate sells the shares to the surviving partners, Capital Gains Tax only applies to any increase in value from the date of death to the date of sale.
No Capital Acquisitions Tax applies to policy proceeds, as each person pays for their benefit. However, the deceased’s estate may face Inheritance Tax on the business shares if their value exceeds the tax-free threshold.
When structuring partnership agreements, long-term retirement planning is another key element to secure future financial independence.
In most cases, an “Own Life in Trust” basis is more suitable due to several advantages:
The key directors and employees of a successful company bring knowledge, experience, and expertise. Without these, the business would not succeed.
Corporate Co-Director Insurance protects the company ensuring that if a director dies, the company can buy back their shares without financial strain.
This is a policy that protects individual directors in a company, ensuring the surviving shareholders have the funds to purchase the shares of a deceased shareholder,
Get help from Smart Financial knowledgeable Business Assurance advisers to discover coverage that meets your requirements.
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In this arrangement, each partner takes out a life policy on their own life, under trust, for an amount equal to their share of the business. Upon a partner’s death, the trust ensures the proceeds go to the surviving partners, who use them to purchase the deceased’s share.
The trust also allows for members to leave the business. New partners can be added as beneficiaries but must join the existing Buy/Sell or Double Option Agreement and obtain their own policy under trust for the other partners to maintain equity, with the policy reverting to personal cover as per the trust terms.
A, B, and C are in business together, with the business valued at €9 million and each holding a 1/3 share. If they take out Partnership Assurance on an Own Life in Trust basis, the process would be:
If A dies, the proceeds from A’s policy go to B & C, who use the funds to pay A’s estate for their share. B & C would then each hold 50% of the business and should review their business protection arrangements to reflect their new ownership structure.
Under current legislation, proceeds from the policy are not subject to Capital Gains Tax. Shares are deemed acquired by the deceased’s estate at their market value on the date of death, incurring no Capital Gains Tax liability at that time. If the estate sells the shares to the surviving partners, Capital Gains Tax only applies to any increase in share value from the date of death to the date of sale.
The proceeds from the policies are exempt from Capital Acquisitions Tax (CAT) if the partnership arrangement complies with Revenue guidelines.
In this arrangement, each partner takes out a life insurance policy on the life of the other partners for a specified sum assured to cover the cost of buying the deceased’s share. This method works well for two or three owners but becomes impractical with more partners.
It also lacks flexibility when new partners join or existing ones leave, requiring policy adjustments. The agreed price must reflect the fair value of the business to avoid tax issues and ensure the estate receives a fair price for the sold share.
A, B, and C are business partners, each owning 1/3 of a €9 million business. Under a Life of Another Partnership Assurance:
If A dies, the €3 million in proceeds goes to B & C, who use it to buy A’s share from the estate. B & C would then each hold 50% of the business and should review their business protection arrangements accordingly.
Premiums can be paid:
Proceeds from the policy are not subject to Capital Gains Tax under current law. Shares are considered acquired by the deceased’s estate at market value on the date of death, with no Capital Gains Tax liability. If the estate sells the shares to the surviving partners, Capital Gains Tax only applies to any increase in value from the date of death to the date of sale.
No Capital Acquisitions Tax applies to policy proceeds, as each person pays for their benefit. However, the deceased’s estate may face Inheritance Tax on the business shares if their value exceeds the tax-free threshold.
In most cases, an “Own Life in Trust” basis is more suitable due to several advantages:
