Page 43 - Bespoke EPG 2017 Digital

■■ The parties may make provision for the survivor(s) to fund the taking over of the
deceased’s share of the business by taking out life insurance on each other’s
lives and by paying each other’s premiums, known as “buy and sell insurance”.
In practice this means that the deceased estate is paid cash for the equity
(from the proceeds of the policy) and the surviving parties take over the shares.

■■ The beneficiaries of the deceased estate are ultimately “looked after” in that
they will receive the value of the equity in cash.

■■ Essentially it means that there is a life policy for each partner, owned by all
the other partners (not by the business). This policy then provides the cash
to enable the remaining partners to buy the deceased partner’s share of the
business. The partner whose life is insured must not own the policy, or it will
be deemed a part of his estate when he dies. By letting the other partners
own the policy, the money falls outside the deceased partner’s estate.

■■ The proceeds of the buy and sell insurance will not be subject to estate duty
provided three requirements are met:

◆◆ The partners paid each other’s premiums. No premium on the policy must
have been paid by the deceased;

◆◆ The relationship (partner or co-shareholder or co-member) to the
deceased must have been in existence at the date of death;

◆◆ It must have been the intention of the parties to enable the partner or
co-shareholder or co-member to acquire the deceased’s interest at his
death. If there was a different intention, the deduction will not apply, even if
the policy proceeds are actually applied to obtain the deceased’s interest.

■■ The reason for the exemption of such policies from estate duty is to prevent
the paying of double estate duties on the same interests. The actual business
interest (whether it be shares or a % ownership in the business) are generally
included as an “asset” in the estate, and thus for estate duty purposes,
however the proceeds used to purchase these interests are excluded.

■■ It is important to note that first and foremost, the buy and sell agreement
needs to be in place between the partners, which is then funded by life
insurance, so that the arrangement is legally enforceable, and the intention is
reduced to writing.

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