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, maintaining control of the business within the company.
To ensure the proper transfer of the deceased director’s interest in the business, it makes sense to have an agreement in place. Co-Director’s Insurance ensures that the surviving directors will receive the necessary funds to purchase the deceased director’s shareholding in the business.
Under this arrangement, the surviving directors purchase their deceased colleague’s shareholding from his/her estate at market value, thereby, helping the surviving directors maintain control of the business on the death of a fellow director.
While co-directors insurance focuses on business continuity, it’s equally important for directors to maintain personal life cover alongside co-directors insurance to protect their families.
In addition to safeguarding ownership structures, income protection for company directors helps ensure financial security during long-term illness or injury.”
Co-Director’s Insurance is set up by the directors, agreeing that if one dies, the others will buy the deceased’s shares. Life insurance is taken out on each director, providing funds for the surviving directors to purchase the shares without straining personal finances or taking large loans.
As part of a well-rounded protection strategy, retirement planning for company directors ensures long-term financial security beyond shareholding concerns.
Directors enter into an agreement stating that if one dies, the surviving directors will buy the deceased’s shares from their estate at a fair market price. This agreement is called a Buy/Sell Agreement and places an obligation on:
A Double Option Agreement offers flexibility, allowing both parties (the estate and directors) to opt not to sell/buy, enabling the shares to stay with the estate if preferred—useful when a family member wants to join the business or is already involved.
It’s important to note that the purchase price should reflect the business’s market value to ensure fairness and avoid tax issues. Advice should be sought to tailor the agreement to the specific situation.
The most common arrangements involve co-directors taking out life insurance on an “Own Life in Trust” or “Life of Another” basis. Before proceeding, legal and tax implications should be reviewed, and independent advice sought. Here’s a look at both types of agreements.
Directors with outstanding home loans may consider tailored mortgage protection to complement their business insurance cover.
Each director takes out a life policy on their own life, under a trust, for the value of their business share. Upon a director’s death, the proceeds go to the surviving directors to buy the deceased’s share. The trust also allows for flexibility when members leave or new directors join, ensuring they can be included as a beneficiary by taking out life cover in trust for the other directors and join the Buy/Sell or Double Option agreement.
A, B, and C each own 1/3 of a €9m business. Under Co-Director’s Insurance on an “Own Life in Trust” basis:
If A dies, the €3m payout goes to B & C, who use it to buy A’s share from A’s estate. B & C will each then own 50% of the business and should review their protection arrangement based on the new shareholding.
Proceeds are exempt from CAT if the arrangement follows Revenue guidelines.
Policy proceeds are not liable to CGT. Shares are inherited at market value upon death, with no CGT on death. CGT may only apply if the estate sells the shares and they increase in value from the date of death to the sale date.
Each director takes out a life insurance policy on the lives of the other directors for a specified sum assured to fund the purchase of the deceased’s shares. This method works well with two or three directors but becomes cumbersome with larger groups. It also lacks flexibility when directors join or leave, requiring policy changes.
It’s important the agreed price reflects the fair value of the business to avoid tax issues and ensure the estate receives a fair price for the shares.
A, B, and C each own 1/3 of a €9m business. Under the Life of Another basis:
If A dies, the total proceeds of €3m from A’s policies go to B & C, who use the funds to buy A’s shares from his estate. B & C will then each own 50% of the business and should review their protection arrangements based on this new shareholding.
Proceeds from the policy are not subject to CGT. Shares are acquired by the deceased’s estate at market value upon death, incurring no CGT. If the estate sells the shares to surviving directors, CGT applies only to any increase in value from the date of death to the sale date.
No CAT applies on the life policy proceeds received by policyholders, as they paid for the benefit. However, the deceased’s estate may incur Inheritance Tax on the business share value inherited if it exceeds the tax-free threshold.
In most cases, an “Own Life in Trust” basis offers a better arrangement due to several advantages:
Important: Before proceeding, all parties should understand the legal and tax implications of Co-Director’s Insurance. Make sure to contact a financial advisor to seek professional advice on the above.
In a partnership, partners rely on each other for support and are key assets to the business.
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.
Get help from Smart Financial knowledgeable Business Assurance advisers to discover coverage that meets your requirements.
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Each director takes out a life policy on their own life, under a trust, for the value of their business share. Upon a director’s death, the proceeds go to the surviving directors to buy the deceased’s share. The trust also allows for flexibility when members leave or new directors join, ensuring they can be included as a beneficiary by taking out life cover in trust for the other directors and join the Buy/Sell or Double Option agreement.
A, B, and C each own 1/3 of a €9m business. Under Co-Director’s Insurance on an “Own Life in Trust” basis:
If A dies, the €3m payout goes to B & C, who use it to buy A’s share from A’s estate. B & C will each then own 50% of the business and should review their protection arrangement based on the new shareholding.
Proceeds are exempt from CAT if the arrangement follows Revenue guidelines.
Policy proceeds are not liable to CGT. Shares are inherited at market value upon death, with no CGT on death. CGT may only apply if the estate sells the shares and they increase in value from the date of death to the sale date.
Each director takes out a life insurance policy on the lives of the other directors for a specified sum assured to fund the purchase of the deceased’s shares. This method works well with two or three directors but becomes cumbersome with larger groups. It also lacks flexibility when directors join or leave, requiring policy changes.
It’s important the agreed price reflects the fair value of the business to avoid tax issues and ensure the estate receives a fair price for the shares.
A, B, and C each own 1/3 of a €9m business. Under the Life of Another basis:
If A dies, the total proceeds of €3m from A’s policies go to B & C, who use the funds to buy A’s shares from his estate. B & C will then each own 50% of the business and should review their protection arrangements based on this new shareholding.
Proceeds from the policy are not subject to CGT. Shares are acquired by the deceased’s estate at market value upon death, incurring no CGT. If the estate sells the shares to surviving directors, CGT applies only to any increase in value from the date of death to the sale date.
No CAT applies on the life policy proceeds received by policyholders, as they paid for the benefit. However, the deceased’s estate may incur Inheritance Tax on the business share value inherited if it exceeds the tax-free threshold.
In most cases, an “Own Life in Trust” basis offers a better arrangement due to several advantages:
Important: Before proceeding, all parties should understand the legal and tax implications of
Co-Director’s Insurance. Make sure to contact a financial advisor to seek professional advice
on the above.
