Why a business trust is the best option for Shareholder Protection
Shareholder protection can be an ideal way of ensuring business continuity in the untimely event that a shareholder passes away or becomes critically ill.
Shareholder protection insurance ensures that funds are available to remaining shareholders to buy back outgoing shares from another shareholder’s beneficiaries, so they can retain control of their company.
One question we often get asked is, is it better to take out shareholder protection as a business trust?
Or is it even possible to do that?
The answer to the second question is, yes.
It is possible to take out shareholder protection in a business trust.
In fact, it’s quite common.
There can be some benefits to taking out shareholder protection written into a business trust, and it is relatively simple to set up.
In some circumstances, it is required for insurance to be written into a trust.
But how do you do this?
And what types of shareholder protection are best suited to being taken out in a trust?
Own life plans in business trust
Under an own life plan, each shareholder would take out an own life policy for themselves.
The policy would then be written in trust to the business, with the other shareholders written as the beneficiaries of the trust.
If in the future one of the shareholders died or became critically ill, the trust would pay out the funds to the remaining shareholders so they could purchase the shares.
That payment would be paid to the deceased shareholder’s family, or financial dependents.
It is also possible to set up a discretionary business trust to hold the shareholder protection, which could be adapted to changing scenarios in the future.
For example, a shareholder could write it into the trust that they are able to take their plan with them if they left the company while the shareholder protection was still alive.
It would also be easy to add or remove shareholders from the trust as and when needed.
Shareholder protection without a business trust
It is possible to take out shareholder protection without the need to write it into a trust, while ensuring the payout is made to the business.
For instance, it is possible to take out a company owned policy.
In this circumstance, the company would be named as the beneficiary and pay the premiums on the policy.
In the event a shareholder passes away or becomes ill, the company itself would receive the payout, to be split among the remaining shareholders to purchase outgoing shares.
Relevant Life Cover (RLC)
This type of business insurance must be taken out as a business trust.
Although this is not typically used as a form of shareholder protection.
RLC enables a business to pay a death in service to their employees’ designated beneficiaries.
This type of policy is typically used for employees with higher wages - like directors or top executives - and can be a tax efficient way of setting up insurance for an employee.
RLC is paid out in the event the employee passes away, or becomes critically ill and is no longer able to operate in the business.
If you want to get more information about shareholder protection insurance or how to set up a business trust, get in touch with one of our expert advisors today.
You can get some free, no obligation advice on which policy would be best suited to you and your business.