Monday, July 19, 2010

Insurance funded buy-sell arrangements

Over the last 2 to 3 years, there has rarely been a week gone by where we have not been fortunate to help a risk adviser implement an insurance funded buy-sell arrangement with their clients.

One issue that comes up surprisingly more regularly than it probably should occurred again last week in relation to the structure of these arrangements and the use of options.

There is an enormous amount of material on insurance funded buy-sell deeds (if you are interested, spend some time looking at our website – see the following link

Invariably, most advisers in this area will, for a multitude of tax and wider commercial reasons, recommend an option based contractual arrangement – these arrangements provide the most amount of flexibility possible for each party.

Where however a discretionary trust is involved in the business structure, it is generally the case under trust laws that the trust deed must expressly permit the granting of options.

The technical reasons for this position revolve around issues concerning the fettering of a trustee’s discretion – practically however the position is that unless the trust does have the power to grant options at the date the buy-sell agreement is signed, there is a risk that the agreement may not be enforceable as otherwise anticipated.

Until next week.

Matthew Burgess