Do I need buy-and-sell insurance?

In the event of the death or disability of a co-owner or partner in a business, it is not only the affected owner’s estate that can be exposed; the remaining owners or partners could also face potential problems.

The purpose of buy-and-sell insurance is to provide the remaining co-owners or partners with cash to purchase the interest of a deceased or disabled co-owner or partner.

Through effective utilisation and structuring of buy-and-sell insurance and a corresponding agreement, this risk can at least be managed from a financial point of view, without negative implications from a capital gains tax and estate duty perspective.

Why could the affected owner’s estate be exposed?

• The remaining owners might not have the resources to purchase the shares from the estate;
• The deceased owner’s spouse may not want to participate in the business;
• The deceased owner may have had unique skills that he/she brought to the business; and
• The deceased owner may have earned a salary in the business, and on his/her death, the surviving spouse cannot simply claim that salary, unless he/she actually works in the business on the same basis as the deceased owner.

Why would the remaining owners face potential problems?

• The executor of the estate of the deceased owner might interfere in a business that he/she knows nothing about;
• The executor might want to sell the owner’s interest to the highest bidder, opening up the business to unknown external investors;
• The involvement of the executor may hinder the business operations with a resulting negative influence on the business; and
• The existing owners may not have the funding to repurchase the deceased owner’s interest at that stage.

At ASL, we are not licensed to provide financial advice. However, we have the skill and experience to understand how the financial decision-making around this process works, and we have access to reliable financial advisors to assist in structuring said insurance and agreements.

Should you require more information about this matter, kindly contact your relationship director, or alternatively, Arnold Scholtz at arnold@asl.co.za.

With acknowledgement to Fin24, Old Mutual and Sanlam for information supplied in preparing this article.