One of the most effective and efficient ways to set up business protection like shareholder protection insurance, is to place it in a business trust.

Placing business protection in a trust can help speed up claims by clearly defining the beneficiaries of a claim, and laying out the procedure to follow in the event a shareholder dies.

Putting business protection in a trust can also be more efficient from a tax perspective, especially when it comes to inheritance tax.

There are a couple of things to keep in mind when it comes to business protection in a trust, one of the most common being whether to use a single option agreement, or double option agreement.

In this guide, Jeremy from Rigby Financial outlines what a single or double option agreement is, and how it works.

Why do you need an agreement for your business protection?

As part of planning your shareholder protection (or other business protection) you need an agreement from both parties over what will happen to the shares once a shareholder dies.

This agreement essentially sets out that is one shareholder dies, their estate of beneficiaries will agree to sell their newly inherited shares, and the remaining company shareholders will agree to buy them.

There are two types of agreement you could incorporate within your business trust planning for shareholder protection:

  • Double option agreement
  • Single option agreement

What is a double option agreement?

A double option agreement is essentially a buy and sale option for outgoing company shares.

It states that should one party wish to exercise their ‘option’ on the shares, the other party must adhere to the agreement.

For example, if the deceased shareholder’s estate decides they wish to sell the shares, the remaining shareholders must buy them back.

On the other hand, if the shareholders decide they want to buy back the shares, the estate must sell them.

However, a double option agreement isn’t a binding sale agreement and it requires at least one of the parties to actively exercise their part of the agreement.

If neither party decides to use their option, there’s no agreement and the shares will be dispersed in accordance with the deceased shareholder’s wishes, or as laid out in the business’ original articles of association.

What is a single option agreement?

A single option agreement gives shareholders the potential to initiate a sale agreement with the other shareholders in the event they suffer a critical illness and are unable (or no longer wish to continue in the business).

This type of agreement is usually reserved when critical illness protection is included within the business protection.

For example, if one shareholder is diagnosed with a critical illness and wishes to sell their shares in the company, they’d exercise their right under the single option agreement, and the remaining shareholders would have to buy the shares.

But, unlike a double option agreement, a single option agreement doesn’t give the remaining shareholders a right to buy the shares.

It means they’d need the affected shareholder’s agreement before they could buy the shares. It essentially removes the risk that a shareholder will be forced to sell their shares if they don’t want to.

If the shareholder decides they don’t want to sell (even if the remaining shareholders make a claim) the payout will be stored in the business trust to be used if the shareholder later decides they do want to sell their shares.

If a claim is made under a share option agreement, you can’t make another claim against the same shareholder later.

Ensure you protect your business

If a shareholder dies, the smooth transition of shares back into the business is necessary to avoid any unnecessary administration or disputes that could stall the sale and put the business’ future at risk.

A smooth translation also ensures each shareholder’s estate or beneficiaries receive financial compensation for a fair value in the event of a death, or critical illness.

Ensuring you have the correct agreements and procedures in place is an essential part of taking out business protection.

If you need the help of an expert, independent brokerage to help you find the right level of agreement, get in touch.

Enter your details below

For your free no-obligation quote, or call 01744 886077

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

    Unsure what you’re looking for?
    Speak to one of our experts.